Slow down in Agriculture

From the Financial Times – click the title for the link.

Generally, I don’t like posting things directly from FT (because they really don’t like it, and I respect that good information is expensive to assemble).  This, however, is a good summary of the state of production-based agribusinesses right now.

As traders sound the death knell of the commodities supercycle, grains prices, which rallied on increased demand from emerging markets and periods of bad weather, also look to be heading for a period of weakness.

Along with oil and metals, agricultural commodities rode the great bull run in raw materials from the early 2000s. On top of new demand from developing countries, biofuel mandates also contributed to supply shortages.

However, as growth slows in China and other emerging economies, agricultural and rural economies are facing a “reset downward” says Professor David Kohl, a US agricultural economist formerly of Virginia Tech.

The “go-go years of 2007 to 2012 for the grain industry” were “set up by a convergence of timely events”, he says.

US Farmers Corn

The good years may have now come to an end. A slowdown in demand has coincided with increased production as farmers around the world have responded to higher prices, helped by ideal weather. Consecutive bumper crops over the past few years and the resulting high inventories around the world have depressed prices and incomes for farmers.

The corn price, for example, is trading at $3.80 a bushel — less than half of the all-time record seen in 2012. In the US, one of the leading agricultural exporters, median net profits for corn farmers peaked in 2012 at $175,079 a household, falling sharply below $55,000 in 2013 and 2014, according to data from about 3,500 farmers compiled by the University of Minnesota.

As farmers’ incomes have fallen, their spending has declined, squeezing profit margins in other industries that depend on it.

According to the Federal Reserve Bank of Kansas City’s latest quarterly report, US farmers’ spending and incomes have fallen for a seventh quarter in a row alongside a sharp increase in loan volumes amid a growing disparity between crop revenues and planting costs.

While the US Department of Agriculture expects this year’s US national net farm income to fall to the lowest level since 2009 — declining 32 per cent to $74bn — farmers in key crop growing regions such as South America, Ukraine and Russia are also struggling, say analysts.

Stefan Vogel, head of agri commodity markets research at Rabobank, says a stronger dollar has meant that “imports, such as fertilisers and seeds, have become much more expensive for farmers in many regions of the world”.

He adds: “The overall situation has worsened over the past two years and they will cut back on what they can.”

The ripple effect is spreading through to international agribusinesses providing seeds, fertilisers and equipment.

Some companies have been hit hard. Among agricultural suppliers, Deere & Co, the equipment maker, reported a 30 per cent fall in half-year earnings this year on a 17 per cent decline in sales.

Others are seeking growth opportunities through consolidation. Last week, CF Industries, the US fertiliser maker, agreed to buy the European and North American assets of Dutch rival OCI in an $8bn deal including debt.

Meanwhile PotashCorp of Saskatchewan last week reaffirmed its $8.6bn offer for potash rival K+S of Germany, while Monsanto, the US seeds and pesticide group, continues to pursue Swiss rival Syngenta with a potential $45bn offer.

Agricultural commodity trading companies are also starting to feel the pain.

Weak emerging market economies and high inventories have meant that margins from the grains and other crops they handle have fallen.

Second-quarter earnings from Archer Daniels Midland and Bunge missed analysts’ estimates, while Cargill, the sector leader, reported a quarterly loss.

“The economic environment remains sluggish in many emerging markets where we have invested significantly over the past several years,” said David MacLennan, Cargill’s chief executive.

The trading house added that its latest quarterly results were hit by “recent years’ record-large crops in the Americas” that reduced price volatility and limited trading opportunities.

Bunge, meanwhile, was hit by the economic decline in Brazil, which affected the company’s local food business.

A severe weather event — such as El Niño — could yet lift agricultural prices and help the profitability of the traders. However, as economic growth in countries such as China, Brazil and Russia decelerates, they will also need to adjust.

Over the past few decades agricultural traders benefited from the opening up of new markets — especially the growth in China — and exports of grains and oilseeds around the world, says Richard Ferguson, agricultural adviser to PwC.

However, Mr Ferguson says as inventories remain high and China’s expansion slows, the agricultural business “faces the challenge of adapting to a different dynamic”.