Agriculture is ‘only in the early innings’ of a bullish upcycle, says Putnam Investment

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China’s big splash in buying U.S. crop markets following its agreement last year with Washington to resume buying American farm products has helped propel corn and soybean prices higher.

But that’s not the only reason why Putnam Investments now is the “most bullish” it’s been on agriculture since “early last decade.”

“We believe that we are only in the early innings of a multiyear upcycle for the global agriculture economy,” a team led by Shep Perkins, chief investment officer, equities, at Putnam wrote in a client note. “This is due to a combination of supply shocks and strong demand that has left crop inventories quite lean, in our view.”

The team pointed to crop supplies that have been hurt by a recent string of weak corn harvests from China, but also extreme weather in the Midwest that dampened last year’s corn and soybean production.

The pandemic disrupted the world’s semiconductor manufacturing, but also crop trade flows, after several countries imposed export quotas, taxes and bans on wheat, rice and corn to bolster domestic supplies.

“While those supply shocks are in the rear-view mirror,” Perkins’ team wrote, they also see tighter regulations around crops and chemical use as likely leading to more supply shortfalls “as farmers struggle to produce high yields without their usual toolkit.”

They also see rising demand for soybeans due with the rise of renewable diesel, which can be derived from animal fats, with the crop used as feedstock.

Corn futures have been surging during the pandemic, with July corn futures
C00,
+2.39%

CN21,
+2.39%
trading as high as $7.03 a bushel on Tuesday, the highest intraday level for a most actively traded contract since March 28, 2013, according to FactSet data.

Meanwhile, the latest forecast for China’s corn imports call for a record 2020-2021 marketing year, with wheat
WN21,
+1.11%

W00,
+1.11%
and soybeans
SN21,
+0.69%

S00,
+0.69%
imports also pegged to climb.

Read: Why the rally for corn, soybeans and wheat likely isn’t over

China’s high demand for U.S. corn, soybeans


USDA, Putnam Investments

The U.S. economic recovery has been tied to its success on the vaccination front, which has led most other parts of the world. Optimism around increased global activity and expectations for a revival of hard-hit industries has helped U.S. stock recently reach fresh all-time highs, even though the Dow Jones Industrial Average
DJIA,
-0.30%
and S&P 500 index
SPX,
-1.03%
were lower Tuesday.

But apart from crops, Putnam also sees upside potential for companies that more broadly support agriculture and farming.

The team listed global seed and chemical provider Corteva Inc.
CTVA,
-0.06%
in that category, as well as U.S. and European machinery makers Deere & Co.
DE,
+1.70%
and CNH Industrial N.V
CNHI,
-0.98%.

“In our view, a wide range of companies with exposure to agriculture are positioned to benefit from these trends,” the team wrote.

Check out: Rural America now has a mutual fund dedicated to its long-awaited revival



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