Agriculture: Notes from the RoadAmmar James, AnalystDecember 17, 2019
2020: A Key Year for the Agriculture Sector
Following record-breaking floods in the U.S. and a turbulent growing season in 2019, we remain optimistic about the outlook for the agribusiness sector in 2020. Bad weather in parts of the Midwest prevented farmers from wrapping up their 2019 harvests on time, with more than 10% of corn acreage still unharvested in states like Ohio, Michigan, and North Dakota as of December 1, according to the U.S. Department of Agriculture (USDA). Consequently, this should push out most fertilizer applications to the spring (2020). Furthermore, the fertilizer applications should be fairly sizable considering that the last robust applications happened in the spring of 2018.
We believe that this has implications for some of the well-known agribusiness companies, including the largest crop nutrient producer in the world, Nutrien. The company produces nitrogen, potash and phosphate fertilizers and has a competitive edge in the U.S. with its large retail distribution network. That, coupled with the company's mergers and acquisitions (M&A) pipeline for retail distributors in the U.S. and Brazil, gives us conviction that the company is well positioned heading into 2020.
As for crop prices, our conversations with farmers, agronomists and seed and fertilizer distributors point to flat corn and lower soybean prices in 2020 as more planted acres in the U.S., and aggressive seed pricing from mid-sized independent seed distributors, offset the positive effects from increasing global demand.
U.S. Soybean and Corn Production
Source: VanEck, USDA, Bloomberg. Data as of November 2019.
These flat to low crop prices tend to spell good news for diversified protein producers, such as Tyson Foods, who utilize both corn and soybean as feed for chicken, cattle and hogs.
Lower feedstock prices, combined with the cascading effects of African Swine Fever in China/Southeast Asia and China’s lifting of its 2015 ban on U.S. poultry imports, should provide substantive tailwinds for protein producers in 2020. Though the impact of African Swine Fever is hard to quantify, China has accelerated its protein imports amid surging domestic pork prices. Likewise, the USDA forecasts that restored market access with China should allow U.S. poultry producers to export more than $1 billion worth of poultry products to the country annually (double the amount of poultry exports before the ban went into effect).
We believe that lower crop prices, shifting supply chains and reopened geographies present ample, albeit uneven, opportunities across the sector in 2020. Investors should take an active, measured approach.
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