Week 279 - Barron’s 500 Agricultural Producers

Situation: This week’s blog looks at how the 12 largest Ag Producers have been doing since 2012. They had been in a slump but have appeared to turn the corner. It seems hard to believe. Agricultural commodity prices remain in a slump and the Dow Jones Commodity Index (^DCI) has shown trendline growth of only 2.0%/yr after completing a 25 yr Commodity Supercycle. But that Index recently bounced off its 1999 low, likely heralding a new Commodity Supercycle . Our regular readers know we think food commodities should be able to buck that trend for two reasons: 1) food is an essential good; 2) the global middle class is projected to grow 10%/yr through 2030. 

Mission: Prove that Ag Producers “have turned the corner”.

Execution: First, we’ll look at the negative side of the argument. Farm production has exceeded demand for 3 years. That has resulted in low crop prices, which have a) reduced farm incomes, b) limited the ability of farmers to buy farm equipment , and c) depressed farmland prices: “The amount of rent farmers pay to landowners also dropped precipitously in the St. Louis area. Farmland rent slid 10% and ranchland rent by 20% in the quarter." 

Now we’ll look on the positive side. The 12 Barron’s 500 companies that produce equipment, fertilizer, seeds, and agronomy chemicals appear to be doing better. Year-over-year rankings comparing 2013 rankings with 2012 rankings show that only one (Monsanto) did better in terms of cash flow and revenues. However, 8 of the 12 did better when comparing 2015 to 2014. Sequential year-over-year results are shown for all 12 in Columns N-Q of the Table, with green highlights denoting year-over-year improvement.

Administration: Drill down on those largest Ag Producers and try to figure out why they turned the corner in 2015. It shouldn’t have happened, since crop inventories were rising and crop prices were falling, partly because Food Stamp usage in the US fell by 15%. The increased Federal spending to expand Food Stamp participation (after the 2008-2009 Recession) ended when The Recovery Act expired on 11/1/2013.

Bottom Line: Ag Producers are recovering. Briefly, we explain why by noting that the S&P 500 Index went through 10% corrections in October of 2014 and February of 2016. That last correction was associated with a 25% Bear Market for the Basic Materials Industry (XLB at Line 22 in the Table), and coincided with a bottoming of stock prices for 11 of our 12 Ag Producers. For 2015 vs. 2014, 10 of those 12 companies are highlighted in green, indicating improved sales and ROIC (see Columns O and P in the Table), and the aggregate Barron’s 500 Rank for all 12 companies improved to 369 from 398. 

Risk Ranking: 7

Full Disclosure: I dollar-average into MON and also own shares of CAT and ADM.

NOTE: Metrics are current for the Sunday of publication. Red highlights denote underperformance vs. VBINX at Line 21 in the Table. Purple highlights denote Balance Sheet issues and shortfalls. Net Present Value (NPV) inputs are described and justified in the Appendix to Week 256. Briefly, Discount Rate = 9%, Holding Period = 10 years, Initial Cost = moving average for stock price over the past 50 days (corrected for transaction costs of 2.5% when buying ~$5000 worth of shares). Dividend Growth Rate is the 10-Yr CAGR found at Column H. Price Growth Rate is the 16-Yr CAGR found at Column K (http://invest.kleinnet.com/bmw1/). Price Return (from selling all shares in the 10th year) is corrected for transaction costs of 2.5%. The Discount Rate of 9% is designed to approximate Total Returns/yr from a stock index of similar risk to owning a small number of large-cap stocks, where risk due to “selection bias” is paramount. That stock index is the S&P MidCap 400 Index (at Line 27 in the Table), and MDY (at Line 20 in the Table) is the ETF for that index.

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