Reflation Trade? Not for Agriculture

The rising Baltic Dry Index (BDI) has stock market investors all a-twitter talking up monetary policy and the reflation trade, however, the data on farm products sales and inventories do not support the theme (Not to mention the cratering equity markets). The wholesale inventories report released by the Census Bureau showed lower than expected inventories and will likely have a negative impact on GDP. However, that is not the juicy nugget; the real story is inside the numbers. In particular, farm product sales are plummeting faster than inventories can be sold.

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Source: Census Bureau

This, of course, is no surprise to those in the farm belt. In January, I posted about dropping fertilizer prices. In that post, I implied that farmers might hold off on purchases until they determine what they will plant. It now appears that we have the data to back up the implication. Farmers are experiencing both lower crop prices and lower fertilizer prices. The only crop that has held up relatively well is soybeans. Conveniently, soybeans do not require the same amount of fertilizer as corn and wheat.

The impact of reduced demand for fertilizer can be seen in the quarterly volume of potash produced by Potash Corp (POT).

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Source: Gridstone Research

Potash Corp. is producing at levels last seen in 2003 when corn and wheat prices were higher than current prices. Another fun fact is the only crop with higher prices today than in 2003, is soybeans. Farmers will soon be making planting decisions and the best business decision is to plant the crop that pays the most with the least cost. It is likely these business decisions will lead to continued weakness in the farm product sector.

Disclosure: I am short MOO.

Comments

[sliman:]

You are about 6 months late on your short. Higher world wide demand for food plus droughts in several countries will lead to higher demand for ag products. These companies are cash rich and can pull back on production waiting for demand to pick up. You have to eat.

Feb 13 10:01 AM

[Brian Kelly:]

While I agree with your long term analysis of the ag sector, in the short term there are backed-up inventories in the supply chain that will impact this sector during the spring planing season.


On Feb 13 10:01 AM sliman wrote:

> You are about 6 months late on your short. Higher world wide demand
> for food plus droughts in several countries will lead to higher demand
> for ag products. These companies are cash rich and can pull back
> on production waiting for demand to pick up. You have to eat.

Feb 13 01:24 PM

[Bartlesby:]

The grains represent only 10-12% of total drybulk volume, and thus have only a marginal impact when comparing the BDI to farm product sales. We should be careful to make inferences on the BDI from this one metric alone. By contrast, coal and iron ore volumes exert much more influence over short-term shipping rates.

Feb 13 02:35 PM

[sliman:]

Brian,
I see from your bio that you have written about bubbles. So where will all this money that is being created flow to? My bet is on gold. What is your opinion?
Thanks

Feb 13 02:55 PM