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Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Agribusiness stocks outperform in June on price jump in grains
Peter Garnry
Chief Investment Strategist
Summary: Agribusiness stocks are among the best performing segments of the equity market in June up 8.1% driven by strong gains across wheat and soybeans as droughts in the Northern Hemisphere are lowering the production outlook for these crops. The longer term outlook for agriculture looks attractive and it is driving more mergers and acquisitions which will drive better unit economics.
Key points in this equity note:
- The grains sector is the best performing in June among all commodities and it has lifted agribusiness stocks up 8.1% in June compared to just 5.1% for global equities.
- The long-term outlook for food prices have improved and thus also the outlook for agribusinesses driving more mergers and acquisitions.
- Climate change is the key upside risk to food prices that could cause food prices to rise faster than what we have observed since the early 1990s.
Extreme weather conditions drive grains higher
As highlighted in our recent commodity notes Commodity weekly: Best month in over a year and COT: Speculators wrongfooted by grains surge June has been good for commodities overall, but especially for the grains sector. Droughts across the Northern Hemisphere have negatively impacted expectations grains production and to make things worse it is happening while commodity markets are on high alert over the return of El Niño which has the potential to aggravate the situation even more.
Higher grain prices have lifted the agribusiness sector in the equity market with the iShares Agribusiness UCITS ETF up 8.1% in June while the global equity market is up 5.1%. The strong performance across agribusiness stocks were also seen in yesterday's US equity market session with positive gains across companies with agribusiness storage, transportation, machinery, seeds, and fertilizer.
The table below show the 10 largest holdings in the iShares Agribusiness UCITS ETF with Deere likely being the most recognisable stocks for the ordinary investor. Deere, the world leading farming equipment manufacturer, is also a good example of what is happening in agriculture these years with sensors and advanced data analytics being integrated in agribusiness solutions creating a exciting industry in the years to come.
Improved outlook for agriculture and increased M&A
The improving long-term outlook for food-related commodities has also increased merger and acquisition activity with Viterra (controlled by Glencore) announcing a merger with Bunge (an American soybean exporter involved in food processing, grain trading and fertilizer). The merger will create an approximately $100bn revenue agribusiness worth around $34bn. However, the merger is seen as highly anticompetitive and the Argentinian government is already objecting to the deal.
One of our team’s ideas that formed during the pandemic was the idea that food prices had for decades been a close to zero contributor to inflation. However, climate change and more erratic weather patterns are putting upward pressure on prices as production is getting more impacted. The UN Food and Agriculture World Food Price Index is only up 2% annualised since 1990 suggesting food prices have risen less than the overall price level. Changing the starting period to early 2003 the annualised price increase goes up to 4% annualised. This level and maybe even higher due to climate change is not an unreasonable long-term expectation and thus we have a positive view on the agriculture sector long-term.
5-year chart of the iShares Agribusiness UCITS ETF vs iShares Core MSCI World UCITS ETF
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