Agriculture Sector: Worth Watching
Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Agriculture stocks had a rough time in the last year, mostly due to weakness in commodity prices. There are some early signs that could be bullish for the sector, but it´s still too early to make a call, needless to say, too soon to commit any money. Many of these stocks have tempting upside potential, though, and they usually move quite fast. It may be a good idea to keep an eye on developments in this sector, because the reward could be quite substantial if things start improving.
There are many kind of companies in the agribusiness complex, some have a broad focus in seeds and crop improving products like Monsanto (NYSE: MON) and Syngenta (NYSE: SYT). Others like Potash (NYSE: POT), CF (NYSE: CF) and Agrium (NYSE: AGU) are more dedicated to fertilizers. The equipment manufacturers, Deere & Company (NYSE: DE) and AGCO Corp (NYSE: AGCO), for example, are interesting alternatives with attractive long term prospects. You can also bet directly on the food and commodity producers like Archer Daniels Midland (NYSE: ADM) or the Latin-American giant Brazil Foods (NYSE: BRFS).
What they all have in common, however, is that their earnings depend to some degree on commodity prices. Seeds, fertilizers, herbicides, equipment and that kind of products are clearly more demanded when prices for agriculture commodities are high, because producers get a better return for their investment in crop improving products and technologies. The chart compares the returns of PowerShares DB Agriculture Fund (NYSEMKT: DBA) and Market Vectors Agribusiness (NYSEMKT: MOO), two ETFs that track agro commodities and stocks respectively. The correlation is easy to see.
It´s really hard to tell what´s going to happen with commodity prices in the future, but we can at least identify some important factors to consider. Weather and production are key factors to watch in the near term, and they are sending important bullish signals. There´s a worrying drought in South America, mostly Argentina and Brazil, that is already affecting prices of products like soy and corn. If these weather conditions continue or get worse, they will have a material effect on prices in the following weeks.
On the other side, some macroeconomic conditions like the European crisis are negatively affecting prices. The revalorization of the US dollar against other currencies like the Euro is typically bearish for these commodities; they tend to rise when there is economic optimism, fear about inflation or elevated risk appetite from investors. The problems in the Eurozone are not helping at all and that´s my biggest concern about the agribusiness sector right now.
Monsanto reported earnings that surpassed analyst estimates yesterday, the report was quite optimistic with sales increasing at a 33% annually and the company raising guidance for the rest of the year, the main contributor to these results was strong demand in Latin America. Martin Richenhage, Agco´s CEO also gave optimistic press comments about demand for the company´s products recently.
These may be signs that investors have been getting too negative about prospects for the industry in the middle term, and it would be reassuring to see a broadly based trend of financial results that turn out to be better than expected. The main catalyst for the sector, however, would be a stabilization or recovery of agro commodity prices.
The Motley Fool owns shares of Archer Daniels Midland Company and CF Industries Holdings. acardenal has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.