At the start of 2016, the U.S. farming industry entered its third year of a downturn due to falling commodity prices and an over-abundance of grain inventory. This has caused many farmers to feverishly try to sell off their stockpiles and beg landlords to lower rents. Due to the lack of income, U.S. farm debts are piling up as farmers try to extend the time allotted for loan repayments. At present, U.S. farm debt is the highest it’s been since the agricultural crisis of the 1980s.
This, of course, is not good for names in the space, both fertilizer and agrochemical providers and equipment makers alike. Big names such as Monsanto (MON), DuPont (DD) and Deere & Company (DE) have all felt the pinch, but could be poised for a turnaround? All three major major agribusiness firms have outpaced the broad sector (see “Beating the benchmark”).
Monsanto is the leader in agrochemical and agricultural biotechnology, but is often more well-known for its controversies. Such scandals include everything from producing products that the World Health Organization have deemed carcinogenic to playing a central role in the genetically modified crop debate, which has turned them into the biggest villain in the space amidst the current trend towards organic, non-pesticide treated food.
Because chemically and genetically modified products have been a point of contention the past five years, many agricultural companies have abandoned their traditional means of harvesting to keep up with the times. However, Monsanto remains stuck in its ways and continues to mass produce chemically infused products. As a result of this, and overall lower spend from farmers who are producing less, Monsanto has missed its revenue targets in seven of the last eight quarters.
DuPont is another well-known agrochemical company that has struggled, posting negative revenue growth for the last eight quarters. However, a huge beat on the bottom-line in the third quarter 2016 translated to year-over-year earnings growth of 162% — the best result in two years. Improved numbers were due to cost cutting, and the stock has gotten a boost from the proposed merger with Dow Chemical (DOW) at the end of 2015. While shares are up for 2016, continued suspensions of the merger review by the European Union have made investors jittery. The merger is expected to be completed in January 2017 and will result in three listed entities focusing on agriculture, materials and specialty products.
Deere & Company is best known for manufacturing tractors and equipment used in agriculture, construction and residential sectors. General weakness in demand, as well as a sluggish global economy has put a dent in Deere’s bottom line. The 2016 outlook forecasts farming equipment sales will decline by 10% with sales in its construction and forestry unit expected to fall by 5%. Meanwhile, persistent currency headwinds will take an additional toll on its results, with the company saying they may reduce equipment sales by 2% for the year. The company still remains positive about future prospects due to the fact that the global population is expanding and expected to grow to 9.7 billion people by 2050, from 7.3 billion today.
The cyclicality of agricultural commodities does mean there will be a recovery at some point, but to what extent is unknown. Competition in crop exportation from countries such as Brazil and Argentina may ultimately limit the rebound in prices, and cause further pain for the likes of Monsanto, DuPont and Deere.