Grain markets, ag shares 'close to bottom of cycle' - BlackRock


Ag markets are "at or close to" their nadir, heralding gains which will spur recovery in valuations of farm sector shares from levels that are "close to historic lows", said Skye Macpherson, commodities expert at BlackRock.

Ms Macpherson, director, natural resources at the fund management giant, flagged the potential for an end to the period of growth in world grain stocks which had fostered falls of some 40% in prices of corn, soybeans and wheat from 2012 highs.

"We have never had a fifth year of expansion" in stocks, she told Agrimoney LIVE.

"That does not mean there will not be one in 2017, but it is interesting to note what we have seen historically."

'More upside than downside'

The price falls, a result of "the fact that we have had relatively benign weather for four successive years", meant that there was certainly "more upside than downside" for grain prices.

Focusing on corn, Ms Macpherson said that Chicago futures - which stand to average some $3.90 a bushel this year should a trend yield pegged at 170 bushels per acre be achieved – may come in below $3.80 a bushel if farmers outperform and achieve a 174-bushels-per acre result.

However, should the yield come in 4 bushels per acre below trend, that would set the average price at about $4.40 a bushel.

"We have 3% downside, 13% upside," she told the conference, in London, adding that "whatever yield scenario you use" US corn stocks look like falling over 2017-18, thanks to lower plantings.

'Multiples at historic lows'

"I think for grain prices, we are pretty close to, or at, the bottom of the cycle," she said, underlining too that prices were "close to cash costs of production in many parts of the world".

And a recovery in crop values stands to support shares in agriculture groups, which have been attributed particularly low valuations by investors because of the difficulties in making money in an environment characterised by low crop values, and weak volatility too.

As measured by price-to-book ratios, ag sector share valuations are at "historic lows", at the kind of levels more common in companies surrounded by significant concerns.

"Equity markets are pricing them like there is a structural issue," Ms Macpherson said, terming stock prices "very, very attractive.

"We do not believe there is a structural issue, just a cyclical issue."

"When the cycle begins to improve, [sector] equities will improve."

Best bets

So-called "upstream" companies – such as farm producers and suppliers, as opposed to "downstream" groups, such as meat producers, which purchase farm commodities – stand to be particular beneficiaries of a change in investor sentiment.

"There is a very supportive environment for the upstream part of the value chain," she said, raising ag machinery groups as particularly good bets.

This subsector, which include the likes of Agco, CNH Industrial and Deere & Co, has "managed well" its production over the ag industry downswing, limiting stocks, and meaning it is well placed to benefit on a sector revival.


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