Saturday, 29 November 2014

Agriculture’s Problem of Plenty

It’s no secret that agricultural stocks could suffer from low prices for commodities like corn and soybeans. But 2015 projections from Deere (ticker: DE) last Wednesday were particularly weak -- $1.9 billion in earnings, versus analysts’ expectations for $2.2 billion -- and suggest that the Street may still be too optimistic. Barron’s warned about farming shares in late September (“Harvest Time for Farming Shares,” Sept. 29). The stocks we highlighted in that story are down an average of 0.3% since, versus a 4.3% rise for the S&P 500. We think they’ll continue to underperform.
Companies dependent on agriculture, from machinery makers, like Deere and AGCO(AGCO), to seed and fertilizer companies, like Potash (POT) and Syngenta (SYT), are likely to continue to suffer. Although corn futures have risen 15% since late September, farmers have too few incentives to boost spending.
“With negativity on the ag cycle rampant, it’s tempting to take the other side of the trade and go long a quality company like Deere, but the company’s initial guidance for FY2015 confirms the adage that the Street always plays catch-up in quantifying the impact of cyclical swings on earnings, and it appears this process has not yet fully played out,” wrote Janney Montgomery Scott analyst Ryan Connors after Deere earnings were released. This holiday season, you can feast on abundant agricultural products while passing on the shares. -- Avi Salzman

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