Taking the Pulse of the Farming Community

The Financial Log Book has several holdings related to the agricultural sector:

Input Capital (INP), a streaming company with a focus on canola

John Deere (DE), an equipment/services company

Rocky Mountain Equipment (RME), a dealer network specializing in Case farming and construction equipment

Clean Seed Capital (CSX), a start-up company in the early stages of producing and distributing a revolutionary (farmer friendly) seeder

The positions are being held for the long term and have been discussed in earlier parts of this blog.

All of the companies are characterized by the following:

• able management with a demonstrated ability to learn and adapt to changing circumstances 
• sound financials
• "muddy boots" with close links to the agricultural community
• ethical behaviour 
• resilience

Agricultural stocks are generally out of favour for short-term investors as farm incomes in Canada and the US have fallen markedly as a result of depressed commodity prices.  This is a cyclical phenomenon:

• favourable climatic conditions in North America and in competitor countries have resulted in bountiful harvests and abundant supplies
• competitors such as Argentina and Brazil have ramped up production in response to attractive market prices in recent years and are, in a sense, "trapped" by the need to realize a return on investment associated with this growth
• a global slowdown has the portent to reduce demand

This said, the long-term drivers which underpin the prospects for these companies remain:

• demand will increase as there are more mouths to feed 
• increased affluence will result in a increased demand for corn, grain etc. either as a direct food source for humans or a feed for livestock and poultry

I believe also, that North America is generally in a more favourable position than South America and parts of Asia:

• climate change is likely to have a disproportionate impact on growing regions outside of North America (incidence of drought and inimical events such as severe storms etc.).  I am still researching this thesis.  
• the transportation infrastructure in North America is robust and less likely to experience disruption as a result of social unrest than in regions such as Argentina and Brazil

Potential changes (%) in national cereal yields for the 2020s and 2050s relative to 1990, with climate change projected by the HadCM3 model under the A1FI scenario (a) with and (b) without CO2 fertilization

http://rstb.royalsocietypublishing.org/content/365/1554/2973

This said, farmers have a tough row to hoe.  I monitor this closely.  To this end, I have found it most informative to read agricultural trade publications and to subscribe to their newsletters.  

The following paragraphs characterize the state of agriculture in the US:

It’s not a secret or surprising that farmers first look at reducing or totally eliminating purchases of equipment when they need to cut costs. This reality was further reinforced by a recent survey of more than 500 farmers by Farm Journal Media and posted on its AgWeb.com website on April 7. The media company has conducted the farmer cost cutting survey annually since 2012.

The list of the ways farmers economize during down times like the industry is currently undergoing include the following actions. (Note: respondents were able to offer more than one answer.)

Reduce farm equipment purchases (67%)

Delay non-equipment capital purchases (46%)

Employ no-till or low-till farming practices (43%)

Purchase less traited seed to reduce seed costs (29%)

Negotiate lower land rents with landlords (26%)

Increase variable-rate application of fertilizer and crop protection inputs (26%)

Reduce energy consumption (through better equipment maintenance and/or power generation (20%)

https://www.farm-equipment.com/articles/14063-deu

For the "big picture" and the "hard facts", I usually consult:

Agriculture and Agri-Food Canada
The US Department of Agriculture

The best source of information to take the "pulse" of the agricultural community is to be found in regional newspapers and trade journals.  Here are a few that I consult on a regular basis:

AgWeb
Farm Equipment
Successful Farming

I NEVER read reports produced by financial analysts.  Their focus is too limited. As I have learned, (read the earlier post about McKinsey & Company) the most important contributor to the long-term success of a company rests in the quality of its management and the market reaction to its products and services.  These are the things which drive the bottom line.  I much prefer to focus on these considerations when making an investment.