There Is Turmoil in Agriculture. Here’s What Investors Need to Know.
By Al Root
Aug. 21, 2019 6:30 am ET
Economic growth is slowing, worrying some investors that a recession is looming. Slower growth, however, is nothing compared with what farmers have had to endure recently.
The agriculture sector has been whipsawed by government agencies, trade policy, disease, weather and currencies. It is hard to be a farmer. That volatility isn’t great for investors, either, because it makes it more difficult to value stocks tied to agriculture. It doesn’t look as if it is going to get any easier in coming months, meaning investors will have to keep watching to make sure the weather—and other factors tied to agriculture—don’t ding their portfolios.
Socially speaking, volatility for farmers is a bad thing. Minimizing it is the theory behind most farming subsidies. Historically, societies like to ensure a consistent food supply.
The 2019 trouble started with poor weather in the U.S. Planting was delayed and corn prices shot up to more than $4.70 a bushel. Then on Aug. 12, the U.S. Agriculture Department, or USDA, released its August grain report. “Baffling” is how one industry participant described the numbers. The USDA increased the expected corn yield, despite poor weather, and dramatically increased expected corn inventories. As a result, corn prices cratered and are now down about 7% year to date. In June, when planting concerns peaked, corn prices were up about 20% for the year.
“The August [world agricultural supply and demand, or Wasde,] report is usually based on actual field surveys,” Todd Hultman, lead grain market analyst at farming news outlet DTN, said. “Not so this year.” The USDA has been backed up by bad weather, so crop yield estimates are based on math and not physical observations, as is usually the case. That brings another element of uncertainty to 2019 agricultural markets.
“The September Wasde report is a much bigger deal now,” Hultman said. He thinks USDA crop size estimates could come down again, even after the August increase. “Farmers are frustrated by the USDA, but their number-one concern is still trade”—meaning the U.S.-China trade war. The U.S. is a large food exporter and China is a large food importer. The Chinese have slowed, or halted, imports of U.S. grains as officials continue to negotiate with the Trump administration.
As a result of U.S. trade policy “farmers are worried about Latin American production,” Hultman said. That is based on the law of unintended consequences. U.S. policy has boosted foreign agricultural producers in the past. Brazil’s soybean business got a boost from Nixon-era grain export embargoes, which frightened Japanese grain traders in the 1970s.
Today, both Brazil and Argentina are large, growing exporters of food products. Argentina, for instance, is the world largest exporter of soymeal, one of the products made from soybeans used in animal feed.
Of course, Argentina is undergoing some volatility of its own. The Peso dropped more than 17% versus the U.S. dollar over the past couple of weeks. That makes Argentine exports less expensive, but the impact of the currency chaos isn’t clear-cut. “Argentine farmers will hold back some grain because it is a more stable currency when the peso falls,” Hultman said.
Turns out soybeans are the original bitcoin.
“Forget about trade,” Mark Feight, president of agricultural consulting firm International Agribusiness Group said. “Chinese demand is all about African swine fever.” Fever is a big deal. It threatens to kill up to a quarter of the total Chinese pork population and China is the largest consumer of pork globally. Despite the trade conflict, China is still importing U.S. pork.
“Next year will likely bring a major impact from African swine fever in China,” Alliance Bernstein analyst Alexia Howard said, “which is likely to lead to a fairly sharp rise in global meat prices.”
That is a potential positive for Tyson Foods (ticker: TSN), but the ultimate impact is difficult to predict. “As African swine fever impacts the global protein landscape, Tyson is well-positioned to meet consumer needs with our diversified portfolio,” CEO Noel White said on the company’s Aug. 5 earnings conference call. “At this time, it remains difficult to know the size of those opportunities or when they’ll happen.” Increased pork exports to China could happen late in calendar 2019, according to Tyson.
Tyson is one way investors can play the agricultural turmoil. Another way is to look at agricultural input providers such as FMC (FMC) and Corteva (CTVA). Crop input stocks, however, will be volatile around the USDA September Wasde report. That crop-production report will matter more than usual—it will be the first one with field surveys, setting up another potential market-moving result.
So stocks may be volatile, but equity investors should be grateful that long-term trends usually overwhelm short-term trading opportunities from commodity price swings. Volatility associated with farming-linked stocks can be a pain, but nothing like what U.S. farmers have to endure.
Write to Al Root at allen.root@dowjones.com
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