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Agriculture stocks on the cusp of recovery

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ETF Securities Equity Research - Agriculture stocks on the cusp of recovery Decline in overall production expenses (-2%) to cushion the fall in cash receipts

ETF Securities Equity Research – Agriculture stocks on the cusp of recovery

Summary

  • Decline in overall production expenses (-2%) to cushion the fall in cash receipts
  • The expected increase in direct US government farm program payments in 2016 will benefit producers
  • The weaker US dollar will benefit US agricultural exports providing a strong catalyst for US farm income
  • The uptick in profitability coupled with the rising sentiment indicator appears favourable for agricultural producers

Farm income outlook less bearish

A sustained period of high crop prices from 2008 to 2012 led to a bout of investment by agricultural producers, since then falling soft commodity prices have revealed high debt loads and narrowing margins. However the drop in input expenses coupled with a turnaround in sentiment is painting a more optimistic picture for agricultural producers heading into 2016.

Our analysis focusses on the S-net ITG agriculture index, which is diversified across Seeds Chemicals & Fertilizers (53%), Commodity Agricultural Products (30%), Equipment (13%) and Livestock (3%) with 70% of the constituents from the United States.

In the latest farm income outlook released by the United States Department of Agriculture (USDA), US net farm income, a key indicator of U.S. farm well-being, is forecast to decline by 3% in 2016. While this will be the third consecutive year in decline, it is not as severe as the declines of -27% and -38% witnessed in the prior years 2014 and 2015 respectively. Cash receipts are forecast to fall 2.5%, falling prices being the key contributor to this price fall as highlighted in the accompanying chart.

Global nitrogen fertilizer supply is poised to grow as cheap energy prices fuel production increases, providing a boost to their bottom line. Although it is worth noting that the recent squeeze on farmers margins does not eliminate the risk of farmers skipping application of fertiliser or shifting acreage from chemical intensive corn to other crops. We believe the fall in fertiliser costs is likely to benefit both fertiliser producers and farmers.

ETFS1

(Click to enlarge) Source: USDA, Economic Research Service, Farm income and wealth statistics, ETF Securities

Lower expenses buffer slide in cash receipts

Overall farm production expenses are forecast (USDA) to decline for the second consecutive year. Occurrences of multiyear reductions in farm production expenses are rare, the last time being 1984-86. This drop in expenses for inputs such as feed, livestock/ poultry purchases and fuel are forecast to outweigh the increase in interest expenses and hired labour costs thereby alleviating falling cash receipts. More importantly input costs (currently in 2nd year of decline) tend to lag behind commodity price swings (that have been in decline for 4 years).

ETFS2

(Click to enlarge) Source: USDA, Economic Research Service, Farm income and wealth statistics, ETF Securities

In addition, US farmers are poised to benefit from a 31.4% ($13.9bn) increase in direct government farm payments in 2016. The 2014 farm bill eliminated direct payments worth $5bn annually and replaced them with a net suite of safety net programs that will be triggered in 2016 if farm prices continue to fall.

Lower US dollar to benefit exports

Agricultural exports have been a major catalyst for the strong U.S. farm income in prior years, accounting for more than 30% of gross cash farm income. As majority of commodities are priced in US dollars, the appreciation of the dollar against the local currency of non-US growers has made the commodities more expensive for the foreign based buyer. Although its difficult to quantify just how much buyers have been sourcing lower cost soft commodities we have seen anecdotal evidence of this behaviour. For example, Brazil’s soya bean exports surpassing US soya bean exports in 2015 are likely due to the Brazilian Real’s depreciation. We expect a continuation of US Dollar weakness in 2016 benefitting farm income which has been squeezed by recent USD strength.

Outlook for Agricultural commodities

The correlation of agricultural producers with livestock, grains and softs has depicted a cyclical relation over time. Current correlation with livestock remains high at 80%, followed by grains at 64% and lower for softs at 30%.

ETFS3

(click to enlarge)

Livestock related commodities account for approximately half of the farmer’s cash receipts while the other half comes from crops (namely corn), so farm income would benefit if these specific commodities rise.

  • Livestock sector ended 2015 as the worst performer among agricultural commodities despite the impact of avian influenza, market prices are expected lower in 2016 according to USDA.
  • The price outlook for grains – namely corn, wheat and soya bean prices remain subdued since their inventory levels remain are at record highs.
  • Sugar prices are expected higher owing to the reduced sugar supply from Brazil and India driving expectations for a larger world market deficit in 2015/16.
  • Dry conditions emanating from the El Nino coupled with a rebound in the real is lending buoyancy to Arabica coffee prices in 2016.
  • Cocoa is forecasted to be in a supply deficit in 2016.
  • While cotton has been negatively impacted from lower import demand into China, the crop is expected to remain in a deficit this year.

Shift in sentiment signals an opportunity

Despite the pessimism surrounding the agriculture industry, agricultural producers are currently trading at 20x earnings and 3x book value, in line with their respective 10-year average. Profitability of these companies has been volatile given their exposure to the vagaries of the weather. We are currently in one of the most extreme El Niño events on record, dating back to 1950. According to the Australian Bureau of Meteorology, out of the past 26 El Niño events since 1900 approximately 40% have been followed by a La Niña. If this came to pass, wheat, corn, soybeans, coffee and cocoa will benefit from favourable weather thereby negatively impacting prices while sugar prices will benefit on the upside.

Net profit margins have been in a downward trend since the slump in commodity prices ensued in 2011 but the last quarter in 2015 has seen an uptick of 3.1% over the prior year. Net debt to assets remains high at 31x. USDA has reported growth in farm real estate loan volumes throughout 2015, commercial banks and the farm credit system has remained cooperative and credit to the sector has not been curtailed until now.

Our sentiment indicator (based on consensus data) has been rising since 2014, highlighting a renewed sign of optimism in holding agriculture producer stocks.

ETFS4

(Click to enlarge)  Source: Bloomberg, ETF Securities

In summary we believe agricultural producers are modestly valued, with profitability starting to turn the corner in-line with shifting positive sentiment. Despite the pessimism that permeates through the farming industry, farm income credit has not been curtailed. While net farm income is forecast to decline for the third consecutive year, the lag in declining expenses is expected to catch up and help alleviate the decline. 2016 has seen a positive turnaround for majority of commodities and is lending support for the price outlook of agricultural commodities.

Important Information

General

This communication has been issued and approved for the purpose of section 21 of the Financial Services and Markets Act 2000 by ETF Securities (UK) Limited (“ETFS UK”) which is authorised and regulated by the United Kingdom Financial Conduct Authority (the “FCA”).

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FUD vs. Fundamentals: What Happened This Week in Crypto?

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Fear, uncertainty, and doubt (FUD) have clouded Ethereum's business prospects after CoinDesk reported on March 20 that Ethereum’s Github repository seemed to confirm rumors about ongoing investigations by the Securities and Exchange Commission (SEC). If true, this could be business as usual for the regulator as it nears its deadline for a decision on ETH spot ETFs on May 23. Nevertheless, statements about the investigations are vague and ambiguous, whether they're focused on the Ethereum Foundation or the companies dealing with it, making it a curious case to monitor closely.

• Ethereum: FUD vs. Fundamentals

• Arbitrum Doubles Down on Dencun’s Cost-Efficiency

• Optimism Strides Towards Full Decentralization

• Can This Major Upgrade Help Fantom Level Up With Solana?

Ethereum: FUD vs. Fundamentals

Fear, uncertainty, and doubt (FUD) have clouded Ethereum’s business prospects after CoinDesk reported on March 20 that Ethereum’s Github repository seemed to confirm rumors about ongoing investigations by the Securities and Exchange Commission (SEC). If true, this could be business as usual for the regulator as it nears its deadline for a decision on ETH spot ETFs on May 23. Nevertheless, statements about the investigations are vague and ambiguous, whether they’re focused on the Ethereum Foundation or the companies dealing with it, making it a curious case to monitor closely.

How did the market react? Nothing dramatic. In the past week, despite Ethereum experiencing a 10% drop on the day of Coindesk’s report, it quickly recovered the following day with a 10% rebound and shrugging off the uncertainty, ultimately closing the week with a modest 1.78% gain. The below on-chain metrics are also worth noting:

• ETH deposits on centralized exchanges increased by ~3%, well within the 3-5% average increases seen in May 2021, 2022, and 2023, which is understandable as investors capitalize on reaching the $4K milestone.

• The market-value-to-realized-value (MVRV) is one of crypto’s leading on-chain indicators comparing Ethereum’s current market price to its historical average transaction price, to estimate its valuation based on past trends.. As shown in Figure 1, the MVRV went from 2.23 on March 13 to 1.65 on March 24, indicating that the network continues to be undervalued when compared to previous bull runs. For example, in May 2021, the MVRV Z-score was at 5.57 when Ethereum traded at around $3.9K.

Figure 1: Ethereum’s MVRV Z-Score (7D Moving Average)

Source: Glassnode

On a more positive note, the biggest news for Ethereum was arguably BlackRock’s announcement of tokenizing treasury bonds and repo agreements. The asset manager has partnered with Securitize as a transfer agent and tokenization platform to launch their yield-bearing fund, BUIDL, on top of Ethereum. As shown in Figure 2, Ethereum accounts for 80.33% of tokenized assets, if we exclude fiat-collateralized stablecoins. BlackRock has joined the likes of Franklin Templeton and Citigroup, among others, in tokenizing real-world assets. The deployment on Ethereum reiterates our thesis that the network will continue playing a vital role across the tokenization realm. So far, there has been a total of over $2 billion worth of commodities and government securities, among other traditional assets tokenized on several networks. Thanks to blockchain technology, these tokenized assets boast several advantages over their traditional form due to their transparency, around-the-clock trading, and faster settlement.

Figure 2: Tokenization Market Share by Chain

Source: 21.co on Dune Analytics

On the fundamental side, Ethereum’s core developers have launched an initiative called “pump the gas” to raise the gas block limit from 30 to 40 million (and even more), decreasing gas fees on Ethereum’s mainnet by as much as 33%. The gas block limit is the maximum amount of gas that all transactions combined can consume within a single block. The discussion of expanding the gas block limit has been up for debate since Vitalik brought it up in January 2024. However, some are not in favor of the initiative, arguing that EIP-4844 has already increased the block size and that it could lead to potential risks of network spam and attacks.

Arbitrum Doubles Down on Dencun’s Cost-Efficiency

With Optimism, Base, and Arbitrum all witnessing transaction fees drop by over 90% post-Dencun’s activation, the total number of transacting addresses across their networks has almost doubled since then, as seen below in Figure 3. However, Arbitrum has taken a step further by introducing the ATLAS upgrade, aiming to drive fees down even more. Specifically, ATLAS decreased what’s known as the “L1 surplus fees” from 32 gwei to zero while lowering the L2 base fees from 0.1 to 0.01 gwei, helping the network achieve a median transaction fee of ~$0.002, the lowest since October 2022. Applications built on Arbitrum can reap the benefit of the upgrade right away without any modifications from their end, while L3 networks built on top of Arbitrum, using its Orbit framework, need to implement the upgrade to capitalize on the blob posting mechanism to experience lower fees.

Figure 3: Number of Transacting Addresses across Base vs. Optimism vs, Arbitrum

Source: msibl7 on Dune

Optimism Strides Towards Full Decentralization

On the other hand, Optimism is progressing towards its vision of full decentralization. For context, the network currently relies on a single sequencer, a validator that posts transaction data from Optimism on Ethereum, run by the Optimism Foundation itself. This sequencer is overseen by an elected security council, which acts as a custodian managing the protocol upgrades and the security of the network by ensuring that the sequencer is acting honestly, amongst other security-related tasks. This means that only a handful of eight elected individuals can contest the validity of transactions if they suspect any malicious behavior. Nevertheless, this was a temporary setup until Optimism released its “Fault Proof” system, which determines the validity of transactions before they’re posted on Ethereum’s mainnet. This enables a proactive rather than a reactive approach to maintaining transaction integrity. In line with this, Optimism rolled out the second iteration of the system on Sepolia testnet after releasing the first in October of last year, with the full launch expected later this year, where anyone can submit a fault-proof and dispute the validity of transactions.

Can This Major Upgrade Help Fantom Level Up With Solana?

The Ethereum alternative blockchain is set to implement its upcoming Sonic upgrade in the spring of 2024. Although the date isn’t determined yet, the next network iteration will position Fantom as one of the most scalable networks within the Ethereum Virtual Machine (EVM) ecosystem, capable of rivaling Solana’s efficiency. Namely, Sonic introduces the Fantom Virtual Machine (FVM), a new operating system facilitating close to 2000 transactions per second (TPS) based on the latest testnet results while adopting parallelization to enhance transaction throughput. Further, Sonic achieves transaction finality in under a second, with transaction fees costing less than a cent while introducing Carmen, a new database model that reduces the storage costs for validators by close to 90%. This enables them to participate in the network’s security validation in a cost-effective manner while expediting the time required for the foundation to spin up a new archival validator node from several weeks to 36 hours.

All in all, the excitement in anticipation of the upgrade can be seen with Fantom’s price growing by 200% over the last 30 days, while its DEX trading volume has surged by close to 12-fold, growing from $5M and peaking at $60M last week. Fantom’s stablecoin assets under management has also increased by about 150% over the same period since the lows of October 2023, implying that new users are increasingly depositing capital into the network to experiment with its ecosystem, akin to what was seen during the run-up of the ETF-led rally last October. Nevertheless, Fantom shows promising growth prospects as its P/E ratio continues to decrease despite its recent price gains, as shown below in Figure 4. This indicates that transaction volume and network utilization are outpacing its market capitalization growth, potentially implying that Fantom remains relatively undervalued.

Figure 4: NVT: The P/E-Equivalent of Blockchain Networks

Source: Glassnode

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This Week’s Calendar

Source: Forex Factory, 21Shares

Research Newsletter

Each week the 21Shares Research team will publish our data-driven insights into the crypto asset world through this newsletter. Please direct any comments, questions, and words of feedback to research@21shares.com

Disclaimer

The information provided does not constitute a prospectus or other offering material and does not contain or constitute an offer to sell or a solicitation of any offer to buy securities in any jurisdiction. Some of the information published herein may contain forward-looking statements. Readers are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties and that actual results may differ materially from those in the forward-looking statements as a result of various factors. The information contained herein may not be considered as economic, legal, tax or other advice and users are cautioned to base investment decisions or other decisions solely on the content hereof.

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BlackRock säger att det finns låg efterfrågan på Ethereum

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Robert Mitchnick, chef för digitala tillgångar på BlackRock, har avslöjat att kunderna till finansgiganten visar låg efterfrågan på Ethereum, den näst största kryptovalutan efter börsvärde. Samtidigt finns det "väldigt lite intresse överallt", vilket innebär att investeringsbolaget inte ens överväger mindre kryptovalutor.

Robert Mitchnick, chef för digitala tillgångar på BlackRock, har avslöjat att kunderna till finansgiganten visar låg efterfrågan på Ethereum, den näst största kryptovalutan efter börsvärde. Samtidigt finns det ”väldigt lite intresse överallt”, vilket innebär att investeringsbolaget inte ens överväger mindre kryptovalutor.

Mitchnick har erkänt att kryptovalutacommunityt vill se finansjätten utforska fler alternativ, men han säger att BlackRock fortfarande främst fokuserar på Bitcoin. Bitcoin, enligt chefen, är ”överväldigande prioritet nummer ett.”

Nyligen gick BlackRock med i tokeniseringsracet genom att lansera en ny fond baserad på Ethereum-nätverket. Fonden, som officiellt lanserades tidigare i veckan, gör det möjligt att tjäna amerikanska dollaravkastning med hjälp av blockchain-teknik.

I november ansökte BlackRock också om att lansera en Ethereum börshandlad fond. U.S. Securities and Exchange Commission sköt dock upp sitt beslut om denna ansökan tidigare i mars.

Som rapporterats av U.Today kollapsade oddsen för att en Ethereum ETF skulle godkännas på grund av regulatoriskt tryck. För en vecka sedan bad senatorerna Jack Reed och Laphonza Butler specifikt SEC-ordförande Gary Gensler att inte godkänna ETFer för fler kryptovaluta-tokens.

Samtidigt har SEC enligt uppgift lanserat en aggressiv kampanj för att klassificiera Ether som ett värdepapper, vilket ytterligare minskar sannolikheten för att en Ether-baserad spot-ETF ska godkännas inom en snar framtid.

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CHIN ETF spårar de 500 största företagen i Kina

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KraneShares ICBCCS China S&P 500 UCITS ETF (CHIN ETF) med ISIN IE0001QF56M0, strävar efter att spåra S&P China 500-index. S&P China 500-index följer de 500 största och mest likvida kinesiska företagen (alla aktieklasser inklusive A-Shares och offshore-noteringar).

KraneShares ICBCCS China S&P 500 UCITS ETF (CHIN ETF) med ISIN IE0001QF56M0, strävar efter att spåra S&P China 500-index. S&P China 500-index följer de 500 största och mest likvida kinesiska företagen (alla aktieklasser inklusive A-Shares och offshore-noteringar).

ETFens TER (total cost ratio) uppgår till 0,55 % p.a. KraneShares ICBCCS China S&P 500 UCITS ETF är den billigaste ETF som följer S&P China 500-index. Denna börshandlade fond replikerar det underliggande indexets prestanda genom full replikering (köper alla indexbeståndsdelar). Utdelningarna i ETFen ackumuleras och återinvesteras.

Denna ETF lanserades den 16 oktober 2023 och har sin hemvist i Irland.

Investeringsstrategi

KraneShares ICBCCS S&P China 500 Index UCITS ETF (ticker: CHIN) är en passivt förvaltad, indexföljande UCITS ETF som försöker mäta resultatet för S&P China 500 Index. S&P China 500 Index omfattar 500 av de största, mest likvida kinesiska företagen noterade på alla kinesiska börser, inklusive Kina, Hongkong och USA. Företag som är tillgängliga för inkludering måste ha sitt huvudkontor i Kina och uppfylla de minimikrav för börsvärde och likviditet som krävs enligt S&P:s indexmetod.

Egenskaper

Strategiskt ägande av Kina som ett tillgångsslag.

Exponering mot företag som drar nytta av ökad inhemsk konsumtion av Kinas växande medelklass.

Exponering mot kinesiska företag noterade i USA, Hongkong och Kina.

Höjdpunkter

Den ökade tillgängligheten av kinesiska aktier för utländska investerare under de senaste åren har lett till uppkomsten av Kina som tillgångsslag.

Kina har världens näst största ekonomi och aktiemarknad, med en kapitalisering på över 9 biljoner USD.

Endast 7 % av Kinas aktiemarknad ägs av utlänningar.

Handla CHIN ETF

KraneShares ICBCCS China S&P 500 UCITS ETF (CHIN ETF) handlas på flera olika börser, till exempel Borsa Italiana, Deutsche Boerse Xetra och London Stock Exchange. Av den anledningen förekommer olika kortnamn på samma börshandlade fond.

Det betyder att det går att handla andelar i denna ETF genom de flesta svenska banker och Internetmäklare, till exempel DEGIRONordnet, Aktieinvest och Avanza.

Börsnoteringar

BörsValutaKortnamn
Borsa ItalianaEURCHIN
XETRAEURCHIN
London Stock ExchangeGBPCHIP
London Stock ExchangeUSDCHIN

Största innehav

NamnVikt %KortnamnISIN
TENCENT HOLDINGS LTD6.39%700KYG875721634
ALIBABA GROUP HOLDING LTD4.32%9988KYG017191142
KWEICHOW MOUTAI CO LTD-A3.59%600519CNE0000018R8
PDD HOLDINGS INC1.97%PDDUS7223041028
CONTEMPORARY A-A1.67%300750CNE100003662
MEITUAN-CLASS B1.67%3690KYG596691041
CHINA MERCHANTS BANK-A1.62%600036CNE000001B33
PING AN INSURA-A1.61%601318CNE000001R84
CHINA CONSTRUCTION BANK-H1.60%939CNE1000002H1
NETEASE INC1.05%9999KYG6427A1022

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