Which Hedge Funds Are Playing The Weather?

Agricultural commodities can be strong in both the short and long run, and are currently being driven by a rash of bad weather. This comes at a stark contrast to the likes of base and precious metals, which are relying heavily on QE3. Corn and soybean prices, as well as other commodities, have spiked due to a record drought, and forecasts look bleak for the remainder of the year. If the drought persists into 2013, supplies will remain strained, and prices could go even higher. The S&P GSCI Agriculture Commodity Index is up 18% year to date.

For fiscal year 2012, the USDA projects U.S. agricultural exports to decline 1% from 2011, and imports to be up as much as 13%; resulting in a decline of 30% in the favorable trade balance in 2012, to $30 billion.

Rebound from the current stressed agricultural commodity environment will come from agribusiness capacity utilization level improvement, driven by world population growth, namely demand from Asian and Latin American countries. As a result, we believe some funds are taking initiatives to capitalize on the recent weather and agricultural commodity outlook, while some are looking to limit exposure to other companies.

The moves we have identified, made by funds, cover various aspects of the agriculture business and range from actual storing and processing of commodities to the seeds that grow commodities.

AQR CAPITAL MANAGEMENT

Archer Daniels Midland Company (NYSE:ADM) is engaged in procuring, processing and merchandising agricultural commodities and products to nutrient and seed producers. At the end of July, Archer reported 4Q 2012 net income of $284 million or $0.43 per diluted share, down from $381 million or $0.58 per diluted share in 4Q 2011, falling short of consensus forecast of $0.60. The decline in earnings reflected losses in the U.S. ethanol business. The company expects to benefit over time from rising living standards in emerging markets and increasing demand for agricultural products. It would appear investors agree – Archer trades at a trailing P/E of 15, and a forward P/E of 10, putting its PEG at 1.1. Of the five agricultural commodity-related companies mentioned here, Archer has underwhelmed the most year-to-date in terms of price performance, down 4%.

However, Archer did have some of the more positive fund interest during the second quarter. AQR Capital Management increased their stake by 74% and SAC Capital increased theirs by 165%, two of Archer’s top five owners by shares. Also noteworthy is D.E. Shaw’s 619% increase, as well as Arrowstreet Capital and Ray Dalio of Bridgewater Associates’s new stakes in the company.

Mosaic Co (NYSE:MOS) is a producer and marketer of phosphate and potash crop nutrients. Mosaic posted 2Q EPS of $1.19, versus last quarter EPS of $1.45 on flat net sales. Mosaic noted that 2Q EPS was negatively impacted by lower phosphate pricing, notable items totaling $0.06. Mosaic is up 18% year to date, even as cultivation of corn is the largest single use of fertilizer in the United States, at about 45% of total consumption.

Three of Mosaic’s top five owners by shares downsized their positions in 2Q by more than 20%. D.E. Shaw downsized by 23%, Chilton Investment Company by 27%, and SAC Capital by 31%. Mosaic is a top pick of Cobalt Capital.

Potash Corp./Saskatchewan (NYSE:POT) is an integrated fertilizer and related industrial and feed products company. The company claims to be the world’s largest integrated fertilizer and related industrial and feed products company by capacity, representing around 20% of global potash capacity. The company is expected to grow EPS next year by 11%, putting its forward P/E at 12, versus its trailing P/E of 15.

Potash saw a vote of confidence from its largest shareholder amongst the funds we track, as Adage Capital Management upped its stake in 1Q 21% and then 11% in 2Q. At the same time Chilton Investment Company dumped 27% of its stake, the same amount they reduced their Mosaic stake. SAC Capital is another firm dumping Potash and Mosaic, reducing their stake by 77%.

Monsanto Company (NYSE:MON) is a provider of agricultural products for farmers, namely seeds, biotechnology trait products, and herbicides that provide farmers with solutions that improve productivity. For the latest quarter, the company posted $1.63 EPS, up from $1.28 a year ago, and beat estimates of $1.53; as well, revenue came in up 18%. The company expects a 3-4% increase in pricing due to higher sales of seeds. Monsanto trades at a trailing P/E of 23, versus a forward P/E of 21.

Monsanto attracted the likes of Lone Pine Capital in the second quarter, who upped their stake by 24% over this period, and Bain Capital’s Brookside Capital, who upped their stake by over 50%. D.E. Shaw also increased his stake by over 20%.

CF Industries Holdings, Inc. (NYSE:CF) is a manufacturer and distributor of nitrogen and phosphate fertilizer products. Revenue was up 54% in 2011, but estimates put 2012 revenue down 6.5%. The company has been faced with capacity constraints and production limits. CF Industries posted 2Q results of $8.70 versus $6.87, but tonnage declined 6.7%. The company’s stock trades at a trailing and forward P/E of around 8, and a PEG of 0.8.

CF Industries has seen a variety of insider sales of late. The top fund shareholder as of 2Q was Egerton Capital Limited, who upped their stake by 300% and had 6% of their 13F portfolio invested in CF Industries. Jim Simons was also an investor who held his shares constant during the second quarter. Chilton reduced their CF Industries holdings by 27%, just as it did with Potash and Mosaic.

CF Industries is up the most, year to date, at 50%, with Monsanto up 30%, Mosaic up 18%, Potash up 6%, and Archer Daniels down 4%. Archer and Monsanto saw the most fund interest of all the companies mentioned here. This duo has solid prospects going forward and should have the opportunity to excel regardless of future weather conditions.

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