Monthly Company Performance

BMI view: In this month's agricultural company performance roundup, we maintain our long-held view for the outperformance of livestock producers and biscuit/flour makers, compared to the underperformance of sugar and agricultural input equities. Within the agricultural input companies, we now see the outperformance of fertiliser producers compared to seeds and machinery, as we believe share prices for fertiliser companies will stabilise after being dragged down by the recent collapse of the Russian-Belarusian cartel .

We maintain our long-held view that livestock and biscuit/flour companies will outperform the rest of the agricultural complex over the coming months. We believe cocoa companies will be top performers too, but believe this view is more difficult to play as Barry Callebaut is one of the only pure players in the cocoa sector. We believe livestock and biscuit/flour companies will benefit from a rebound in margins in the short term on the back of sharp moderations in grain prices. In fact, our view for grain prices to moderate in Q213 has played out spectacularly, with strong US corn and soybean harvests expected this season, while European wheat crops are also seeing a recovery. The S&P GSCI Grains index has fallen by 22.0% since June and, although we see most of the losses in prices behind us, we expect lower prices will start being fed into producer margins in the near term.

Livestock On Top
Select Sub-sectors - Average Three-Month Share Price Performance Of Constituent Companies (% Chg)

We expect companies like Tyson Foods and JBS to continue to perform strongly compared to the rest of the agricultural complex. (see 'Global Company Strategy' for JBS and Tyson). JBS and Tyson have seen their share price rise by 24.9% and 22.3% respectively in the past three months, benefitting from improving conditions in the US beef sector, growth in the poultry sector and moderating feed prices. Even if these companies' price/earnings ratios are close to a top, we are not calling yet for their share prices to lose ground in the near term as we believe there is more room for margins to recover and as investor sentiment has been improving towards the US livestock industry as a whole.

Tyson & Premier Foods Ripping All The Gains
Select Companies - Share Prices (Rebased)

We maintain our view for sugar and agricultural input companies to underperform the agricultural complex. Sugar companies have returned -2.9% over the past three months and we expect them to perform relatively poorly over the coming quarters. This is because sugar prices have come down a long way in the past months losing 27.7% since the start of 2013. Even though margins for major Brazilian producers such as São Martinho have been cushioned by the strength in the ethanol sector and advantageous forward contract prices (at USc20.40/lb in June for São Martinho), global price weakness will eventually impact margins and leave producers' valuation subdued in the coming months. This will be exaggerated by the already high trailing P/E seen in the sector (São Martinho trades at 27.0x compared to 25.0x for the Bovespa). Also, even though we called for prices to bottom around the USc15-16/lb area, we see minimal recovery potential in the coming year as we forecast prices to average USc17.50/lb in 2013 and USc17.00/lb in 2014.

Fertiliser Losing Ground
Select Sub-sectors - Average Three-Month Share Price Performance Of Constituent Companies (% Chg)

Agricultural input companies have performed the worst of the agricultural complex in the past three months, dragged down by the disastrous performance of fertiliser companies after Russian potash producer Uralkali proclaimed the end of its cartel with Belarusian potash producer Belaruskali. In fact, Uralkali and Potash Corp's share prices lost 30.4% and 29.8% respectively in the past three months. The move will push potash prices, and as a result all fertiliser prices, lower in the near term. This is because the end of the partnership dismantles the world's most important potash cartel after Canpotex (trade association of Canadian producers), with 42.0% of the world's potash exports coming from the Belarusian Potash Co. (BPC), a joint venture between Uralkali and Belaruskali set up in 2005, compared to 25% for Canpotex. As a result, 42.0% of the potash market could effectively be liberalised, pushing prices lower in the near term. Currently trading around US$400/tonne, potash prices could fall below US$300/tonne in the coming months, their lowest level since January 2010.

Already Gone A Long Way
Bloomberg Fertiliser Leaders Index (Weekly) & RSI (Below)

However, we believe fertiliser companies' share prices will stabilise in the near term for a combination of fundamental and technical reasons. First, we believe pricing prospects for the main potash producers remain relatively favourable and do not expect potash prices to collapse much below current levels. This is because we see Uralkali's strategy to boost volume at the expense of prices, especially to China, as overoptimistic. Also, we expect major projects in the potash sector to be delayed or abandoned over current uncertainty facing the industry, which will leave prices supported in the near term. Second, relative strength indexes on most fertiliser companies, especially potash producers, are in oversold territory while their price/earnings ratios have reached historical lows.

Only Way Is Up?
Select Fertiliser Companies - Share Price (Rebased)

As a result, we expect fertiliser companies to outperform the rest of the agricultural input complex over the short term. Even if we are neutral on seeds companies, we are particularly cautious on agricultural machinery companies, especially US focused companies, such as Deere & Co. In fact, we believe machinery companies will see the most impact from lower grain prices and therefore lower farmers' revenues and disincentives to invest in their crops. We believe agricultural machinery demand is the most elastic to farmers' revenues in that category as it is more costly and has a longer life span. Over the medium term, however, we see more mixed prospects for the three groups of companies.

This article is tagged to:
Sector: Agribusiness
Geography: Global, United States, Global, Global, Global, Global, Global, Global

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