Agriculture – A Golden Harvest

It Looks Like a Golden Harvest

From August 1 to December 31, seasonal strength in agriculture stocks is triggered by cash generated by grain crops in North America that is used to purchase goods and services from farm suppliers, notes Thackray’s 2010 Investment Guide.

Major product purchases include fertilizer and farm machinery. The seasonal trade has been profitable in 12 of the past 15 periods for an average gain per period of 16.3%. In contrast, the S&P 500 index gained an average of only 2.5% during the same period. Purchases tend to peak near year -end when farmers are spending cash to optimize their taxable income level.

Major companies in the sector include Potash Corp. of Saskatchewan (POT/TSX), Mosaic Co.( MOS/NYSE), Monsanto Co. (MON/NYSE), Syngenta AG (SYT/NYSE), Deere & Co. (DE/NYSE), Agrium Inc. (AGU/TSX) and Archer Daniels Midland Co. (ADM/TSX).

Grain prices have an important influence on the seasonal trade. Higher grain prices realized by farmers generate more cash for purchases of farm supplies. Soybean, corn and wheat prices bottomed this year in the first week of June and recently resumed an intermediate uptrend on the charts. Monitoring a basket of grain prices is possible by examining a chart on iPath DJ-AIG Grains Exchange Traded Notes (JJG/NYSE).

Crop conditions in the U.S. Midwest have been ideal this year and U.S. grain production this year could hit a record if weather conditions remain favourable. Hot dry weather this week could have a negative impact if extended. Offsetting higher potential U.S. grain production is lower production expected from other parts of the world, including Canada and Europe.

Production in Alberta and Saskatchewan has been reduced by spring flooding, while dryer than average weather has hurt production in France, Germany and the United Kingdom. Russia recently predicted that grain production this year will slip to 85 million metric tons from 90 million metric tons due to heat and drought conditions. China recently purchased grain on world markets to replenish inventories to normal levels.

On the charts, exchange traded-funds and stocks in the sector are starting to look interesting. All are in intermediate downtrends. Their short-term momentum indicators are deeply oversold and are showing early signs of bottoming.

Stocks in the sector also could benefit from second-quarter earnings reports that are better than last year’s depressed earnings. Two exchange-traded funds are attractive candidates for the seasonal trade: Market Vectors Agribusiness ETF ( MOO/NYSE) and the Claymore Global Agriculture ETF ( COW/TSX).