It is hard to think of many investors or analysts who have been bearish on agriculture in recent years. After all, people have to eat, demand from emerging markets is strong, agricultural commodities' prices have been surging, and food is a marvellous defensive play.
All the more interesting, then, that National Bank Financial analyst Robert Winslow is downgrading his view on the agriculture sector, citing growing market uncertainty and the impact it may have on companies' ability to borrow.
"In addition to slightly lower revenue and margin expectations, we contend that market volatility and uncertainty has increased the costs of capital of the ag stocks we cover," Mr. Winslow wrote in a research note.
He cut target prices for stocks on his coverage list as much as 15 per cent, citing lower earnings and higher risk premiums. Grain handlers and processors' prices were trimmed as little as 4 per cent, while junior fertilizer developers, which face large capital spending commitments in the years ahead, were deemed the most at risk
"We note that despite reducing our targets for Ag Growth International and Hanfeng Evergreen , we upgrade these stocks, given the strong recent price depreciation," Mr. Winslow said. He upgraded AFN to "outperform" from "sector perform" and Hanfeng to "sector perform" from "underperform."
Mr. Winslow also points out that his current analysis does not include grain-price movements, which have shown correlation of more than 85 per cent with agricultural equities over the past five years.
"Grain prices are currently well above (i.e., 80 per cent+) the recent lows of 2010 when prices bottomed near estimated costs of production, suggesting the prices are nearer the top than the bottom of the current cycle," he said.
"However, should grain prices move strongly downward, opening the door to lower earnings growth, we would be inclined to revisit our estimates accordingly. The opposite would be true should grain prices move to even higher levels."