Winter earnings season continues to roll along, and the most
recent sector to take center stage was the food and beverage
sector. Last week there were numerous earnings reports from
within the sector, setting the stage for the next few months.
One of the bigger food-related stocks to report its quarterly
results was Deere & Co. (
), the largest manufacturer of farm equipment. The company
reported a 5% jump in net income, but looking ahead it issued a
warning that farm equipment sales are likely to moderate,
resulting from lower farm incomes. It forecast a 6% drop in
equipment sales during the current quarter, and a 3% drop
That Deere forecast a drop in farm incomes does not come as a
surprise. The Department of Agriculture has already forecast a
during the current year. It forecast a 27% decline in farm
incomes, hitting the lowest level since 2010.
Dean Foods (
), which produces dairy products such as milk, butter, and ice
cream also reported last week, issuing its fourth-quarter results
on February 11. The company missed its earnings forecast, and
reported an 8 percent decline in revenues. The company stated
that already high milk prices are expected to continue rising
through the first half of the year, creating a "very challenging
environment" for the company. It issued full year earnings
guidance in a range of 73 cents to 86 cents per share, coming in
well below the $1.12 analysts had previously forecast.
) also reported last week. That company, which makes crop
nutrients, also reported fourth-quarter results on the 11th,
posting a 79% year over year drop in quarterly profits. The
decline was blamed on last year's breakup of one of the world's
biggest potash traders, Belarusian Potash Co., which caused a
sharp drop in the price of potash, which is used as a nutrient.
This, along with a drop in grain prices, was responsible for
Mosaic's big profit slide.
Mosaic had earnings of 30 cents per share, sharply lower than
the 42 cents analysts had expected, while its $2.2 billion
revenues was higher than the consensus estimate for $1.86
Despite the big earnings miss, the stock did move higher, but
that was mainly because the company announced it would buy back
an additional $1 billion in stock, on top of the $2 billion it
announced back in December. Additionally, the company reported
that nutrient prices were already rebounding, and that this would
be a better year for earnings.
Combined, these earnings report highlight potential future
weakness in the food and agriculture sectors. If the overall
economy continues to improve through the year, these companies
could trade higher, but at the current time the outlook does not
appear too favorable.
If you want to make a play on the agriculture sector, you may
want to consider setting up a hedged trade on the exchange-traded
fund Market Vectors Agribusiness ETF (
). This ETF is set up to track the performance of the Market
Vectors Global Agribusiness Index, so it will keep pace with
entire sector. Among its top holdings are Monsanto (
), Deere & Co., Archer Daniels (ADM), and Syngenta (SYT)… all
of which are major agriculture stocks.
I would take a bearish position on MOO, but I would also look
to hedge my trade just in case we do see major improvements take
the sector higher. I would look to set up a bear-call credit
spread with enough protection so that the trade will remain
profitable even if MOO trades higher over the upcoming
A nice hedged trade on MOO would be the May 55/60 bear call
credit spread. In this trade, you would sell the August 55 call
while buying the same number of August 60 calls for a credit of
35 cents. This trade has a target return of 7.5%, which is 15% on
an annualized basis (for comparison purposes only). MOO is
currently trading at $51.83, so the trade has 6.7% downside