Cowen Getting Less Pessimistic On Ag Sector; Favors Agrium

Cowen’s Charles Neivert raised his view on agricultural sector to Neutral from Negative and upgraded shares of CF Industries Holdings, Inc. CF, Mosaic Co MOS and Potash Corporation of Saskatchewan (USA) POT to Market Perform. It also raised Agrium Inc. (USA) AGU to Outperform.

Finances

“Our upgrades are based on the market reasonably discounting two of the three major drivers of ag equities: supply/demand fundamentals for the nutrients and the potential for further deterioration in grain prices,” Neivert wrote in a note.

However, Neivert said farmer finances (third driver) remains problematic and will likely present a bigger drag than the market currently discounts. Based on Cowen’s grain forecast, the analyst expects capped crop prices to constrain farmers’ financial upside.

“We see the still challenging financial condition, and the possibility of two more years of financial difficulty creating the strongest impediment to a durable broad based recovery in ag,” Neivert continued.

The analyst expects average prices for crops and livestock for 2017 likely to continue to decline, as year-end 2016 prices were generally below the early year price. Neivert estimates farm cash net income could drop to between $82 billion and $86 billion for 2017.

“[G]iven the direction of crop prices, 2018 could decline further on higher costs (unlikely to get the benefits of 2016 for fuel prices, fertilizer prices and net interest expenses in 2017 and 2018),” Neivert added.

Looking Forward

That said, the analyst expects the situation to improve relatively in 2018 on expected increase in nutrient prices, driven by the reduced impact of new capacity on the market.

In addition, a far lower capex spend in both 2017 and 2018, should boost free cash flow for companies.

“While we expect them to remain conservative in 2017, looking mostly to repair balance sheets, by 2018 we should see the return of dividend hikes and share repurchase programs. We would see this most strongly for CF and secondarily for AGU,” Neivert highlighted.