Linked In
News In
Linked In

You are viewing your 1 complimentary article.

Register now to receive full access.

Already registered?

Login | Join us now

Goldman upgrades Deere, as ags preferred to other commodities

Twitter Linkedin eCard

Agco and Deere escaped a downgrade by Goldman Sachs to its forecasts for machinery industry shares, amid a growing trend of investors treating agriculture separately from other commodity sectors.

Goldman Sachs cut to "cautious", from "neutral", its guidance on shares in machinery makers overall, including downgrades to "sell" in shares such as Manitowoc Crane and Terex Aerial Platforms.

The downbeat sentiment reflected reduced optimism over purchases from buyers in sectors such as mining, foreseeing an "extended machinery downturn across commodity-exporting countries where capital stock is high and infrastructure investment is slowing".

Profitability among commodity producers overall is being underlined by low prices, with the CRB index on Monday recording its lowest close in six years.

The bank also noted that valuations for machinery sector shares were "in line with" the average share in the benchmark S&P stock index, "compared to a 20% discount during the 1990s' commodity exploitation period".

'Multi-year downturn'

However, the bank lifted to "neutral", from "sell", its rating on shares in Deere & Co, the maker of John Deere equipment, and Agco, the owner of marques such as Massey Ferguson and Fendt.

Goldman Sachs said it continued "to expect a multi-year downturn in end demand" as larger corn and soybean inventories weigh on prices of the crops, and so undermine farmers' willingness to invest.

The bank also noted that the North American tractor fleet was the "youngest it has been in two decades", with farmers reluctant to buy even second-hand machinery, with used equipment prices falling by as much as 15% year on year for higher-horsepower tractors.

But the group said that farm machinery makers had managed surprisingly strong margins, despite the apparently soft sales environment.

'Further tailwind'

Deere had managed a 2% rise in prices in its latest quarter "despite headwinds from challenging used equipment values, high competitor inventories, and weak customer returns", Goldman said.

The group has also benefited from lower raw material costs – finding some compensation the lower commodity prices undermining takings for other machinery groups.

"Given the continued decline in steel, we see [a] further tailwind for Deere in coming quarters."

Agco's margin performance "has been much better than we expected driven by a combination of strong cost control, global tractor platform integration, currency tailwinds, pricing, and raw material tailwinds".

Agro furthermore enjoys a lower North American cost base, thanks to importing 16% of its product content from Europe, Brazil, and Japan, the bank said.

'More idiosyncratic'

Goldman's separation of makers of farm equipment, to those making the likes of mining machinery, comes amid a growing theme of investors viewing a gap between ags and other commodities.

JP Morgan, flagging that "weak growth indicators from China weighed heavily on commodities and commodity equities in recent weeks", highlighted that "commodity position indicators retrenched across all commodities with the exception of agricultural commodities".

Speculative positions in agricultural commodities "tend to be more idiosyncratic and less sensitive to economic growth", the bank said, noting that managed money positioning on most major ags was close to historic averages, unlike that in the likes of copper, gold and gasoline.

El Nino draw

Meanwhile, data from ETF Securities, a large issuer of exchange traded products, showed a move by fund cash into agricultural commodities for the first time since 2012, and after a net outflow of nearly 20% last year.

Barclays said that agriculture sector indices and ETFs, after witnessing a net outflow of $2.4bn in the October-to-December quarter, saw net inflows of $400m in both April and May.

Concerns over the potential dent to crop production from El Nino on are said to be fuelling the shift, with talk of Chinese funds being attracted to the sector thanks to the weather concern.,

However, many recent investors betting on firm agricultural commodity prices have been caught out.

Official data highlighted that, for instance, speculators were continuing to raise their net long positions in Chicago corn derivatives - even as futures were heading for their worst week in a year.

By Mike Verdin

Twitter Linkedin eCard
Related Stories

Evening markets: Rise in Russian wheat prices to multi-month high lifts Paris futures

Logistical setbacks, and strong demand, lift Russian wheat values, and thence Paris ones too. A dryish Argentine weekend props rapeseed

Rally in agricultural commodity prices not over yet, says JP Morgan

The bank upgrades price forecasts for many contracts in the ag complex - commodities’ "best performer" of 2018, where gains are "not over yet"

Hopes high for Brazil's 2018 coffee crop, even as exports falter

Brazil’s coffee exports began 2018 at the slowest in six years, Cecafe data show, as the prospect of a big harvest reassures importers

Hedge funds return to net long position in ags. Where to now?

Hedge fund buy bets exceed short holdings for the first time this year. Has this sated appetite for purchases, or is there more to come?
Home | About | RSS | Commodities | Companies | Markets | Legal disclaimer | Privacy policy | Contact

Our Brands: Comtell | Feedinfo | FGInsight

© 2017 and Agrimoney are trademarks of Agrimoney Ltd
Agrimoney is part of AgriBriefing Ltd
Agrimoney Ltd is registered in England & Wales. Registered number: 09239069