China's Tariffs Strike Another Blow To Agricultural Stocks

China has threatened to hike tariffs between 5% and 10% on U.S. goods worth $75 billion — the latest escalation in the prolonged trade war between the world’s two largest economies. China would impose additional tariffs of 5% or 10% on a wide range of U.S goods, including agricultural products, in two stages on Sep 1 and Dec 15, 2019.

U.S Agriculture Industry Caught in Crossfire

The U.S Agriculture industry has been grappling with low commodity prices and sluggish farm incomes. Tariffs imposed by China on U.S. agricultural exports last year dealt a severe blow given that China is the largest export market for U.S. agriculture producers.

Per American Farm Bureau, U.S. agricultural exports to China shot up 700% over 2000-2017. However, the trade war led to a 50% plunge in agricultural exports to China to $9.1 billion in 2018. Exports of farm products to China declined by $1.3 billion in the first half of 2019. Per the latest available data, farm bankruptcy filings have gone up 13% in the 12-month period ended June 2019. Also delinquency rates for commercial agricultural loans are at a six-year high.

Per the U.S. Department of Agriculture's (USDA) latest available projections, net farm is anticipated to increase 10% year over year to $69 billion in 2019. However, it remains well below the high of $123 billion reached in 2013.

This has weighed on farmer sentiment, making them more cautious about spending on farm equipment. This has weighed on the Manufacturing - Farm Equipment industry’s top line. Tariffs imposed by the Trump administration last year on steel and aluminum added to equipment manufacturers’ woes by inflating raw-material costs.

The Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates gloomy prospects for the Manufacturing - Farm Equipment industry in the near term. The industry, which is a six stock group within the broader Zacks Industrial Products sector, carries a Zacks Industry Rank #208, which places it at the bottom 19% of 256 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

So far this year, stocks in the Manufacturing - Farm Equipment industry have collectively gained 3%, lagging the S&P 500’s growth of 13.5% and its sector’s 5%.

Deere & Company (NYSE:DE) , one of the major names in the industry, with a market capitalization of $48.4 billion, has cut its fiscal 2019 guidance twice this year citing a weak agricultural sector. Lindsay Corporation (NYSE:LNN) , which makes irrigation equipment, has also been impacted by the trade war and weak farmer sentiments.

Nevertheless, the USDA’s $16-billion aid for American farmers who have been affected by the trade war will provide some respite. Farm equipment demand will eventually pick up, spurred by the need to replace ageing equipment. Despite the near-term headwinds, the long-term prospects for the industry’s equipment will be fueled by increased global demand for food and efficient water use. Benefits from Precision Agriculture initiatives will help over the long haul.

Investors still keen on the industry may consider Kubota Corp. (OTC:KUBTY) , currently sporting a Zacks Rank #1 (Strong Buy), and AGCO Corporation (NYSE:AGCO) , carrying a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank stocks here.

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