It’s been a volatile period for agricultural markets. They are contending with challenging growing conditions and working through burdensome supplies.
More evidence of that came with the August USDA crop-production report for 2017-’18. It forecast U.S corn production of 14.2 billion bushels and U.S. soybean production of 4.4 billion bushels.
Additionally, a large Black Sea wheat crop helps offset a tight U.S. supply backdrop. Meanwhile, this year’s U.S. cotton output could be the largest in 10 years.
While the supply outlook paints a bearish picture, several bullish demand forces will temper the downside moves. Consider …
- A weaker U.S. dollar – which makes U.S. commodities cheaper to overseas buyers.
- An uptick in Chinese economic figures that point to a stronger growth outlook.
- U.S. economic conditions show improvement.
Meanwhile, the PowerShares DB Agricultural Fund (DBA) slipped back to our entry level, weighed down by weakness in the grain and live-cattle markets. But, further downside should be limited by …
- Improving livestock fundamentals worthy of attracting fresh demand.
- Gains in coffee in response to tight supplies in Brazil and Vietnam.
And that offers a turnaround path for our DBA position.
Our position in Mosaic Co. (MOS) is not immune to ag-sector weakness.
Its Q2 earnings-per-share (EPS) came in ahead of estimates. But flat revenues and disappointing guidance sent shares lower.
However, the current reset in expectations is typical at key turning points, which bodes well for the phosphate and potash markets.
Another positive for MOS is that Brazil regulators approved the acquisition of Vale’s fertilizer business.
The deal, expected to close later this year, will greatly increase Mosaic’s production capacity. And it will allow the company to take advantage of rising phosphate and potash prices.
Also, management at MOS took permanent steps to lower the cost of production.
Finally, you should be stopped out of Range Resources Corp. (RRC) at $20.47. While disappointing, the protective stop did its job by preserving capital.
Shares of RRC are down 18% since our stop was elected, with second-quarter earnings and cash flow from operations both falling short of expectations.
