This year's hot and dry US weather which has sent grain prices soaring could set a pattern, Credit Suisse warned, as it recommended share investors to buy into palm oil producers, but take profits in fertilizer groups.
The US heatwave, which follows unduly hot temperatures last summer too, is down to shifts in the jet streams which are consistent with thinking on the impact of climate change stemming from at least 2008, the bank said.
The jet streams – bands of fast moving air at altitudes of around 23,000-39,000 feet which are key determinants of weather, and of which there are two in each hemisphere – appear to be moving away from the equator.
"Over the longer term, climate scientists suggest that global warming may be causing warmer poles and a widening of the earth's tropical belt which is forcing the jet streams to shift away from the equator and further towards the poles," the bank said.
'More regular occurrence'
The result has been the hot US weather, as the jet stream pushes further north into North America, besides the unduly wet UK summer so far – although this may be about to change.
Official UK meteorologists are "now forecasting that the part of the polar jet stream that cuts through European airspace will have diverted to its more usual northerly route possibly as early as next week, just in time for the start of the Olympic Games", and bringing drier weather for the newly-started harvest.
And the climatological change has rendered jet streams slower-moving, and more meandering, too – meaning "weather patterns appear to be in place for longer, resulting in prolonged heat waves or cold snaps".
The "long-term implications" of the change in the jet streams is "important", Credit Suisse said.
"It implies that the long, hot summer that the US has been experiencing could be a more regular occurrence over future decades," although in the short-term the onset of an El Nino weather pattern, which typically shifts the jet stream further south, may alleviate dryness.
The caution came in a report in which Credit Suisse, which on Tuesday flagged the differing implications to Black Sea meat producers of higher grain prices elevated by weather setbacks, assessed the impact of the rally on companies in other geographies.
The price gains boded ill for buyers such as Unilever and Danone, whose share the bank rated "underperform", thanks to "some concerns over the margin outlook" at a time when the stocks were already trading at "stretched valuations".
For fertilizer groups - whose shares have risen strongly on hopes that higher grain prices will prompt farmers to splash out on nutrients to raise yields – the higher stock valuations represented "an opportunity to take profit in the sector".
"The bottom line is that global fertilizer markets are in excess supply."
'Learned valuable lessons'
However, the bank held out potential for shares in Brazil farm operators such as Sao Martinho and SLC Agricola, both rated "outperform" as the country raises farm output to meet world demand.
And it held out hopes that US meat groups Smithfield and Tyson Foods would ride out this grain price rally better than the last, despite every $1-a-bushel rise in corn prices translating into a $0.50-a-share drop in the companies' earnings per share.
"The livestock industry has learned some valuable lessons since the last cycle in 2008 put one of the leaders in the chicken industry into bankruptcy and threatened to sink many more," the report said.
Many had lowered borrowings, and learned to enact more rapidly production cutbacks to protect meat prices, while chicken groups have introduced more "cost-plus" contracts, passing on to customers the impact of higher grain bills.
"As a result, we think these companies are interesting value propositions when the crop cycle turns," Credit Suisse said, rating Tyson neutral and Smithfield outperform.
'Promising price outlook'
And the bank recommended an overweight in shares in palm oil producers, such as Genting Plantations, London Sumatra and Sime Darby.
"The outlook for palm oil prices is promising," Credit Suisse said, noting relatively small global inventories of vegetable oils, and the potential onset of an El Nino, a weather pattern which "always been positive" for palm oil values in depressing output.
Further, Malaysia in particular is set for another year in 2013 of disappointing production, thanks to continued tree stress stemming from the bumper 2011 harvest.
"Global palm oil output has historically showed a year of strong production, as in 2005 and 2008, followed by two years of decelerated growth rate, as in 2006-07 and 2009-10."