As uncertainty mounts over earnings and the overall equity market valuation, investors looking for safe havens with some growth may want to go green, not by investing in high-tech clean energy companies, but rather by looking at agribusiness.
While many positive factors have emerged for the industry, uncertainty remains. As with many sectors these days, decisions coming out of Washington, D.C., will have a major impact on agribusiness. The
U.S. agribusiness industry is awaiting decisions on whether increased ethanol blend rates will be allowed and whether the biodiesel tax credit will be reinstated. If these do not occur, there is greater risk of overcapacity and lower earnings in these industry subsectors. Also, adverse weather conditions, periodic disease outbreaks and changes in government agricultural policies can have unforeseen negative effects on earnings and cash flow.
While agribusiness faced some severe reductions in profitability during 2009, longer-term positive fundamentals remain due to pricing, population growth, and a growing middle class in developing countries. The extent of losses in fertilizer, ethanol, and financial subsegments dragged down overall earnings for major agribusiness processors in 2009. However, the USDA’s Agricultural Projections through 2019 show that corn, wheat, and soybean prices are projected to remain historically high over this period. As of February 2010, the USDA’s range for wheat prices for the 2009/2010 crop year was $4.75−$4.95/bushel, corn was $3.45−$3.95, and soybeans were $8.70−$10.20. The upward revisions to January USDA crop estimates alleviated fears of potential crop deterioration from the excessively wet harvest period and brought prices down. The ability to fetch higher prices and the fact that they have held back on fertilizer purchases will likely encourage farmers to buy fertilizer, even at higher prices. In addition, as consumers move up in income levels, their diets improve. Continued demand for biofuels and a resumption of economic growth also support long-term growth for the sector. Moreover, governments like Brazil provide significant financial support to drive long-term growth in strategic sectors such as agribusiness.
Additional reasons to overweight agribusiness in one’s portfolio include:
• U.S. agribusiness companies are benefiting from their ability to store, transport, and process the large U.S. crops from the fall 2009 harvest.
• Recent U.S. soybean crush margins have been strong as U.S. exports have been able to capture more of the export demand due to the drought-reduced soybean crop in Argentina last spring.
• Vegetable oil demand will be driven in 2010 by Brazil’s implementation of its B5 biodiesel mandate, as well as demand increases due to E.U. biodiesel mandates.
• Increased high fructose corn syrup volumes to Mexico, driven by high sugar prices, have been positive for the industry and are expected to help compensate for volume weakness in the U.S. due to lower carbonated soft drink consumption.
• Ethanol margins have remained fairly robust in 2010, in line with higher crude oil prices. In addition to high energy prices, ethanol production margins have also been supported recently by moderate corn prices.
Gregg D. Killoren
victoria1014
