At the other end of the spectrum were 148 companies with 12-month earnings of 10% or more of total assets, even after rate hikes and recession concerns. After paying higher diesel and fertilizer bills in 2022, U.S. farmers won’t be surprised to hear that oil and fertilizer companies have done well. Many well-known names that are not cyclical also made the list. In general, companies in this group have little to fear from today’s bearish headlines.
Another nice feature of the model is that we can run a simple stress test to get an idea of how vulnerable these companies are to today’s interest rate and recession concerns. Federal Reserve Chair Jerome Powell recently said there may be a few more rate hikes ahead, but no one knows for sure. If we look gloomily into the future and increase the parameters of the model to reflect a 2 percentage point increase in the interest rate and a 2 percentage point decrease in the return on investments, we see that the number of companies suffering negative return on assets increases from 12 to 90.
As bad as that sounds, 64 of the 90 losing companies would suffer negative returns on assets of 2% or less and could be tightened by something — something many companies have leeway for after years of low interest rates. Of the 36 companies in the higher-risk, major-loss category, many are financial firms, which are notorious for carrying large amounts of debt. Some of the high-profile names that required bailouts in the 2008-09 meltdown fall into this higher-risk category.
No model is a perfect proxy for the economy, and there is no guarantee that economic conditions will not deteriorate than the simple stress test offered above. However, having heard nonstop since June about the impending recession, I feel it is important to find a more credible and insightful source of information than the daily news.
Traders sold their long positions in corn and soybeans this summer primarily because they were listening to the bulk of public opinion rather than someone doing his or her homework, and it cost them a lot of money. For growers marketing grain, this is a good lesson to remember.
At farm shows people sometimes tell us that they don’t need DTN because they can get the information they need for free off the internet. I can’t speak for the internet, but I can tell you that at DTN we do our homework. Will you be at the National Farm Machinery Show February 15-17? Stop by the DTN booth #2000 in the West Pavilion and say hello. DTN Meteorologist John Baranick and I will be speaking about 2023 weather and markets each day in DTN’s seminar room.
**
The above comments are for educational purposes only and are not intended as specific trading recommendations. Buying and selling grain or grain futures or options involves significant risk and is not suitable for everyone.
Todd Hultman can be reached at [email protected]
Follow Todd Hultman on Twitter @ToddHultman1
(c) Copyright 2023 DTN, LLC. All rights reserved.
Comments are closed.