Agriculture shares: great theme, lousy investment...but turning?
Agriculture is such a great conceptual investment theme. Global population growth driving demand, falling arable land availability and hence a need for all those productivity tools (fertilisers, seeds, machinery) plus the hope that some day the Chinese will start to consume meat like America or Europe does.
I have loved the theme for many years but it has not been amongst my better performers. I was reminded why by Agco earlier today who had already profit warned on the numbers they published today:
Source: Agco Q3 earnings presentation document
It is actually pretty rare to see every geographic region showing YTD year-on-year sales declines especially before currency impacts.
So it has been tough. A quick glance at the corn price over the last year tells you why:
Source: www.bigcharts.com
But what is that we see on the far right of the chart above? A little bit of upward movement in the much-maligned agricultural grade?
Inevitably multiple rumours are afoot: short covering, a temporary pause ahead of upcoming harvests, some decent ethanol demand (finally), the influence of sub-optimal weather in Brazil for crops...that sort of thing. Here's my observation: corn relative to a longer-term price history is pretty cheap and, additionally, I cannot think of a better disincentive to plant corn than a lowish price. My feeling is that the corn price is bottoming...and that is great news for all agricultural facing stocks.
In the meantime, I note that Agco are doing all the right things like cutting production to fit in better with underlying demand, going on a cost control drive, keeping pricing up and initiating a share buy back equivalent in size to over 10% of the company's market cap. Even with suppressed numbers (and via a couple of profit warnings) the shares trade on a P/E of just over x10 with a 2.5% free cash flow yield. Not bad for an out-of-favour mega theme.
More generally I think agricultural related stocks could well be a happy hunting ground looking into 2015: it is amazing what more stable underlying commodity backdrop combined with some cost control, positive pricing and buyback focus can do.