We all have to eat and agriculture is big business. Contemplate agriculture investment opportunities and commodity prices with this primer from TD Ameritrade.
We all have to eat. That’s not exactly a portfolio strategy, but it's a good place to start when contemplating investing opportunities in American agriculture.
The ongoing harvest season in the major grain-producing states of the U.S. Midwest offers just the latest reminder of agriculture’s year-round, 24/7 role—and also of ways for investors to get in touch with their inner “foodies.”
“We all know food,” says JJ Kinahan, chief market strategist at TD Ameritrade. “We are all familiar with the end product, and we know it’s vital to everything we do.”
Where to start with ag stocks in such a vast industry? Agriculture covers a sprawling, interconnected array of producers, suppliers, processors, handlers, and retailers—it’s constantly at the whim of difficult-to-predict factors such as weather, commodity prices, and geopolitics. Cash receipts for last year’s farm commodity production—grain, livestock, milk, and more—totaled $352.4 billion, according to the U.S. Department of Agriculture.
In other words, the path to your dinner table is a complex journey with many moving parts. For investors, it’s important to know a few basics about farming and agriculture, and the types of businesses that serve key functions.
Farming and the overall U.S. economy don’t always move in the same direction. In recent years, the farm economy slumped as record harvests and excess grain supplies weighed down prices for corn, soybeans, and wheat, three of the most widely grown U.S. crops.
For farmers, “it's been hard to break even, or make profit,” said Sterling Liddell, global data strategist with RaboResearch Food & Agribusiness. “We’ve simply had too much production, and it's putting balance sheets for crop producers in a difficult situation.”
For example, benchmark corn futures in Chicago traded around $3.50 a bushel through early fall 2017, and into the harvest period, about half the levels of three to four years ago.
In the current climate, farmers may be less inclined to drop $200,000 or more for a new tractor or harvester. Grain markets “don't look like they're going to recover anytime soon,” Liddell said. With farmers' eroding incomes, “it’s hard to cover the debt they have, so buying additional equipment or fertilizer would be difficult.” A market recovery probably won't happen till around 2019, he added.
Still, many major ag equipment makers also serve other industries, such as construction and landscaping, which can mitigate downturns in the farm economy, experts say.
Publicly traded players include AGCO Corp. (AGCO), Caterpillar Inc. (CAT), and Deere & Co. (DE).
Corn (so-called field corn, not to be confused with the sweet corn people eat directly off the cob) is the biggest U.S. crop based on several measures, and it plays a critical role in the global food supply.
In 2016, U.S. farmers seeded a record 94 million acres—nearly 147,000 square miles, an area roughly equivalent to Montana. That year’s harvest, a record 15.1 billion bushels, was valued at $51.7 billion (the soybean harvest ranked second, at $40.9 billion).
About 5.4 billion bushels was fed to cattle, chickens, and pigs, and a similar amount was used to produce ethanol; another 2.3 billion bushels was exported. Much of the rest was processed into food ingredients, including sweeteners, starches, syrups, and more.
Sources: U.S. Department of Agriculture, National Corn Growers Association
Crops require “inputs,” starting with the seed, along with herbicides, pesticides, and nutrients. If farmers are planting less grain because of weak prices, it follows that they won’t be using as much seed or fertilizer, although—similar to the equipment makers—many companies in this sector have gotten bigger through recent mergers, and are diversified across other industries.
Ag-related businesses often use downturns as opportunities to get leaner and be ready to capitalize on the inevitable upturn.
“These companies will have to work harder for market share and figure out how to sell their products into this market,” Liddell said. “The current economic climate is a chance for companies to slim down and adjust balance sheets, so they can be more effective in the future.”
Publicly traded players include CF Industries Holdings (CF), Monsanto Co. (MON), Mosaic Co. (MOS), Potash Corp. of Saskatchewan (POT), and the recently merged DowDuPont Inc. (DWDP).
This sector is about taking raw material and turning it into the higher-value ingredients and products that ultimately end up lining supermarket aisles. These companies can benefit when cheap, abundant grain might boost profit margins—although, like farmers, they too must manage market volatility and geopolitical risk. Because much of the U.S. corn crop is used to fatten livestock, meat processors are also affected by grain supplies and price swings.
Publicly traded players include Archer Daniels Midland Co. (ADM), Bunge Ltd. (BG), Hormel Foods Corp. (HRL), Sanderson Farms, Inc. (SAFM), and Tyson Foods, Inc. (TSN).
Farmland might be considered the classic agricultural play, but it may not be accessible for many investors. In addition, farmland prices have tumbled with the grain markets (average values in Iowa, for example, are down about 25% from 2013 peaks, according to Iowa State University).
Another option: exchange-traded funds (ETFs) linked to corn or other commodities.
Kinahan notes that farming, like many other industries, is increasingly driven by technology that helps producers more efficiently raise animals and crops—think computer chips, GPS, data tools … even drones (“precision ag,” in industry parlance).
“There’s a tech element that people may not think about,” Kinahan says. “As the technology improves, farmers will continue to invest in it.”
Do Not Sell or Share My Personal Information
Content intended for educational/informational purposes only. Not investment advice, or a recommendation of any security, strategy, or account type.
Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.
TD Ameritrade and all third parties mentioned are separate and unaffiliated companies, and are not responsible for each other’s policies or services.
Inclusion of specific security names in this commentary does not constitute a recommendation from TD Ameritrade to buy, sell, or hold.
Investments in commodities are not suitable for all investors as they can be extremely volatile and can be significantly affected by world events, import controls, worldwide competition, government regulations, and economic conditions.
Futures and futures options trading involves substantial risk and is not suitable for all investors. Please read the Risk Disclosure Statement prior to trading futures products.
Futures accounts are not protected by the Securities Investor Protection Corporation (SIPC).
Futures and futures options trading services provided by Charles Schwab Futures and Forex LLC. Trading privileges subject to review and approval. Not all clients will qualify. Prior to a name change in September 2021, Charles Schwab Futures and Forex LLC was known as TD Ameritrade Futures & Forex LLC.
Charles Schwab Futures and Forex LLC, a CFTC-registered Futures Commission Merchant and NFA Forex Dealer Member. Charles Schwab Futures and Forex LLC is a subsidiary of The Charles Schwab Corporation.
Market volatility, volume, and system availability may delay account access and trade executions.
Past performance of a security or strategy does not guarantee future results or success.
Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Options trading subject to TD Ameritrade review and approval. Please read Characteristics and Risks of Standardized Options before investing in options.
Supporting documentation for any claims, comparisons, statistics, or other technical data will be supplied upon request.
This is not an offer or solicitation in any jurisdiction where we are not authorized to do business or where such offer or solicitation would be contrary to the local laws and regulations of that jurisdiction, including, but not limited to persons residing in Australia, Canada, Hong Kong, Japan, Saudi Arabia, Singapore, UK, and the countries of the European Union.
TD Ameritrade, Inc., member FINRA/SIPC, a subsidiary of The Charles Schwab Corporation. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. © 2024 Charles Schwab & Co. Inc. All rights reserved.