Agribusiness: Is agriculture coming back to life?
It would be silly to assume that agriculture was not alive for one single day. Farmers are toiling day in day out to provide the world’s population with food. However, they too have to deal with different cycles. After a boom period, which lasted up to about 2008, we have gone through a particularly painful bust with prices of most agricultural products dropping to precipitous lows. Whether it’s milk, meat, grains or oilseeds, prices have all come down severely. For some soft commodities, we’ve already been witnessing a bottoming out of prices. Short term, weather patterns are crucial. Long term, that may well be the case in certain regions due to sustainable changes. Nevertheless, the evolution of supply and demand is the key factor driving prices. Supply depends on what crops farmers decide on. That decision depends on the expected profitability of each crop. Financial aspects like crop insurance or hedging may play a key role too. USDA, the United States Department of Agriculture, provides ample statistics on crops (acreage, stocks etc). Yet planting decisions are unlikely to be easy for US farmers as soybean and corn are generating similar operating profits. This process is ongoing in all agricultural regions in the world like Brazil, Argentina and Southeast Asia. However, we’re not particularly concerned with the price evolution of certain crops. We take the broader picture. These fundamental long-term trends are well known. Simply put, a growing population becomes more wealthy, needs more and better food, yet less and less agricultural land is available to produce it. That is the playing field for the broad agricultural sector.
Opinions diverge widely as to where we are in the cycle. Company reports offer some indications on the state of affairs. We distinguish different business segments or industries: fertilizers, agrochemicals and seeds, food processors and traders. Other industries provide machinery and equipment (Deere, Bucher). There’s no question that overall demand remains strong. The problem for pricing is supply. Oversupply has played havoc in the fertilizer industry. Industry and company reports still point to a very difficult situation for almost any fertilizer. We have studied several companies, but don’t feel comfortable enough with their outlook.
The crop and seeds sector is under the spell of M&A. The outcome of three mega acquisitions in agrochemicals (Syngenta, Dupont and Monsanto) depends on the decision of antitrust authorities. We expect these deals to go through, as has been confirmed by the companies. This offers some arbitrage opportunities for venturesome investors. Particularly in the case of Monsanto and Syngenta the outcome (offering price) is clear. Bayer stated to have made good progress in obtaining antitrust approvals. Regulatory filing in the European Union is planned for 2Q17. Bayer expects low single-digit growth for its Crop science business unit in 2017. Bayer’s head of Crop science referred to the oversupply in last years due to bumper harvests. He added: “Right now, there are early indicators that the trough has been reached and that there is hope for a slow return to growth.” Those indicators are stock-to-use ratios of corn, soy and wheat. For the first time in years, these have stopped increasing. A second key indicator is the future commodity prices. These are trending upwards for corn and maintained staying above USD 10 a bushel for soy, a price where farmers can enjoy a good profitability. A third early indicator is SeedGrowth, Bayer’s portfolio for protecting seeds against insects and against disease. Farmers only invest if they are confident to get a return on that investment. Bayer is seeing solid growth in its SeedGrowth unit. This optimistic view is shared by Syngenta and prudently confirmed by Deere, who raised its outlook.
We recently initiated Bunge, that seems to offer the best of both worlds. It is a play on the improving fundamentals of the agrosector. But the company itself has also been overhauled and to quote its CEO, is now “stronger than ever”.
Danny Van Quaethem
Data & recommendations as of March 06th, 2017 close
This document is an objective and independent explanation of the content of the recommendation and cannot be considered as adapted to a person or based on the analysis of the situation of a person.