By Rick Lear, Lear Investment Management
For several evenings in September, the moonrise comes shortly after sunset and provides an abundance of natural light. The extended period of illumination is cheered by farmers working in the field to harvest their summer crop. Thus, when observing the “Harvest Moon” last weekend, I thought of this Neil Young classic and our appreciation for the American Farmer.
Because I’m still in love with you
I want to see you dance again
Because I’m still in love with you
On this Harvest Moon
Before you ask, we are not trying to win primaries in Iowa. At Lear, we have a deep-rooted love for those working to grow the food on our tables as my grandfather was a Farmer (Lear Farms).
This week we’ll explore the blight of the farmers and the opportunities for upside in the following three sections:
Cause of the Blight - It has been a challenging couple of years for the American Farmer. The combination of flooding, low commodity prices, and tariffs by China have wreaked havoc in the Farm Belt.
The tariffs on US agricultural imports by China has been financially painful. Despite $28 billion of subsidies provided by the US government, the falling demand for crop exports to the nation’s largest partner, China, has lowered demand and commodity prices dramatically.
The challenges have created opportunities for stock investors. We recently added Archer-Daniels Midland Co (ADM) to the portfolio as the result of a severely depressed valuation.
Why China Needs the American Farmer - China has over a billion mouths to feed, thus it relies heavily on importing agricultural goods. The problem is more complicated than many people believe since US agricultural products are the largest export to China and an integral piece to their food chain. Corn and soybeans are used to feed their massive herds of livestock - specifically pigs. Within the last year, an African Swine Fever epidemic has emerged across China, leading to the slaughter of 100 million pigs, or a quarter of the world swine population. Due to this, demand for corn and soybeans sank.
Pork is the largest source of protein in China, thus the Swine Fever has caused major disruptions. The decrease in corn and soybean demand will be temporary as China looks to rebuild their hog population and as breeders in other countries look to sell into China. Ultimately, breeding the new stock will drive demand for corn and soybeans to help feed the next generation of hogs.
Further, China has a pollution problem which resulted in a plan for cleaner-burning fuel. Beginning in 2020, China will implement an ethanol requirement for gasoline. While Brazil has been filling the gaps for corn ethanol, we believe US Exploring investment topics with the inspiration of music LEAR - Song of the Week Lear Investment Management Song of the Week, September 20th, 2019 agriculture is important and the demand from Chinese will return for US corn.
China’s Recent Tariff Exemptions - Last week, China announced tariff exemptions on several items – including agricultural products. It is no coincidence soybeans and corn were included on the exemption list. China relies on these agricultural goods for vital aspects of everyday life. We still do not believe a grand trade deal between the US and China is likely; however, the discussion of mini-deal exemptions allowing both parties to “win” is a refreshing new development.
In Conclusion, the song Harvest Moon is about a long-lasting love affair like the one we have for our Farmers. It turns out, the Chinese also have an appreciation and dependency on these hardworking men and women of our country. A Field of Dreams for US agricultural is still possible. We hope this contrarian thinking will yield a positive outcome for our investors and for those suffering in the Heart Land.
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Rick Lear is the Founder and Chief Investment Officer of Lear Investment Management. Lear is a pure investment firm founded in 2015 with focus on generating returns with measured risk. With over two decades of experience, his ability to identify global investment trends has resulted in superior outcomes for clients.
The Lear Global Vigilance Strategy is rated 5 Stars by Morningstar and ranks in the 5th percentile of managers in the Tactical Allocation category.
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