Tighter food supplies and the tendency to hoard food in the midst of the pandemic have boosted agricultural prices over the last few months

 

A NUMBER of vaccine candidates are on the horizon, but with virus cases still rising, the tendency to hoard food should support a positive outlook for agribusiness bond issuers.

 

Agriculture prices have risen sharply over the last few months, a trend that may continue into 2021. The Bloomberg Agriculture Sub-index, which tracks the performance of a basket of futures contracts including coffee, corn, wheat and soybeans, has climbed 22 per cent between end-June and Nov 11. In comparison, the S& P 500 index gained 15 per cent during this period.

 

Low production, dry weather, tighter exportable supplies and high demand support crop prices. According to the USDA, the price of wheat is projected to rise as the amount of exports has exceeded domestic production. Likewise, lower supply in South America and strong demand have pushed export prices of soybeans in the US and Argentina to their highest levels since July 2016. Under the Phase One trade deal with the US, China has committed to acquire more farming products and this could keep procurement orders at an elevated level.

 

At the same time, agricultural commodity buyers have been hoarding food in the midst of the pandemic. Countries such as Egypt and Jordan have boosted crop purchases, while farmers in China were said to be boosting reserves in their warehouses in anticipation of further price increases.

 

When news of the contagion was first announced earlier this year, consumers began stocking up their supplies at home and there were empty shelves in the supermarkets. With global virus cases increasing every day to new all-time highs, customers are likely to develop a greater propensity to store more food than they need, particularly in areas where there are high virus infection rates.

 

In addition to changes in consumption behaviour, the outbreak has led to disruptions along the food supply chain, with bottlenecks forming due to government-imposed travel restrictions, thereby limiting the free movement of labour, and slowing the transportation of agriculture supplies.

 

Apparently, there is a risk of virus transmission through food imports and this may have led to stricter checks on imported packages. On the other hand, border restrictions have prevented the hiring of migrant workers on farms.

 

These persistent commodity shocks and soaring prices have benefited companies in the areas of commercial farming activities. Bunge, one of the biggest oilseed processors in the world, has reported a record profit in the second quarter, while Archer Daniels Midlands managed to exceed earnings expectations on robust export volumes.

 

Asian bond issuers in the agricultural sector have also seen an improvement in revenue from higher rubber and palm oil prices. Benchmarks tracking the performance of front-month futures in rubber and palm oil contracts have risen 41 and 47 per cent, respectively, since the end of June, exceeding the gains seen in the broader Bloomberg Agriculture Subindex and the S& P 500.

 

Worldwide demand for medical gloves and a recovery in automotive production in China have lifted the price of rubber. The shift towards electric vehicles and a preference for private cars instead of public transport have fuelled higher trading volumes in rubber contracts. Palm oil prices, in the meantime, saw an upward trend due to lower stockpiles, with inventory levels in Malaysia dropping to its lowest point in three years.

 

The disruptions in agrarian commodities may be short-lived or structural in nature. A structural change would require long-term adjustments to a new economic reality, and would create a brighter outlook for agriculture issuers in general.

 

Bond issuers such as Golden Agri-Resources, Halcyon Agri and Olam International have managed to raise capital through debt capital markets this year despite tight credit conditions. In October, Golden Agri-Resources raised international depository receipt (IDR) 1.4 trillion through its subsidiary Sinar Mas Agro Resources and Technology, while Halcyon Agri recently priced US$200 million of perpetual notes. Olam, which counts Temasek Holdings among its largest shareholders, issued a S$500 million 5.5-year senior note at a coupon rate of 4 per cent in August.

 

The credit outlook for Asian agricultural credits will still depend on consumption trends that are invariably linked to the global economy. As the US Federal Reserve said in November: " The path of the economy will depend significantly on the course of the virus." It is quite evident that economies that succeeded in keeping low virus case counts have reported better economic performance than others with surging infections.

 

When Pfizer and BioNTech released news of a 90 per cent efficacy rate vaccine last week, there was an immediate shift in risk appetite to the upside. Yields on speculative-grade bonds were sent lower and equity indices rose. Financial markets appear to price in a big upside scenario in 2021. Even as the US sets to clear the Pfizer vaccine for emergency use and more vaccine announcements from other companies are likely, a logistical challenge awaits in terms of the vaccines' deployment to different countries.

 

Pfizer has projected that up to 50 million vaccine doses will be produced in 2020. This isn' t for everyone, especially for developing countries. Our best guess is that developed nations such as the US and Europe will have priority access to any successful vaccine.

 

Another pressing issue is whether people are willing to get vaccinated. Herd immunity will require vaccine uptake of more than 60 per cent.

 

We think agricultural credits will do well. Bond prices of these issuers will continue to be supported even if the disruption in commodities is proven transitory. The companies mentioned in this column have good institutional support and a reasonably decent credit profile to withstand downside scenarios.

 

The basic underlying demand for food and the credit metrics of these agricultural firms will likely hold up in the near term.