ON April 18, Standard & Poor's revised its rating outlook for the U.S. from stable to negative, citing that nation's large budget deficit and rising indebtedness.
While the stock market for the general US economy has been less than stellar over the past five years, agribusinesses have not only been stable but profitable, according to a new University of Illinois report.
University of Illinois agricultural economist Gary Schnitkey said the financial situation was generally holding back a more robust recovery in the U.S. economy.
"This likely is slowing demand for agricultural products to some degree, but not as much as some companies whose products are not as necessary as food," he said.
Schnitkey authored the new report, which compares the returns of publicly traded companies from 2007 through the end of the first quarter of 2011. The report shows an 8.6% market value increase for agribusinesses, while companies in the S&P 500 experienced a 2.7% decline (Figure 1).
"We looked at 21 agriculture-related midwestern companies in five sectors: fertilizer, equipment, seed and genetic companies, crop production companies and first processors. The overall goal was to build an AgIndex that measured the change in market value of publicly traded agricultural companies and compare it to the S&P 500, looking at their market values and how they did over time from 2007 up to the first quarter of 2011," said University of Illinois graduate student Clay Kramer, who created the index with Schnitkey.
The S&P 500, an index by Standard & Poor's, tracks the market value of 500 large-capital U.S. companies.
All of the agribusinesses monitored in the University of Illinois' AgIndex have an interest in agriculture, but the majority also have interests in other sectors, such as construction.
For their index, Kramer and Schnitkey evaluated the markets using a geometric mean, which is similar to an average.
"For example, if you invested funds in 2007, this would be your average yearly rate of return. So, 8.6% for 2007 through 2010 means you would have had an increase of 8.6% in value each year up to 2010," Schnitkey explained.
Kramer said over the course of the study, the AgIndex performed much better than the S&P 500.
"In the first year, we saw a 55% increase in ag companies, compared with 2.2% from those in the S&P 500," Schnitkey said. "Year two was the year of the big stock price decline. The S&P 500 declined 35% from the beginning of 2008 to the end of 2008, and the ag market fell even further -- 48%."
Schnitkey said if stock prices take another hit similar to in 2008, agriculture will not be immune to the drops. However, he said agribusinesses probably will rebound more quickly than other companies.
The report shows that market values varied across sectors, with fertilizer, equipment and seed and genetic sectors posting large increases in market value (Figure 2).
The report notes that the fertilizer sector had the largest increase from 2007 through 2010, more than doubling in market value. Stronger fertilizer demand and merger activities likely led to the higher market value for firms within the fertilizer sector.
The equipment sector had the second highest increase -- at 51% -- followed by seeds and genetics with a 37% increase. Sales of equipment and seeds have been strong over the past several years, partially due to higher farm incomes and increasing acreages in row crop production.
"These firms supply products to farmers, who have generally had above-average incomes," Schnitkey said. "Farms having above-average incomes likely led to higher demand for the fertilizer, equipment and seed and genetic sectors."
Among the five agricultural sectors, crop protection companies and especially first processors didn't perform as well as fertilizer and equipment companies, Kramer said. In fact, the report shows that the first processor sector had the lowest market value increase since 2007.
"This sector purchases inputs from grain farms, and higher commodity prices may have played a role in lower market values," Schnitkey explained.
"From the beginning of 2007 to the end of 2010, there was a 2% decrease in the crop protection sector and a 4% decrease in the first processor sector," Kramer said. "These sectors did relatively well in the first quarter of 2011, having increases that caused the second-quarter 2011 value to exceed the first-quarter 2007 value."
Schnitkey said he expected agricultural companies to continue to perform well into the future because they are well managed.
"Many of these companies went through a tough climate during the late 1990s and early 2000s. They have made changes and know how to manage risks. They are also working in a good sector of the economy," he said.
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