Since 2016 when Global Grain prices dwindled an unprecedented amount of Agriculture related M&A activity was triggered. It started at the origination, more specifically with Chemical & Seed companies, and currently moving along the chain into Agriculture Cooperatives and Trading companies.
Below is a table containing all S&P 500 Agriculture related publicly traded companies (ex-Food), as of March/18.
Monsanto (table above) represents 49% of S&P 500 Fertilizer & Ag Chemicals Sub sector Market Cap.
Commodity and specifically Agriculture is a sector that historically has been deprived of a large sample of Global public players.
As the number of publicly available companies shrink so does the volume of quarterly reported data. Available fundamental data not only helps to understand a company’s financial health but it provides an investment pulse for that particular segment therefore supporting the construction of relationships between companies and commodities. Those relationships become proxies for sector investment. Leading indicators that support among many things, the need to understand farmers crop husbandry practices, farmland investment, and the impact on production cost and commodity pricing.
Global Agriculture is a private and rich business but unfortunately, data poor.
In Capital Markets, money flow increases as data maturity improves.Look no further then comparing Open Interests for Corn, Soybean, Sugar and Coffee Futures. USDA freely available and highly standardized reports combined with an easy access to historical data plays an important role on the liquidity of US grains futures markets.
Another element which is appealing to investors is the presence of natural players. Natural players are companies that are associated to a single market segment making it easier for analysts and Equity Portfolio Managers to correlate company fundamental data with macro economic elements associated to the sector. i.e. Strong correlation between Equipment manufacturer sales in Latin America against historical Soybean cash prices within the region. Recent consolidations in the sector have combined organizations that together spam onto various segments taking away the single natural focus that once existed.
Historically, and in some cases, the availability of such companies not only have permitted that non-traditional Ag entities to take some investment liberties, but more importantly they have provided education to the investment community.
As a consequence, those relationships between Equity and Commodity data have historically allowed for Commodity research organizations to stretch its offerings beyond the traditional market players, improving data democratization for an extended set of market participants while capitalizing within it.
But despite its more illiquid and volatile nature, Agriculture is a sector full of good news.
And I firmly believe that We are in need of a new set of securities that will once again broaden the sector knowledge and facilitate investment allocations.
Thiago Terzi is the founder of The Commodity Innovation Lab. A hands-on, Agriculture focus, collaborative advisory firm that brings data culture forward and center enabling a much needed change to organizations while bringing the consumer optics to the decision table.