Etikett: grains

Agriculture stocks on the cusp of recovery

ETF Securities Agriculture stocks on the cusp of recoveryAgriculture stocks on the cusp of recovery

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

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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.

(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).

(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%.

(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.

(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.

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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”).

The information contained in this communication is for your general information only and is neither an offer for sale nor a solicitation of an offer to buy securities. This communication should not be used as the basis for any investment decision. Historical performance is not an indication of future performance and any investments may go down in value. This document is not, and under no circumstances is to be construed as, an advertisement or any other step in furtherance of a public offering of shares or securities in the United States or any province or territory thereof. Neither this document nor any copy hereof should be taken, transmitted or distributed (directly or indirectly) into the United States.

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Deal or no deal…stability will be restored

Deal or no deal…stability will be restored

ETFS Multi-Asset Weekly – Deal or no deal…stability will be restored

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Highlights

Grains post strong gains.

Is correction territory a buying opportunity for China?

Swedish and Swiss central banks go on the currency war offensive.

Defensive assets are likely to benefit from the uncertainty in Greece. The ‘No’ vote in the referendum yesterday received more than 60% of votes. Failure to make progress in debt negotiations elevates the risk of a default on the €3.5bn that is owed to the ECB on 20th July. Another default would almost certainly lead to the emergency liquidity assistance (ELA) being switched off and throw Greek banking system into an untenable position. While there is near term risk of greater volatility and downside equity risk, evidence of continued growth in the Eurozone and the US should help restore stability once the initial ‘event’  risk

Commodities

Grains post strong gains. Deteriorating growing conditions and lower acreage sown for corn and wheat saw the grains sector significantly outperform the broader commodities market. While Soybeans rode the grains momentum higher despite a record crop being planted in the US. Sugar also posted solid gains as the Indian monsoon season has begun to deteriorate. Compared to historical averages, rainfall was 14% lower than normal in June, potentially threatening the crop from the world’s second largest producer. An intensification of the El Niño could further exacerbate the disruption of crops, providing further price support. Soy is the likely exception, with an El Niño assisting growing conditions in South America. Meanwhile, the first increase in the US oil rig count has prompted crude price weakness, something that could gather momentum in the weeks ahead, if, as we expect oil production remains elevated and moves higher as rigs come back online.

Equities

Is correction territory a buying opportunity for China? Further stimulus by the People’s Bank of China last week was followed up by an easing in its crackdown on margin lending for equity market investments. The sharp slide in A-shares that the changes to margin lending rules has brought about has authorities concerned and policymakers are justifiably wary over excessive volatility and the potential threat to social stability. Policymakers are attempting to smooth the transition to market transparency and financial liberalisation and will likely continue to be supportive with fresh policy measures. The continuing Greek debt crisis prompted sharp losses across most European bourses last week and in early trading this week, as the Greek government defaulted on an IMF repayment and Greek Prime Minister continued to urge citizens to vote ‘No’ at last weekend’s referendum. Citizens duly responded, with 60% of the vote. Expect more downside risk and volatility or equity markets.

Currencies

Swedish and Swiss central banks go on the currency war offensive. Currency wars continue to be waged in the background, as the Greek crisis takes the headlines. The lack of clarity surrounding the fate of Greece has given investors no respite from currency volatility. The Swedish Riksbank cut rates further into negative territory (4th cut in 2015) and coupled with additions to its QE program, is keen to keep any currency gains in check (because long end rates remain elevated). The reason long-end rates are high is because of the lack of liquidity – a problem that larger central banks pursuing QE (the Fed, the ECB and BOJ) have not had to contend with. As a consequence, another issue is that the currency has strengthened more than expected, and hampers any benefit for the local economy. We expect the Riksbank will more closely target its currency in the future, as long as its QE program remains ineffective.

For more information contact:

ETF Securities Research team
ETF Securities (UK) Limited
T +44 (0) 207 448 4336
E  info@etfsecurities.com

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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 (”FCA”).

Investments may go up or down in value and you may lose some or all of the amount invested.  Past performance is not necessarily a guide to future performance. You should consult an independent investment adviser prior to making any investment in order to determine its suitability to your circumstances.

The information contained in this communication is for your general information only and is neither an offer for sale nor a solicitation of an offer to buy securities. This communication should not be used as the basis for any investment decision. Historical performance is not an indication of future performance and any investments may go down in value.

This communication may contain independent market commentary prepared by ETFS UK based on publicly available information. Although ETFS UK endeavours to ensure the accuracy of the content in this communication, ETFS UK does not warrant or guarantee its accuracy or correctness. Any third party data providers used to source the information in this communication make no warranties or representation of any kind relating to such data. Where ETFS UK has expressed its own opinions related to product or market activity, these views may change. Neither ETFS UK, nor any affiliate, nor any of their respective, officers, directors, partners, or employees accepts any liability whatsoever for any direct or consequential loss arising from any use of this publication or its contents.

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Investors Accessing Broad Commodity Exposures

Investors Accessing Broad Commodity Exposures

ETF Securities Commodity ETP Weekly Investors Accessing Broad Commodity Exposures

•    Agricultural commodity prices surge, attracting investors on supply concern.

•    Sugar inflows of US$15.3mn mark the largest inflows into any commodity over past month.

•    Optimism over global recovery drives outflows from gold.

•    Largest inflows into energy ETPs for 14 weeks, totaling US$10.5mn.

•    This Thursday, we are hosting the webinar: ”Sentiment vs Fundamentals, What Happens Next?” taking a look at what may happen when prices realign with fundamentals. Learn more and register

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Broad basket commodity ETPs received over 50% of total inflows. With bond and some equity benchmarks seeming stretched, investors appear to be increasingly looking at the relative value of the commodity market and gaining broad based exposure via ETPs that offer a diversified exposure to a number of sectors. Meanwhile, despite the prolonged negotiations attempting to stem a Greek debt default, investors appear to be anticipating an 11th hour deal. Investors are becoming more optimistic about economic conditions and appear to be gaining more cyclical exposures and reducing defensive assets and with China continuing to support its economy with fresh rate cuts, commodity prices are likely to be well supported.

Agricultural commodity prices surge, attracting investors on supply concern. Wheat led the agricultural sector gains, as excess rainfall in the US is expected to further delay to the winter crop harvest. Meanwhile, the International Grains Council has also released estimates indicating a deficit for the 2015/16 crop year for both wheat and corn. However, with significant stock levels for both commodities, material gains will depend on how growing conditions will affect the progress of this year’s crop.

Sugar inflows of US$15.3mn mark the largest inflows into any commodity over past month. Bargainhunters appear to be seeing the 6½ year low sugar prices as an attractive entry point amid a global sugar glut. While expectations abound for another year of surplus in 2015, the threat to sugar supply from the El Niño could curb supplies from India, the world’s second largest producer. Additionally, data released last week showed that some Brazilian production in the June 2015 remains significantly below the same period a year earlier.

Optimism over global recovery drives outflows from gold. Last week saw the largest outflows from gold in 14 weeks, totaling US$126.8mn. Investors are seeking more cyclical exposures, believing in the sustainability of the economic recovery. In contrast to gold, and hovering at multi-year lows, silver, in particular has experienced strong inflows in 2015, with a greater amount of its demand profile coming from industrial sources.

Largest inflows into energy ETPs for 14 weeks, totaling US$10.5mn. Inflows into broad basket energy ETPs reached a 5-week high, netting US$7.2mn. Long natural gas ETPs received the biggest single commodity flows, receiving US$5.4mn after the build in storage levels surprised the market on the downside. Recently a surge in demand from power generation has seen stocks decline, largely due to warmer weather in recent weeks.

Key events to watch this week. With the Greek crisis enflamed by the decision to hold a referendum on the reform and bailout conditions, the secondary focus for investors will be the CPI readings for the Eurozone and the nonfarm payrolls in the US to gauge the extent that the future of monetary policy path will be divergent. Commodity investors will again focus on the weekly oil and natural gas storage figures, while in the agricultural space, this week’s USDA crop conditions and acreage reports will be monitored for any potential threat to current supply expectations.

Video Presentation

Martin Arnold, Research Analyst at ETF Securities provides an analysis of last week’s performance, flow and trading activity in commodity exchange traded products and a look at the week ahead.

For more information contact

ETF Securities Research team
ETF Securities (UK) Limited
T +44 (0) 207 448 4336
E info@etfsecurities.com

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Time to revisit the commodity market

Time to revisit the commodity market

Recent price corrections bring opportunities Time to revisit the commodity market

Most commodities are trading close or below their marginal cost of production, with platinum, nickel, oil and grains the most striking examples. While in the short-term companies and mines can continue to produce even if prices are trading below marginal costs, it is not sustainable in the long term.

Unprofitable operations will have to be shut down or downsized, reducing production to contain costs. We expect the recent correction in commodity prices to be short-lived and believe commodities are attractively valued at current levels. Most of the factors that have hit commodity prices over the past month are temporary, and we believe the price correction creates tremendous opportunities for medium to longterm investors.

The state of play

Concerns about European and Chinese growth, markets digesting higher US rate expectations and US dollar strength, bumper grain crops, and adjustments to oil supply and demand expectations have been the main drivers of the poor commodity performance in 2014 (Figure 1). We believe a number of the increased supply price drivers will be transitory and that the recent period of softer global growth will prove short-lived.

US dollar strength should not hinder a price rebound as dollar strength is being driven by expectations of improving US demand. As China eases policy to boost growth, the US economy recovers and years of gradually tightening capacity start pushing up inflation, commodities should recover from current beaten down levels.

Metals

Investors focussing on global risks prompted a volatility surge across asset classes, which resulted in a sell-off across cyclical assets. Global equity benchmarks led the correction, prompting prices of several metals to fall below their marginal cost of production. Prior to the price weakness in September, industrial metals had staged a striking recovery in 2014, with a 6.4% rise in the first eight months of the year. While we believe most metals are attractively priced at current levels, we think platinum, palladium and nickel offer interesting opportunities at the moment.

Platinum and palladium markets were plagued by a 5-month long strike in South Africa at the beginning of the year that took over 1moz of platinum and 700koz of palladium off the market (equivalent to 14% of 2013 total production of platinum and 8% of 2013 total global production of palladium). As palladium is extracted as a by-product of platinum in South Africa and of nickel in Russia, it will only be produced as long as it is convenient to extract platinum and nickel, respectively. At the moment, platinum is trading 9.3% below its marginal cost of production (Figure 2) while nickel is around 18% below its marginal cost of production (Figure 3). Indonesia is the biggest nickel producer with 21% of global supply.

’

The metal ore export ban that began in 2014 remains in place and Chinese producers of nickel pig iron, a lower-quality substitute for refined nickel, have since turned to the Philippines, the 2nd largest global producer with 14% of supply, to keep their industry well supplied.

However, seasonal rains are set to disrupt nickel mining and seaborne transportation of the metal in the Philippines. Disrupted production should start to reduce elevated stockpiles, in turn buoying prices.

While the aluminium price has also fallen below its marginal cost of production and the industry has undertaken considerable steps towards a more balanced market, we believe its price is not yet ripe for a recovery. Despite recent efforts to discipline aluminium supply and the market ex-China being in a deficit, we believe further cuts will be needed to compensate for the build-up in capacity coming from China and for prices to be pushed substantially higher.

Agriculture

While wheat, soybeans and corn are all trading at multi-year lows on the back of expectations for record crops this season, Arabica coffee has rallied over 70% since the beginning of the year on supply concerns.

With grains priced for perfect growing conditions, any small setback in weather in major producing countries or an escalation in trade restrictions in Russia or Ukraine could drive a price rally. The whole grains sector is trading below total cost of production (Figure 4), and because of the seasonality of production, there is likely to be changes in what and how much is grown in coming seasons because sustained weak prices could prompt producers to switch to more profitable crops or use of their land. A decrease in next year’s expected crop should lead to a drawdown of stockpiles and help support prices, which have just begun to stage a rebound.

While the International Coffee Organisation envisages only a slight recovery for coffee in the 2014/2015 season, as a devastating leaf rust disease is likely to prompt switching to other crops, we believe the recent rally was excessive as there is no immediate shortage of coffee and prices remain well above marginal costs of production (Figure 4).

Energy

Weak global demand for oil and distillates combined with ample global supply of crude sent both Brent and WTI prices to the lowest since November 2010 for Brent and June 2012 for WTI. The geopolitical risks in some OPEC countries and the sanctions on Russia have so far very limited impact on global oil supply and failed to provide support to oil prices against market expectations. In the meantime, the OPEC members entered a price war in October, selling their oil at a discount in order to increase market share in Asia, putting further downward pressure on both oil benchmarks. The key to greater support in oil prices lies with OPEC. With oil prices hovering below most major oil producers’ budget break-even levels (Figure 5), we believe it is a matter of time before OPEC start to reduce supply. While the IEA has indicated that most oil produced is still economic at US$80/barrel, the majority of OPEC countries are estimated to require oil prices of at least US$90-US$100/barrel to balance their government budgets. While different oil fields have different breakeven costs, it is generally alleged that US shale oil, which accounts for most of oil production growth over the past few years, has a breakeven price ofUS$60-US$80 (Figure 6).

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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 (“FCA”).

Investments may go up or down in value and you may lose some or all of the amount invested. Past performance is not necessarily a guide to future performance. You should consult an independent investment adviser prior to making any investment in order to determine its suitability to your circumstances.

The information contained in this communication is for your general information only and is neither an offer for sale nor a solicitation of an offer to buy securities. This communication should not be used as the basis for any investment decision. Historical performance is not an indication of future performance and any investments may go down in value.

This communication may contain independent market commentary prepared by ETFS UK based on publicly available information. Although ETFS UK endeavours to ensure the accuracy of the content in this communication, ETFS UK does not warrant or guarantee its accuracy or correctness. Any third party data providers used to source the information in this communication make no warranties or representation of any kind relating to such data. Where ETFS UK has expressed its own opinions related to product or market activity, these views may change. Neither ETFS UK, nor any affiliate, nor any of their respective, officers, directors, partners, or employees accepts any liability whatsoever for any direct or consequential loss arising from any use of this communication or its contents.

ETFS UK is required by the FCA to clarify that it is not acting for you in any way in relation to the investment or investment activity to which this communication relates. In particular, ETFS UK will not provide any investment services to you and or advise you on the merits of, or make any recommendation to you in relation to, the terms of any transaction. No representative of ETFS UK is authorised to behave in any way which would lead you to believe otherwise. ETFS UK is not, therefore, responsible for providing you with the protections afforded to its clients and you should seek your own independent legal, investment and tax or other advice as you see fit.

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ETF och indexutveckling 16 – 20 maj

ETF och indexutveckling 16 – 20 maj

ETF och indexutveckling 16 – 20 maj. Veckan var fortsatt volatil. I USA gick både Dow Jones och S&P 500 ned och avslutade veckan med nedgångar på 0,7% respektive 0,3%. Nasdaq avslutade veckan med en nedgång med 0,9%. Sverige avslutade veckan kring nollstrecket.

Den europeiska marknaden / indexet Dow Jones STOXX gick ned med 0,3% i lokal valuta. Bästa landet i vårt urval var Egypten med en uppgång på cirka 5% uttryckt i US-dollar. Sämsta landet var Vietnam med en nedgång om cirka 7%. Bästa sektor ETF:en i USA var gruvbolag (”metal miners”) som avslutade veckan med en uppgång på cirka 3%. Den sämsta sektorn var solenergi med en nedgång med cirka 7%.

De bästa ETF:erna denna vecka var iPath Dow Jones UBS Grains ETN (ticker JJG) 8%, iPath Dow Jones UBS Cotton (ticker BAL) 7,7% och iPath Dow Jones UBS Agriculture ETN (ticker JJA) 6,4%.

De tre sämsta ETF:erna var Market Vectors Vietnam ETF (ticker VNM) -10,6%, Guggenheim Global Solar Energy (ticker TAN) -7,1% och PowerShares Dynamic Retail Portfolio (ticker PMR) -4,2%.*

(*inkluderar inte hävstångs ETF:er och omfattar bara ETF:er noterade i USA)