“Any thoughts about ideas for a new watch list: companies, sub-themes, industries and sectors who will benefit as a consequence of the current agricultural situation?
“That would be a nice follow-up to your anticipated agri call."
Eoin Treacy's view Thank you for this topical question which I'm sure will be of interest to other subscribers. While the majority of commentary has focused on damage to US crops from abnormally warm and dry weather, it is by no means the only region that has to contend with inclement growing conditions. The south and east of Europe is coping with above average temperatures, this is the worst monsoon in India since 2009 and Western Australia is also suffering drought conditions.
While some of these stories are only beginning to hit news wires, the question is to what extent they are already reflected in the prices of corn, soybeans, wheat and oats. Following rather abrupt pullbacks during May and early June, prices for all of these commodities surged over the last month. They have become overbought in the short-term as they test historic highs with soybeans and wheat forming key day reversals yesterday. They have all followed through to the downside today suggesting a peak of at least near-term significance and potential for a reversion towards the mean has increased.
How much of a consolidation occurs in the above commodity prices will in all likelihood be a factor of how weather patterns evolve. While grain and bean prices have been directly impacted by drought conditions, lumber and natural gas demand are also affected. Lumber prices had recovered somewhat as the outlook for new housing starts improved. Wildfires, resulting from drought conditions have given additional impetus to prices recently. Natural gas prices bottomed in April and rallied by more than 50% as short covering took hold. However as increased demand for cooling becomes more of a factor price pushed through $3. Cotton cultivation is water intensive but so far the various droughts have had little effect on pricing. It hit a medium-term low in early June and has held a progression of higher reaction lows since as the oversold condition is at least partially unwound.
I have reviewed a number of the shares impacted by agriculture prices over the last month.
Fertiliser shares are perhaps the most obvious beneficiaries since farmers can be expected to attempt to enhance yields at the next planting. (Also see Comment of the Day on July 17 th).
Farm machinery companies can expected to have mixed performance since demand from North American farmers can be expected to decline following the low yield while the trend of increased mechanisation across Latin America and Asia can be expected to continue. (Also see Comment of the Day on July 6th).
Irrigation should also attract increased interest. Valmont Industries has rallied impressively since finding support in the region of the 200-day MA in June, and while overbought in the short-term a sustained move below the trend mean would be required to question the consistency of the medium-term uptrend. Lindsay Corp has rallied to test the upper side of its more than yearlong range and while somewhat overbought in the very short-term, a clear downward dynamic would be required to signal more than a temporary pause in the current area. .
In the seeds and chemicals sector Monsanto broke above $80 in June for the first time in more than two years. A sustained move below it would be required to check medium-term scope for additional upside. DuPont de Nemours dropped back below the 200-day MA in May and while it has held a progression of higher reaction lows since October, it will need to hold a move above $50 to indicate a return to demand dominance beyond the short-term.
Food processors and restaurants generally have a solid hold on their supply chains and have previously used commodity price inflation as an opportunity to increase margins. (Also see Comment of the Day on July 18th and July 16th.
I last reviewed a number of lumber REITs in Comment of Day on June 25th .
I also reviewed a number of natural gas related companies yesterday. They may also benefit from increased interest from M&A activity following CNOOC's takeover of Nexen.