Harvest Time for Farming Shares
The price of corn has fallen by two-thirds in two years. Justin Crownover sold half his crop in May, when a bushel traded at a still profitable level of five bucks. Four months later the season's corn supply is looming like a tsunami and the price is down around $3.25. While the Texas Panhandle farmer hopes for a rally, he's thinking of ways to spend less on machinery and fertilizer."Are we concerned?" he mused earlier this month as he moved some cows down the road. "Definitely."
For the first time in almost a decade, American producers of corn, soybeans, and wheat might lose money on all three if prices don't rise. The downturn comes on the heels of the most profitable years in most farmers' lives. Coming into this year, every part of the farm economy was on a roll–from seeds and fertilizer to tractors and technology. Farmland had become a must-have asset for the smart-money investor. The same applies to the shares of companies lending a hand in feeding the world, as the population grows from seven billion to over nine billion by 2050. High commodity prices led to vast new acres of corn and soybeans. That spurred sales at machinery makers like Deere (ticker: DE), fertilizer vendors like Potash (POT), and seed and herbicide providers like Monsanto (MON). Eyeing this megatrend, you can understand why many folks stopped thinking that the farm business was cyclical.
Photo: Daniel Acker/Bloomberg
"I'm one of the people who said there is no more cycle," says Martin Richenhagen, the plain-spoken chief executive of AGCO (AGCO), the Duluth, Ga.–based maker of Challenger, Fendt, and Massey Ferguson farm machinery. "I stand corrected."As bumper crop forecasts rose over the summer, Wall Street debated how long and deep the down cycle might be—and how fully it's priced into ag shares. Deere is down 12% since early May, to $83, and sells for barely nine times its recent earnings. Does that make it and the others value plays? Probably not. The floor for these stocks could be at least another 10% to 15% lower, if farmers put off investments in machinery and fertilizer beyond next year and Wall Street has to lower its estimates of what farm suppliers can earn across the agricultural cycle.Historically, U.S. farmers are slow to downsize production in response to lower prices, says Purdue University agricultural economist Michael Boehlje. "So the not-so-good times last at least as long, if not longer, than the good times," warns the professor.We're talking about farming, so no one knows if a frost or drought might winnow the harvest enough to revive crop prices, just as it was hard to anticipate the supply surge from what Deere Chief Executive Sam Allen wryly describes as the extreme weather event called: "It's great weather everywhere around the world."THE LOWEST COMMODITY PRICES in seven years have resulted from the combination of extremely good growing weather with the more predictable effects of burgeoning crop yields and the better than 20% increase in U.S. corn acreage over the last decade–not to mention the creation of giant new farms in the Brazilian state of Mato Grosso. American corn yields will set a record of 171.7 bushels an acre this year, some 15% above the five-year average, according to the U.S. Agriculture Department's September estimate of world agricultural supply and demand. The soybean crop is also expected to have record yield and production globally. Inventories, the government says, are ample.
Supply has caught up because two big drivers of the last decade's growth in demand are spent. American gasoline already has the mandated 10% blend of ethanol. China has wasted little time in reaching Western levels of meat consumption, while developed countries–ironically–are eating fewer grain-fed cattle.
The 2015 prices forecast by J.P. Morgan's economic models would leave corn growers' incomes down by a third next year, with soybean profits down at least 15%, and wheat growers' incomes down by more than 40%. At Morgan Stanley, machinery analyst Nicole DeBlase summarized her worried outlook in an August report titled "AGpocalypse Now?"
Visiting Barron's, AGCO chief Richenhagen warned us not to get overly pessimistic. No one realistically expects a farm bust on the scale of the 1980s. Grain inventories are at reasonable levels. Interest rates are low. And farmers have used the recent years' prosperity to pay down debt on their balance sheets, according to studies by the Federal Reserve Bank of Kansas City. Many of those balance sheets boast highly appreciated farmland. ...
Previous warnings:
Corn under four bucks does not inspire farmers to open the checkbook for big-ticket items.
"U.S. corn, soybean crops will set record""Too Much Corn With Nowhere to Go as U.S. Sees Record Crop" (Buy storage)
"U.S. Corn Farmers Face a Cash Crunch"
What the Collapse of Crop Prices Means For Corporate America (DD; MON; DE; CAT)
Amount of Corn in Storage Sharply Bearish
Watch Out Deere: "Farmers face lower incomes - for years" (DE; AGCO; CAT; MON: MOO)
That gets us back to June 25. And then there's:
Iowa State's Worst Case Corn Prices: $2.89 By 2017
34 cents away.
