Market review
-Agribusiness companies rallied in September.
-After experiencing profit taking over August, forestry-related companies climbed on the back of higher lumber prices.
-Corn prices slumped 8.5% after the US Department of Agriculture (USDA) reported higher-than-expected stocks as the harvest of a near-record crops gathers pace. This news comes 13 months after corn prices soared to a record settlement of US$8.31 a bushel as the worst US drought in decades battered the Farm Belt. The high prices prompted farmers to plant the most corn acreage in 77 years this northern hemisphere spring, and weather has been mostly favorable for growing.
-Soybean prices suffered a similar fate, declining by 5.5% as stockpiles were far larger than the market expected at the start of this marketing year, beginning in September, with the higher soybean stocks buffering a late start for the autumn harvest.
-Palm oil prices fell 4.4% on worries that supply could outstrip demand as largest producers Indonesia and Malaysia head into seasonally higher output cycles; production will pick up as we approach the beginning of the monsoon season.
-By contrast, wheat prices rose 3.8% as the market for the grain has been underpinned by strong demand from China and Brazil, which has helped drive US exports to more than half the USDA's target of 29.9 million tonnes just four months into the 2013/14 marketing year. Furthermore, wet weather is impacting harvesting in Russia and the Ukraine.
-Sugar prices shot up 8.8% on concerns that rain and maintenance issues will hamper harvesting Brazil, the world’s largest grower. The price rise over September needs to be viewed in the context of a sugar market that has been in a price slump since 2011 owing to high global supply exceeding consumption.
Fund activity
We sold Smithfield Foods following the successful completion of the acquisition by Shuanghui International. Smithfield will become a wholly-owned subsidiary.
-Additions: the portfolio added to positions in Archer-Daniels-Midland (ADM), Agrium, Ingredion and Smurfit Kappa. ADM is a large agricultural services company with over US$80 billion of sales in the business of converting agricultural harvest such as corn, wheat, soybeans and other products into basic ingredients for both consumer and industrial product manufacturers. Management remains optimistic about the outlook for 2014 given what will likely be a sizeable US corn crop resulting in favorable ethanol blending economics, increased volumes and utilization in agricultural services.
-Agrium is a leading global wholesale producer and marketer of major agricultural nutrients nitrogen, phosphate and potash, and the premier supplier of specialty fertilizers in North America. The company is attractively valued by our estimates and is one of the world’s lowest-cost nitrogen producers. We are expecting increased 2014 earnings from Agrium’s Strong retail segment.
-Ingredion provides nature-based sweeteners, starches and nutrition ingredients. Its shares have gone through a difficult period and this pessimism makes it attractive from a valuation perspective. In particular, the market is underestimating Ingredion’s financial strengths. It has ample cash on its balance sheet, solid earnings relative to debt and significant potential for improvement in working capital. Finally, we believe that headwinds in Brazil and the US in 2013 will abate into 2014 providing a platform for earnings improvement.
-Smurfit Kappa is a vertically integrated paper-based packaging producer with operations centred in Europe and the Americas. The company had been in debt repayment mode, but 2012 was a turning point with the acquisition of Orange Country Container Group signaling a return to growth. This acquisition has proved to be more than simply a bolt-on-addition to Smurfit Kappa’s existing operations. We believe that the full benefits of the acquisition will become clearer over the next financial year and help to widen Smurfit Kappa’s overall margins.
-We reduce dour positions in Olam International and Malindo Feedmill. Singapore-based commodities trader Olam’s disappointing 4Q13 report prompted us to reduce our earnings expectations for the company. Fourth-quarter profits nearly halved due to higher tax charges and challenging market conditions, while the group appears to be experiencing slowing growth in emerging markets.
-We took some profits from Indonesia’s Malindo Feedmill, which produces animal feeds and breeds chicken. Disproportionately low meat consumption in Indonesia provides immense room for Malindo to grow. However, an imminent slowdown in domestic growth and the depreciation of the currency, which brings greater inflationary pressures, are unhelpful for the stock.
Market outlook and fund positioning
-Powerful structural themes underpin an optimistic long-term case for soft commodities. The world’s population is growing by around 56 million each year and agricultural volumes will need to rise to feed many more people. This is taking place even as agricultural productivity slows and supply of water and arable land becomes more scarce.
-Broadly, we are overweight food processing stocks, the supply chain sector and seed and crop protection companies.
-We are positive towards grain handlers as they have difficult to replicate asset bases and higher throughput leads to greater profits. Food processors are benefiting from greater demand for protein-rich foods from emerging economies. Seed and crop protection represents staple, ‘must-haves’ in agriculture. Crop protection is a necessity at all times and in all cycles. Likewise, seeds which are weather and disease resistant are essential.
-Conversely, we are underweight the fertiliser and paper sectors. Turmoil in the potash industry continues to make us cautious about the fertiliser space overall and the paper industry in Western economies is structurally unattractive as capacity exceeds consumption.
