The Agriculture Act of 2014 (commonly referred to as the “new Farm Bill”) seeks to build upon the strongest five-year period in agriculture exports. From 2009-2013, farmers and ranchers stateside reaped the rewards of auspicious market conditions. In 2013 alone, this metric reached a record $140 billion, establishing an annual record. This performance was made possible with successful efforts by the U.S. Department of Agriculture (USDA) and a renewed focus from various federal initiatives to expand and grow markets around the world. Supported by the Foreign Market Development Program and Market Access program, the USDA led more than 150 agribusinesses on agriculture trade missions and helped more than 1,000 U.S. companies and organizations promote their products at trade shows globally.
The new Farm Bill, which will cost nearly $1 trillion over the next decade, will help the USDA to expand markets for offerings at home and abroad, breaking down unfair barriers to trade, investing in the bio-based economy, strengthening conservation efforts, creating new opportunities for regional food systems, maintaining important agriculture research, and establishing an environment in which farmers can continue to thrive. Additionally, the bill strengthens and expands insurance coverage options for farmers and ranchers. While providing more risk management options, it also makes insurance more affordable for beginning farmers. Furthermore, the initiative provides avenues to expand farm safety options for organic producers.
The law sought to address lobbyists representing agriculture interests, groups that want to cut government spending, supporters of international food aid programs, and welfare/anti-hunger pressure groups. Regardless, much like every piece of legislation, there are perceived winners and losers. Despite the elimination of outdated subsidies, farmers appear to have come out with a collective smile on their face, as they secured expanded crop insurance and created new subsidies for rice and peanut growers. Those that appear to have come out on the losing end appear to be welfare recipients. Roughly 850,000 households, or close to 1.7 million people would lose an average of $90 per month in benefits to their food stamp program.
Whether a product of the new farm bill or not, mergers and acquisition activity among crop insurers are apparently surging ahead. Deere & Company (DE) announced that it would review options for its crop insurance business. John Deere Insurance Co. (ranked ninth by market share in the U.S.) is one of 19 entities eligible to write policies under the federal government’s Multi-Peril Crop Insurance program. Too, HCC Insurance Holdings has agreed to purchase Producers Ag Insurance for $100 million from CUNA Mutual. Deere’s decision to exit this line of business reflects unfavorable operating conditions, which is highlighted by intense competition. Much to DE chagrin, new entrants are continuing a breakneck pace of writing policies, despite increasingly weather volatility.
Sales of agriculture equipment is influenced by total farm cash receipts, which is primarily influenced by crop prices and yields, acreage planted, and government policies. Other factors include general economic conditions, farm land prices, farmers’ debt levels and access to financing, etc. Moreover, many of these factors are, one way or another, covered under the new Farm Bill. One company positioned to benefit from the new law is Deere, although 2014 appears to be more challenging than previously thought.
After consecutive years of record farm-income levels, circumstances appear to have cooled considerably, despite an uptick in recent crop markets. This reversal of fortune is due to positive weather conditions in the U.S., which is positioned to produce a substantial hike in crop inventories. Forecasts by the U.S. Department of Agriculture (USDA) show declines in prices for major U.S. crops: soybeans, wheat, cotton, and corn ranging from 5%-15% for the year. Record U.S. crops, together with substantial exports from South America (notably Brazil), are proving detrimental. While cotton output from leading global producers China and India is on pace to decline this year, output of this product stateside is slated to forge ahead during the same period, leading to a fifth-consecutive year of rising global stocks. Domestic farm income is on pace to plummet materially from the $130 billion reached last year.
Besides cooling crop markets, the USDA predicts farmers will incur relatively high production expenses in 2014, despite a year-over-year moderation. These factors together ought to force farmers to maintain a tight grip on spending. Moreover, Deere expects industry sales of agricultural machinery in the U.S. and Canada to decline 5%-10% for 2014. Concurrently, orders from South America are projected to fall around 10%. Business from the Commonwealth of Independent States should be down significantly this year, while sales from Asia are apt to be the sole source of year-over-year gains in farm equipment sales. Construction equipment markets are benefiting from a broad economic recovery in many corners of the world and higher housing starts in the U.S. At the same time, end users in the forestry realm are positioned to spend generously after years of deferrals.
We think the broad-based pullback in price for agriculture equipment stocks presents an opportunity for interested investors. Based on an eventual recovery in global construction markets, the company’s growing presence in emerging markets, and favorable long-term trends in the agriculture space, we look for a share-profit recovery in the years ahead.