A favourable outlook for grain prices in the second half of 2009 is setting the stage for an interesting seasonal trade this summer.
The agriculture sector has a period of seasonal strength from the end of July to the end of December. According to Thackray’s 2009 Investor’s guide, the sector has gained in 11 of the past 14 periods for an average increase per period of 17.4%. Fertilizer stocks such as Potash Corp and Agrium are notable for their seasonal strength during this period.
Key influences during the period of seasonal strength are grain prices and taxation. Farmers buy more agricultural products (e.g., fertilizer, tractors) during years when grain prices are high and incomes are above average. The seasonal peak in December is related to additional purchases of agricultural products prior to year-end partially to reduce taxable income.
The stage is set for a significant rally in grain prices in the second half of 2009. Grain prices virtually collapsed from July to October last year, down 40%. Since October, grain prices have moved sideways. Farmers responded by cutting back spending, including a reduction in the purchase and use of fertilizer and a reduction in farm equipment purchases. As a result, grain yields are expected to decline significantly in the current crop year. Lower than expected yields from the Argentine crop this year – partially due to a decline in fertilizer use- is likely to repeat in North America. In addition, weather cooler and wetter than average in North America this spring is raising concerns about this year’s North American crop. Lower yields come at a timewhen demand for grains is growing. The Chinese are a major buyer of soybeans.In addition, the Obama administration is studying the possibility of raising ethanol content in U.S. gasoline from 10% to 15%. More corn will be needed if the proposal becomes law.
Higher grain prices will prompt farmers to use more fertilizer during the 2010 crop year. The lower use of fertilizer during the 2009 crop year cannot be repeated in 2010 without a significant reduction in yield. Fertilizer sales are expected to spike as year end approaches.
Preferred investments for the seasonal trade are Agriculture Exchange Traded Funds and a basket of fertilizer stocks.
Editor Note: Buying opportunity? Potash Corp stock plunged $12.66 or 10.5 per cent yesterday. Full story:
Shares in Potash Corporation of Saskatchewan Inc. fell sharply Wednesday after the company said it would cut output by 800,000 tonnes.
The cut raises the total reductions to 4.7 million tonnes this year.
Potash Corp. stock plunged $12.66 or 10.5 per cent to $108.34 in trading on the toronto Stock Exchange. The 52-week range is $61.81 to $246.29.
The company said the cut followed “lagging demand due to an extremely slow U.S. spring season and extended negotiations with offshore buyers.”
In reporting its first-quarter results, the company said North American potash volumes fell 86 per cent, while offshore volumes fell 78 per cent.
“Only 0.5 million tonnes were sold in the quarter, compared to 2.5 million tonnes in first-quarter 2008.”
The cuts announced so far this year are equal to about half of the 2008 total production.
Still, the company said it expects international demand to pick up in the second half.
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Don Vialoux has 37 years of experience in the Investment Industry. He is a past president of the Canadian Society of Technical Analysts (www.csta.org) and a former technical analyst at RBC Investments. Don earned his Chartered Market Technician (CMT) designation from the Market Technician Association in 1995. His CMT paper entitled “Seasonality in Canadian Equity Markets” was published in the Spring-Summer 1996 edition of the MTA Journal. Don also has extensive experience with Exchange Traded Funds (also know as Index Participation Units) as well as conservative option strategies. In 1990 he wrote a report that was released in the International Federation of Technical Analyst Journal entitled “Profiting from a Combination of Technical and Fundamental Analysis”. The report introduced ” The Eight Phases of the Stock Market Cycle”, an investment concept that continues to identify profitable entry and exit points for North American equity markets. He is currently a member of the Toronto Society of Fundamental Analyst’s Derivatives Committee. Now he is the author of a daily letter on equity markets available free on the internet. The reports can be accessed daily right here at www.dvtechtalk.com.