Comments
Transcript
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LEAny update on Williams Co, Peter? Thanks!
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JMI am left wondering if buying the ETF CORN might be just as good an option to capture the potential upside since Peter said corn might move from $4.50 currently to as high as $6? During the midwest summer draught of 2012 corn went to $7-$8 per bushel. In any case when should one put this trade on - ie Fall? Wait for firmer estimates of potential corn shortfall? What if farmers get a very mild fall which compensates for poor start? Generally a nice idea.
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DRThe weakening US dollar, which on the charts looks set to collapse toward the lower 80's on DXY in the coming months, makes it easy for US grain to compete against other exporters whose currencies are rising this year against the dollar. Like being long the ags, select commodities & foreign stocks, and certainly short the garbage greenback for the rest of this year.
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PGAlways appreciate learning about the underlying mechanics of an industry/commodity like in this case. Thanks Peter and RV!!
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GHThanks for the idea. Very thoughtfully laid out. Took Peter up on his CCK idea and up 40% currently
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LDHow does record production in SA and Ukraine impact the outlook on corn and beans? With US dollar strength, isn’t demand outside the US hard to come by?
JUSTINE UNDERHILL: Welcome to Real Vision's Trade Ideas. Today, we're sitting down with Peter Boockvar of Bleakley Advisory Group. It's great to have you back.
PETER BOOCKVAR: Always good to be here. Thanks.
JUSTINE UNDERHILL: So, today, let's talk a little bit about commodities and the disastrous planting season that we've seen, specifically for corn and soybeans. Could you walk us through exactly what's been going on?
PETER BOOCKVAR: So, as of probably a month ago now, the USDA follows as the planting season began. Since they just started- in the US, there's one planting season as opposed to like Brazil, for example, where they have two. The US really begins in March, and then it gets harvest later on in call it October. So, because of the awful weather, the flooding that was going on a lot of it in the Midwest and down South, the time at which farmers would be planting seeds into the ground got delayed.
And the USDA, as the planting season progresses, it basically measure what percent of the fields and the acreage had been planted. And they've started collecting this data going back to 1980. So, as about a month ago, the planting intentions of farmers of both corn and soybeans were the lowest since 1980. So, during the planting season, corn needs more time in the ground before it really starts to flourish, where soybeans can be planted later on in the season. So, early on in March, when the weather was really bad farmers were saying, okay, I need to wait on the corn. But worse comes to worse, I'll shift to soybeans because I'll only need less time for that.
And then as the planting season got on and the weather was consistently bad, farmers not only couldn't plant their corn, but they started to get worried about planting their soybeans as well. So, we went deeper into this planting season with the amount of seed in the ground being much less than historical seasons. Now, this is 2019. This is seven years into what has been a very difficult time for farmers. So, this was just like almost the death knell for many farmers, forming commons down by half.
So, I've been optimistic about trying to find a bottom in agriculture. And I feel like this is finally the stick in the ground in terms of getting there. So now, we are finally fully into the planting season where all the acreage that's going to be planted has been planted. And there were plenty of acres that aren't really planted and the USDA, specifically today, gave out their estimates where corn acreage actually was more than expected. But because of the way they calculate it, I don't think it's that accurate, whereas soybean acres planted is the lowest since 2013.
And back to corn for a second, corn inventories are at six-year lows. So, this is really going into the season, no room for error in terms of output. And I think the amount of bushels that will end up being harvested in good quality are going to be well below historical trends. So, we've been finally beginning to see, mostly in corn, a price response. So, corn about two months ago was about $3.40 a bushel. Now, before I didn't see it post this USDA news, but before that, it was about $4.40, $4.50. So, rather short move.
And soybeans has been lagging because of worries about the trade deal with China, and also swine flu in China has dramatically reduced the demand for the feedstock of soybean or soy meal, oil because of the dramatic drop in the pig population. But once that recovers and they shift to other proteins, I do think that the demand for soybeans will eventually pick up. So, I'm thinking that by the time we get to next spring, when the next planting season occurs, prices potentially could be much higher. And that sets the stage for a better planting season next year, sets the stage for more demand for fertilizer. And that gets to my idea of continuing to like the fertilizer names.
JUSTINE UNDERHILL: And actually, so speaking of fertilizer, you were here a year ago looking at agriculture, looking at some fertilizer name, specifically, Mosaic, could you walk us through the trade that you had a year ago, what you were looking at and whether that still holds today?
PETER BOOCKVAR: So, it was a same theme of trying to unfortunately pick the bottom in this agricultural bear market. And a year ago, we also had the same situation where inventories were thin. But the planting season last year still was relatively robust. And it's been robust for years. And that's why we've seen this bear market continuing in the crops. And then of course, you throw in the trade war accelerating, which screwed up my trade because it dramatically lowered the price of soybeans, since we export so many- we were exporting 30 million tons a year of soybeans to China that basically went to zero.
So, I would really say that that screwed up the trade. Now, Nutrien's been in a range, it hasn't accelerated to the upside, it hasn't broken down. It's just been a wide range and you'd be collecting a good dividend. Mosaic has suffered more. It's at the lower end of this multiyear trading range, which now with this, what I call a disastrous planting season, I believe finally sets us up for a move. That's not just a fake out, which was last year, but something that has more legs.
Now, agriculture is still very volatile. These aren't buy and hold for a long period of time type of stocks, they are more trading and you rent them type stocks. And you want to buy commodity-related situations when at the trough, and you sell them when they've had a nice run. And to me, and I'm honing in on Mosaic rather than Nutrien because that has been beaten down more, that has also been affected negatively by- there are two main nutrients are potash and phosphate. Whereas Nutrien is more potash and nitrogen, which has held in much better. It's a phosphate business.
And Mosaic has been more of a drag because there's been less demand out of China, they're producing some of it their own. Phosphate prices have fallen. But there's been a supply response and Mosaic is close to phosphate mine. So, there's been a supply response. So, I think that that's a very interesting situation. And generally with agriculture is as long as the global population is growing, and getting wealthier, and then there's more of a middle class, the demand side for food is pretty consistent. You can be confident that every single year, the demand for food is going to go up.
So, when analyzing agriculture, you got to get the supply side right. And I feel that this planting season being as bad as it is and will likely be when they harvest it in the fall, that's the supply side that finally meets up with that and falls below that demand side that lifts crop prices much higher, and fertilizers after many years of bear market-type action, we'll finally get a more sustainable lift.
JUSTINE UNDERHILL: Would you consider trading commodities outright? So, corn and soybean? Or do you prefer just to stick to the fertilizer stocks?
PETER BOOCKVAR: I do think that corn, which is about $4.50 a bushel, I think you could see five, $6 by next spring.
JUSTINE UNDERHILL: So, even after the season starts?
PETER BOOCKVAR: Even after this, I think this is just more of the beginning of more of a surge. And on the fertilizer side, you can obviously play it too. But yeah, I think the risk reward for corn even after this move, and also soybeans, which hasn't moved as much. And it's still well below its previous highs because of the situation with China, could be very interesting. And I want to point out one interesting thing with Mosaic because we see the shifting trade flows now that's going on with the trade war. So, China is buying less soybeans from the US, but they're buying more from Brazil, to use that as an example.
Well, Mosaic recently closed in on a big acquisition of a fertilizer business in Brazil, buying volleys fertilizer business. So, if fertilizer- more demand comes into Brazil, less from the US because of these changing trade flows, well, Mosaic is going to benefit. That Brazilian business is a gem for Mosaic, and it helps to offset any potential weakness that they may see in the US in terms of where their customers are coming from.
JUSTINE UNDERHILL: So, almost no matter what happens with the trade war, Mosaic is hedged in some ways?
PETER BOOCKVAR: Exactly because China has shifted their purchases of soybeans to Brazil and other countries. Brazil has been a major beneficiary of the issues that China has with us.
JUSTINE UNDERHILL: So, then what levels would you be looking at for Mosaic? Would you enter now? Or would you wait for more weakness?
PETER BOOCKVAR: So, Mosaic right now is about 24, $25, it's come down from the 30s. It was recently in the mid-30s. Its recent low is probably 22, 23. So, you're really right off the lows. And it's gotten a lift with crop prices. But I think this could just be the beginning of a more sustained move easily back into the 30s if I'm right on the underlying crop, and if I'm right on the amount of bushels that are going to end up being harvested being well below what people are used to.
JUSTINE UNDERHILL: And would you see it hitting the 30s over the next year so you would wait until at least the next planting season?
PETER BOOCKVAR: So, I think you're going to go into the winter, into the spring with prices that have gone up a lot, which will embolden farmers to say, you know what? Prices are now the highest they've been in years, have had a really difficult time, I need to really maximize this planting season. I need to go out there, I need to spend money for my fertilizer, because I got to make sure I'm going to maximize every single acre of land that I have after last year's disastrous year. Which means that if farming incomes are still depressed because farmers are still having a difficult time, maybe they're going to buy less tier tractors, and they'll go more into the used market.
But they need to make sure next spring that they're, assuming weather permitting, that this will be an ultimate planting season, which means they got to have the right fertilizer and they got to spend money for it. So, you can see the move in these fertilizer stocks going into the planting season, irrespective of what it ends up being.
JUSTINE UNDERHILL: Would you put a stop loss on this trade?
PETER BOOCKVAR: So, I think the risk reward is very attractive, and you can use the stop loss of just the lows we recently saw. So, just before this big move higher in corn prices, and just corn needs more fertilizer, needs more nutrients. So, the more acres of corn that are planted, the better it is for the fertilizer. So, you can use the recent low in Mosaic around 22-ish as your stop. So, your downside's $2 in the shares and your upsides, what I believe, is potentially five to $10 or more if this is the beginning of maybe a multiyear run in agricultural prices.
JUSTINE UNDERHILL: What would you say is the biggest potential risk to this trade?
PETER BOOCKVAR: I think it's another fake out in terms of the crop price rise. Let's just say that the bushels per acre end up being much more robust than feared because of the quality of the seeds and it's just not ending up being as bad. And then instead of seeing $6 corn, corn goes back below $4. It's back to $3.5, where if a trade war accelerates and soybean prices get knocked back down again and US farmers can't find enough customers to offset the disappearance of their Chinese customer. And that's why the stop on Mosaic is pretty tight. So, I think your downside is pretty limited if these risks start to materialize, but your upside, if my both thesis is correct, could be notable.
JUSTINE UNDERHILL: All right, can you summarize your trade thesis in 30 seconds?
PETER BOOCKVAR: So, I believe that this spring planting season in the US, specifically the Midwest has been really awful. And I think that the rise in corn prices rather than just the knee jerk bounce, could have some legs. And I think soybean prices which have been knocked down post trade war could also start to rebound as hopefully shipments start to resume to China. So, Mosaic is a great way of playing this. It's a fertilizer stock that has been hit pretty hard. I think the spring planting season is going to be robust with a lot of demand for fertilizer. This stock should rally going into that. The stock get around $25, could see upside to the mid-30s, downside only to about $22.
JUSTINE UNDERHILL: Great. Peter, thank you so much for joining us.
PETER BOOCKVAR: Thanks, Justine.
JUSTINE UNDERHILL: So, Peter is bullish on agriculture. Specifically, he likes buying mosaic ticker symbol MOS at current levels with a stop loss at $22 and a target price of $35 over the next 12 months. Just remember this is a trade idea and not investment advice. You should do your own research, consider your risk tolerance and invest accordingly. For Real Vision, I'm Justine Underhill.