A Record US Grain Crop Isn't Good for Farm Incomes—or for Farm Stocks Such as Deere

09/04/2014 5:12 pm EST

Focus: COMMODITIES

Jim Jubak

Founder and Editor, JubakPicks.com

Wall Street analysts are projecting the drop in farm income and in sales for farm companies to extend into 2015 and 2016, but MoneyShow's Jim Jubak—who owns shares of a farm equipment provider in his long-term portfolio—thinks that kind of pessimistic overreach can wind up fueling a rally when it gets reversed.

Logically a record crop ought to be a wash for farmers: higher production would drive down the price that farmers receive for a bushel of whatever, but the larger size of the crop would mean that farmers would sell more bushels.

Wash, see?

Unfortunately for farmers—and the stocks of companies that sell to farmers—the real world doesn’t adhere to that logic. Record crops impose their own costs that eat into what farmers receive for their extra production. A bumper crop drives up costs and can drive down what farmers get for their bushels to an extent that exceeds the gains from selling more bushels.

And that’s what seems to be happening with this year’s record grain crop in the United States. With a record grain crop competing for space on railroads with oil from new US fields in North Dakota and elsewhere, and consequently with higher demand for storage in grain silos, the price that farmers are actually getting for their corn, soybeans, and wheat is falling significantly below benchmark prices in the commodities markets.

For example, operators of grain silos in North Dakota are offering farmers only $2.70 a bushel for corn. That’s about 80 cents a bushel below the September 3 commodity market price of corn for December delivery. Among the higher costs cited by silo operators are the rising prices of booking a shuttle train to move corn from farm to silo. The premium to book a shuttle has climbed by $2,000 to $3,000 a car this year from a year ago, the Financial Times reports.

The increased costs that come with a record grain crop look to take a significant bite out of net farm incomes this year. Net US farm cash income will drop 22% in 2014, according to the US Department of Agriculture.

Companies in the farm sector, which were already predicting a tough 2014, are cutting projections even further. For example, in August, Deere (DE) forecast a 6% decline in equipment sales. That’s down from the company’s May projection of a 4% drop.

I don’t think you need any other explanation for shares of Deere climbing just 1.4% in the 12-months ended September 2 when the Standard & Poor’s 500 (SPX) is up 24.6% in the same period.

Right now, Wall Street analysts are projecting the drop in farm income and in sales for farm companies such as Deere to extend into 2015 and 2016. (Deere is a member of my long-term Jubak Picks 50 portfolio.)

That 2016 projection seems to me to be the kind of pessimistic overreach that can wind up fueling a rally when it gets reversed. Keep one eye open to see if Wall Street produces a bumper crop of pessimism on crop projections in 2015.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I managed, Jubak Global Equity Fund, I liquidated all my individual stock holdings and put the money into the fund. The fund shut its doors at the end of May and my personal portfolio is now in cash. I anticipate putting those funds to work in the market over the next few months and when I do I’ll disclose my positions here.

Related Articles on COMMODITIES