RETURNING to trend-line yields may pressure corn and soybean prices for some time to come, but according to the latest update from Fitch Ratings, the farm sector still remains a smart investment heading into 2014.
All indications are that farmers' net incomes and even net worth are likely to fall from recent record levels, but the analyst sees reason for optimism.
"We believe that generally prudent underwriting practices by lenders in the Farm Credit System (FCS) have mitigated risks of a sharp rise in credit losses, even if crop prices remain depressed," the ratings service said in a late-August statement.
"We observe that farm lenders such as AgriBank, which has the most exposure to farmland within FCS, have utilized conservative per-acre debt caps and land price forecasts derived from sustainable crop price assumptions for underwriting purposes," Fitch added.
Accordingly, the amount of debt incurred by farmers is relatively small compared with the recent run-up in land prices (Feedstuffs, Aug. 19). Fitch said the strength of farmers' balance sheets should prove adequate in mitigating any "asset quality concerns" in the near to midterm.
Despite recent Federal Reserve reports pointing to increasing farmland prices despite falling grain prices, Fitch said "there is little evidence" that lower crop price expectations are fueling additional borrowing.
In its second-quarter earnings report Aug. 9, AgriBank said net income increased 7% in the first half of the fiscal year to $281.3 million. The company cited the strength of its loan portfolio, reporting that loan loss provisions decreased and non-adverse loans stood at 99.8%.
AgriBank said while crop producers' profits are likely to shrink due to bin-busting crops this fall, lower grain and oilseed prices will benefit livestock, poultry, dairy and ethanol producers.
Fitch echoed the positive outlook for the livestock sector, predicting that cash flow fundamentals for livestock loans are likely to improve in the coming year, offsetting some of the modest income reductions in the crop sector. As a business sector, packers have seen mixed results in recent months, with the record drought of 2012 affecting their bottom lines in different ways.
Cargill, for example, reported that its fourth-quarter and fiscal 2013 results were negatively affected by the drought's long tail.
"Combined earnings among the segment's animal protein businesses were down from last year, chiefly due to the negative impacts of drought, high feed costs and, in the U.S., the tightest cattle supply in 60 years," Cargill said.
Privately held Cargill reported net earnings of $483 million for the quarter, with full-year earnings of $2.31 billion, nearly double the prior year's results. Chief executive officer Greg Page said nearly all of Cargill's business units were profitable, and more than two-thirds exceeded year-ago results.
Cargill's origination and processing segments were the largest contributor to consolidated earnings last year, with improved performance in grains and oilseeds in most geographies. Results in the sector were up "considerably" from last year.
Despite poorer performance in its protein business, however, Cargill said it is investing heavily in animal production and processing, including a poultry further-processing plant in Russia, an integrated poultry production and processing facility in China and an animal nutrition facility in South Korea.
Tyson Foods, meanwhile, reported stellar third-quarter profits, owing to strong demand for chicken and beef and near-record retail prices. The company reported record chicken segment earnings of $220 million, with beef earnings up more than 60% to $114 million.
Tyson's chicken sales, meanwhile, were up 11%, with beef sales up nearly 7%. Both segments benefited from higher prices and stronger volumes alike.
Analysts generally hailed Tyson's performance, with many lifting their fiscal year stock estimates and targets.
As with Cargill, Archer Daniels Midland Co. (ADM) reported mixed results in its most recent quarter. Oilseeds Processing segment profits decreased $10 million as stronger origination and crushing profits were offset by poor cocoa results.
Corn Processing, on the other hand, saw profits rise $149 million on improved ethanol results. The company's Ag Services segment saw a $42 million drop in profitability due to lower U.S. grain origination volumes and weaker international merchandising.
Overall, ADM reported second-quarter earnings of $223 million, off slightly from last year. The company said it unlocked nearly $2 billion in cash in preparation for closing the largest acquisition in company history, with its $3.1 billion purchase of Australian grain giant GrainCrop expected to close by year-end.