Shorts in agribusiness unmoved by drought

So far, investors are not hugely active in trying to monetize the global drought. China and Northwest Europe have suffered an incredibly dry spring and even though it is raining as I write, the damage has already been done with crop yields 10-50% lower according to farmers. With the price of wheat up 70% since this time last year and remaining at these levels despite Russia/Ukraine lifting their export ban, chances must exist to predict the ramifications. Further, Bloomberg Business Week notes that the winter-wheat crop in the US, the largest exporter, is rated poor or worse. If we screen on short selling in food related companies we can see a tentative pattern. There is low short interest in those that trade grain while short selling is low but on the march in firms that have to buy agricultural produce in order to sell their goods.

Drought: rising short interest

Meat producers

There are seldom black and white investment propositions and I am sure there are many shades of grey if you sell beef and chickens. But, on the face of it, if you need to buy grain to feed your chickens and cows (as is the US way) the drought related higher cost will lower your profit margins. The Bloomberg Relative Value (RV) comparison from Bloomberg shows high short interest in poultry producer, Sanderson Farms (NASDAQ:SAFM) (15% of total shares outstanding on loan) and rising shorts in a similar firm, Pilgrim’s Pride (NYSE:PPC) (1.2%). Tyson Foods (NYSE:TSN) is another comparable firm with some short selling at around 3% (if you subtract the dividend inspired borrowing) after a big recent increase.

Cereals

Sellers of cereal could also be in for margin compression but we are yet to see any material demand to borrow Kellogg Co. (NYSE:K) Demand is rising in another breakfast cereal maker, General Mills (NYSE:GIS), but only from zero to 0.5%. The same would apply to makers of pasta but the worlds’ biggest – Barilla Holding – is private. Short selling is also low in the UK’s Premier Foods (LSE:PFD) despite their Hovis bread making business looking set to have to charge even more for its loaves.

The negative case above presupposes that firms whose cost base will rise are not able to pass on this cost to the next person in the chain be it a supermarket or the consumer. If you believe that there is a short term ceiling on how far prices can rise, then the case has merit. There are big liquid firms whose fortunes are harder to read such as Archer Daniels Midland (NYSE:ADM). This firm is more of a processor and warehouser of arable produce. The share price is sliding and short selling is somewhat above normal but remains very low at 0.5%. It is a similar story for Corn Products (NYSE:CPO) with demand to borrow rising from nothing to 0.25% very recently.
 

Drought: declining short interest

Those with grain to sell to bridge the gap between supply and demand are sitting pretty, suspects the short sellers. This is especially the case since many farmers, eager to lock in the high prices on offer in recent months, will have pre sold a fixed tonnage at a fixed price. If you had done this you would need to buy grain from others to meet your delivery commitment if your own crop is insufficient and this means going to a grain trader and paying their price. This might explain how the short interest has come down in agri-business Viterra (TSE:VT) from 14% to 2% since November! We can’t seem to write a piece at present without mentioning Glencore (LON:GLEN) but as a trader of agricultural commodities – and listed since most are not - they stand have much to gain or lose depending how they are positioned regarding cereals. Short selling is 1.3% of the free float and rising.

Bottom Line

This time last year the weather was a big investment theme be it the drought in Russia/Ukraine and the floods in Australia. With so much going on at present, the fact that the UK had had the driest May for 350 years and France for the last 50 years is not high up the news agenda. The data shows that it is not an area showing up much trading activity albeit some recent movement. Sentiment may well change over the summer and it is very uncrowded for those interested in going short or underweight in their chosen areas.