Market Overview
After a relentless grind down through the second half of 2008, which saw prices fall to
levels not seen since October 06, and again in the beginning months of this year, soft
commodity prices (particularly spot corn) have rebounded and stabilized this month.
Prices rose mid-month on downward revisions to Latin American production and ongoing
drought concerns and have continued to climb as the battle for farm acreage distribution in
the U.S. plays out. Farmers have responded to lower soft commodity prices by planting
fewer acres, providing needed tightening to the market.
Speculative sentiment has continued the downward trend this month with non-commercial
net fund length in CBOT corn/soy on a downtrend since the second half of 2008.
Valuations that appeared dislocated late last year should begin to be realized as the soft
commodity market transitions back to fundamentals from disequilibria. Central to this thesis is the impact of the deceleration in GDP on end-consumer demand, which has
differed dramatically across all commodities. On the other side of the coin, the ability of
producers to adjust capacity quickly and forcefully has varied significantly, the best
example being in the fertilizer space. We will continue to monitor the demand impact,
supply response and market sentiment and react by making both relative and fundamental
judgments across the agriculture spectrum.
On the political side further discussions about increasing protectionism are being observed.
We have not seen any evidence in agricultural trades being reduced due to protectionism.
Trade turnover data from Brazilian rail and port operators even suggest a pick up in
exports for January through March. Echoing concerns recently raised by the World Bank,
the EU commented on shortfalls in our industry:
Water supply and the pricing of it are most likely the predominant measurable issues for
agribusiness. A worsening of water supply in California for instance might lead to either
crop failure (mostly vegetables and fruit), cuts in production output or higher prices for
farmers and consumers to irrigate. With volatility increasing for micro climates, a better
understanding and utilization of plant vernalization, sunlight arbitrage/utilization at the
farm level and aligned/precision farming systems will become much more relevant. So far the discussion for most mainstream investors has been around new seed traits, fertilizer
mixes and crop control. Going forward one has to get a clearer view of yield increases at
the soil and machinery level.
Performance Commentary
On the crop protection side, the performance was mixed as evidenced by the bifurcated
performance of the largest generic producers. A similar pattern was seen in the genetically
modified seeds space with outperformance led by large US manufacturers and
underperformance led by mid-tier players. This further supports our market dislocation
thesis and we will continue to opportunistically add/subtract from the portfolio as
situations warrant. The upstream assets had mixed performance this month, depending
where on the supply chain the particular asset was located. We have seen renewed focus
on the fertilizer space as market participants focused on the cost/benefit of those products
that are used later in the global planting season.
As a result, we have seen those players that are more heavily geared for the cycle, e.g.
Intrepid Potash, see continued pressure throughout the month. The leading beef and
chicken producers have seen a recent rebound as investors have shifted from a dire to more
favorable outlook towards the industry as chicken and beef margins are expected to
improve seasonally post March. The global economic turmoil has weakened a number of
weaker competitors in the international supplier space as a result of the credit crunch. This
has lead to speculation that Olam will aggressively expand market share through inorganic
growth opportunities.
Positive performers in terms of contribution to return for March included:
Symrise, +27.8%, the German manufacturer of food additives and flavor, recovered from
previous share price weakness after reporting well above consensus earnings. The company grew sales by 1.3% in the 4th quarter of 2008, weathering the economic crisis.
With an attractive price/earnings ratio within the bottom quartile of our universe and a FCF
yield of nearly 12% the company still operates within a disciplined oligopoly. The flavors
market should benefit exiting a recessionary environment probably in 2010; valuation
however, still suggests margin compression and significant sales decline.
Olam, +20.7%, the supply chain manager for cocoa, cashews, cotton, dairy, coffee
amongst others continued to execute its strategic plan to exchange existing convertible
bonds with new bonds yielding a higher coupon rate. The company indicated that it may
be able to recognize a gain by retiring the convertible debt below par. Later in the month
Olam successfully renewed a $170 million multicurrency trade facility that will be used to
finance cocoa and coffee operations. At the end of the month, Olam was able to exchange
an additional $21 million of convertible bonds for the new issuance.
Marine Harvest, +30.2%, the worlds largest fish industry player that is engaged in
farming, processing and sale of salmon and related processed products for institutional
kitchens and meals for supermarkets, has seen the current market for salmon tightening -
with sustained end buyers and a restrained supply chain and support to current prices. On
the cost side, the near-term outlook for fish farming is favorable as fish feed costs (over
55% of the cost of producing farmed salmon) are projected to come down by around 20%
this year on the back of easing commodity prices. Given these price estimates, an analysis
of the current balance sheet indicates the company should have sufficient liquidity through
year end for operations.
AGCO Corp., +14.4%, the third largest global manufacturer of agricultural equipment and
distributor focused on Latin America, Europe, and the United States, rallied on strength in
the Brazilian market. Additionally, AGCO entered into an agreement with Topcon Position
Systems Tierra remote asset management solution as the sole global telematics provider.
This agreement exhibited AGCOs commitment to integrating user-friendly, cutting edge
technology across all of their equipment lines. AGCO also restated its goal for expansion
into the high horse power North American markets through the Challenger brand.
Nufarm, +19.9%, a global leader in generic crop protection chemicals with market
positions across its product range in Australia, NZ, Western Europe, the US, Canada and
Brazil, reported earnings this month with positive signs of increased sales clearing the
supply chain and working down of existing inventories. The company continued to post
strong ROE for the year, indicative of the strong management team and strategy. We will
continue to monitor the companys market share in existing markets and the number of
new product registrations in order to assess the medium term revenue growth.
March: Top Contributors / Detractors
Top 10 Holdings* as of end of March 2009
2009