A Trade War Agriculture Pair Trade From JPMorgan

Stocks have taken a beating in the past two weeks thanks to a rise in international trade tensions between the U.S. and China. China is targeting U.S. agriculture with its latest round of tariffs, but one analyst has suggested an agriculture pair trade to help investors mitigate the trade war risk.

The Analyst

JPMorgan analyst Ann Duignan has downgraded Deere & Company DE from Neutral to Underweight and lowered her price target from $154 to $132.

Duignan also upgraded AGCO Corporation AGCO from Neutral to Overweight and raised her price target from $66 to $77.

The Thesis

Thanks to the trade war, Duignan said the environment for the U.S. agriculture business is deteriorating rapidly.

“Beyond tariffs (which have weighed on US soybean exports in 2018/19 TD, down 27% YoY), Chinese import demand for soybeans is likely to decline significantly as it deals with a ~30% reduction in its hog herd following the outbreak of African swine fever (ASF),” Duignan wrote in a note.

The strength of the U.S. dollar isn't helping American agriculture compete in the international market, where Brazil and Argentina have both produced near-record soybean and corn crops this year.

Duignan said the current situation is the “perfect storm” for U.S. agriculture, and risk for Deere is skewed to the downside until the situation improves. At the same time, AGCO stock is down more than 5 percent from its May peak, yet Duignan said the company has limited exposure to the U.S. row crop sector.

Price Action

Deere shares traded around $148.84 on Tuesday, while AGCO shares traded around $71.06.

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