Displaying items by tag: agriculture
You probably have not even registered it, but food prices have risen sharply since late last year. One big reason why this is going mostly unnoticed is that economists, and thus the media, like to report inflation with food and energy stripped out. According to Jefferies, “Almost unnoticed, broad food and agricultural prices have climbed vertically”. So the question is who will benefit, and luckily that is quite clear. Firstly, fertilizer companies tend to do well when food prices are high and are uncorrelated to other asset classes. And secondly, agricultural machinery is a big winner. The sector is already experiencing exceptional supply tightness, which is bullish for pricing. According to Barron’s “large tractor prices up roughly 20% year-over-year and small tractors up about 50%, on the back of significantly tighter inventories”.
FINSUM: Deere and AgCo seem like quite good buys given this backdrop.
Farming, often considered one of the original green industries, has fallen out of sync with…see the full story on our partner Magnifi’s site
There is an enormous asset bubble that has engulfed much of the US, yet you probably haven’t even heard of it. That bubble is threatening a meltdown that has not occurred since the 1980s. Where is the bubble? In debt linked to farm land values. Despite falling grain prices for years, Midwest farm land has held its value very well. This has led to debt levels that hve not been seen since the farm debt crisis of the 1980s. Farm income has fallen by half since its peak in 2013, yet farm equity has only dropped 5%. According to the FT, “Farmers remain creditworthy in the eyes of banks, even as their incomes fall, because the collateral value of land remains high”.
FINSUM: That last sentence is very dangerous because it sets the stage for a doom loop of dropping values and high rates, and foreclosures, leading to even worse values. Many big lenders have a lot of money tied up here, and there are likely implications for muni bonds as well.
One the most brutalized stocks on Wall Street is going through a renaissance. The agricultural stock Mosaic has been beat up lately. The fertilizer specialist has been hammered because of weakness in crop prices and corresponding falls in fertilizer. Shares are down 18% this year. The company just released earnings where it cut profit forecasts and then something amazing happened—it surged 7%. Analysts and the market suddenly decided the stock was too cheap. One JP Morgan analyst summarized, saying “Mosaic has been a poor equity performer over a one, three, five, and 10 year period … And we think the shares are now priced to create a favorable risk-reward balance”.
FINSUM: This is a classic blood-in-the-streets type purchase, but the stock is so cheap compared to almost every valuation metric that there does seem to be asymmetric risk to the upside.
President Trump is set to unveil a package of trade tariffs on $60 bn worth of Chinese goods. Unsurprisingly, the Chinese are preparing their retaliation, focused on US agricultural exports. However, the very interesting part is the retaliatory package will only be on $3 bn of US imports to China, much smaller than the US package. The new Chinese tariffs will be on items ranging from fruit to pork to recycled metals. One US adviser commented “All the products on the list are small potatoes, and the real important ones are U.S. farm products like soybeans and sorghum”.
FINSUM: So why is the Chinese measure so much smaller? In our view it means that they are either afraid to seriously anger the US, or that they need our imports much more than we realize. Interesting development.