CNH vs. AGCO: Agriculture Industry Primer Combo (Part 1)

Catching up on the US Ag Equipment + Global Ag (Row Crop) sectors prior to our CNH and AGCO deep-dives

“So why do you keep doing (value investing) then?” Because it's created an extraordinary circumstance for me, which is I'm like the Maytag repairman, I'm like the last guy doing it. And so I don't have to pay 12x earnings anymore for stuff that I think might be a bit better. I can buy what I just told you, 10x bottom-of-the-cycle earnings. Those kind of opportunities used to exist at the bottom of a bear market, because normally you would have to pay 18x bottom-of-the-cycle earnings for an obviously cyclical business.

But because nobody's paying attention, I can get half of that, and I don't need other investors to figure it out because I've got a 3% dividend yield, and I've got a 7% buyback, which means the company is basically giving me 10% of my investment every year. Which doesn't sound exciting when the market wants to go up 30% a year or something like that, but a 10% return in a 4% interest rate environment is a pretty nice outcome.” — David Einhorn, famous value investor

What David Einhorn is describing here is simply the reverse-blade of the double-edged sword concerning what he said earlier — about capital markets having been irreparably damaged by passive funds. When brainless passive funds auto-buy and auto-sell stocks regardless of valuation, it creates unbelievably inefficient market opportunities for value investors like Einhorn. And clearly he believes that CNH qualifies as such a candidate.

In his recent CNBC interview above, Einhorn stated that he had acquired a medium-sized position in CNH. For the uninitiated, the US Agriculture Equipment (AgEq) sector is dominated by the Big 3 with a combined market share of 40% — John Deere (NYSE:DE), CNH Industrial (NYSE:CNH) and Agco (NYSE:AGCO).

Many readers are likely unfamiliar with the old-world Ag industry, hence I thought it’d be instrumental to first bring everyone up to speed on recent developments in the sector (a lot has happened). Part 1 of this analysis will serve as industry primers for both the US Ag Equipment and the Global Ag row crops sectors respectively — the latter is where the AgEq sector has the biggest exposure. Subsequently, we will build on it in Part 2 to perform a deep-dive into both CNH and AGCO. (Why AGCO? Stay tuned to find out.)

In Part 1, we’ll explore all of the moving parts in the US AgEq sector — namely its business model, competitive dynamics, and the business differences between the Big 3 of the industry (Deere, CNH, AGCO). I’ll also be doing a similarly detailed industry primer for the wider global row crop sector, given its outsized influence on the US AgEq sector — where we’ll cover what contributed to the Ag downcycle of 2024, as well as the factors behind the immediately preceding Ag upcycle of 2022/23.

Doing this should give us a comprehensive 360° view of all of the relevant moving parts necessary for the analysis, whereupon we can pull it all together in Part 2 to finish our deep-dive analysis into CNH and AGCO next week. This side-by-side comparison of the two AgEq giants will lay bare the drivers of AGCO’s surprising outperformance vs. both Deere and CNH — and how it might fare differently going forward into the next Ag cycle. It will also help us figure out what Einhorn likes about CNH — and more importantly, what he hasn’t said about why he likes them.

The global row crop sector — and the US AgEq sector by extension — is a byzantine labyrinth of a minefield to understand, and there are a lot of prevailing misconceptions about what affects the global spot prices of row crops (e.g. did you know that high crop prices are not necessarily a good thing?). This US AgEq + Global Ag Row Crop industry primer combo should go a long way towards clarifying what matters and what doesn’t in the sector, while also adding incrementally to your mental model of wider global macro developments.

Wider US equity valuations today are analogous to picking up pennies in front of a steamroller. Is it time for value (factor) investing to come back in vogue?

CNH vs. AGCO (Part 1): Ag Equipment + Global Ag Row Crop Industry Primers

1. Ag Equipment Industry: Business Model Primer

2. Global Ag Row Crop Industry: Macro Sector Model 

3. Macro Factors behind the 2022/23 Global Ag Upcycle (Row Crop)

4. Macro Factors behind the 2024 Global Ag Downcycle (Row Crop)

CNH vs. AGCO Deep-Dive (Part 2: Next Week)

1. Normalized LT Sector Outlook: Global Ag Row Crop + US Ag Equipment

2. CNH: Why Not Deere?

3. AGCO: Reinventing The Wheel

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Ag Equipment Industry: Business Model Primer

Which better represents the future of the Ag Equipment sector?

Ag Equipment Industry: Business Model Primer

1. Big 3

2. Crop Cycle

3. Sector Inventories

4. Used Equipment Market

5. Purchasing Behavior

6. Dealer Network

7. Financing

8. AgTech!

9. iOS vs. Android

10. Permanent vs Row Crops

11. Returns: Farmland vs Crop Sales

12. Subsidies & Reference Prices

13. Tariffs

14. Geographical Exposure