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U.S. and South American Crop in 2014


SAM HALPERT: We came into the South American planting season needing a good harvest, particularly out of soybeans. Soybeans have certainly taken a bit of a hit given the lowered expectations on total crop size, but we're still close to a record output. We're getting some relief on the soybean side, which is almost intolerably tight in the U.S., given that exports have been strong. We’ve also had a fair amount of cooperation from the weather so far.


There are also a couple of factors in Latin America that have driven some of this tightness in the U.S. Because Argentina is selling dollar-denominated crops, farmers have been holding onto soybeans and corn in the hope that they get higher prices as a type of hedge against devaluations. The weather's mostly been good so hopefully we'll see some of the crop come out, which should ease pricing.

We're headed toward the U.S. planting season and the USDA has come out with its initial estimates. They predict very good acreage numbers, both in corn and soy. The estimates are above 90 million acres in corn and close to 80 million in soy. Assuming normal weather, we expect another good crop, which should ultimately put some downward pressure on prices.

Agribusiness Equities


HALPERT: Agribusiness equities have two major factors influencing price, one of which is the underlying commodity, e.g.: soy, corn, etc, and the other is companies that actually benefit from large crop sizes. We tend to think pricing is going to move lower as crop sizes normalize, assuming normal weather. Lower commodity prices are potentially negative on equities. On the other hand, some companies benefit from larger crop sizes. A long-term theme is companies investing in agriculture technology to achieve larger yields. Ag technology has potentially large benefits to yield and is a long-term theme.


Precision Farming


HALPERT: We do think that global protein consumption will continue to increase and technology is one way to match demand. Companies like Monsanto and Agrium are making huge strides and advancements towards better yields via precision ag farming. They’re venturing into mobile applications that allow farmers to get more feedback, including what nitrogen might be needed, where to plant, and things of that nature. Right now, they have about 20 million acres that are covered via free apps and several hundred thousand that are covered via paid sources. This is a huge area of growth and could potentially have a huge impact on yield, even in a place like the U.S. which has arguably one of the more developed farm economies. Precision ag may also be something that's sustainable regardless of commodity pricing and a positive for a lot of these companies.


 

Equities Driven by Commodity Prices


HALPERT: The other side of the equation is companies that are dependent on commodity prices. Potash has had some impact on industry dynamics, changing the landscape when prices were lower. Things are perhaps getting a little bit better as we're seeing a bit of bounce back in pricing. This price increase could be further driven by the upcoming U.S. application season. Nitrogen has also imparted some industry changes although some of them are shorter-term in nature. For example, the U.S. imports nitrogen, but with Chinese coal-fired nitrogen or coal-based nitrogen being at the high end of the cost curve, it looks like the U.S. may rely on some of the capacity that's currently being built.


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