'The biggest player, they have the most ability to spend on tech & innovation': Isherwood on Deere

Key Concepts

• Agricultural (Ag) Cycle: A cyclical market pattern typically lasting 18–24 months, driven by commodity prices, geopolitical stability, and input costs.
• Crush Margins: The difference between the cost of raw soybeans and the market value of the resulting soybean oil and meal; a key profitability metric for processors.
• Strait of Hormuz: A critical maritime chokepoint for global energy and fertilizer supply chains.
• Input Inflation: Rising costs for essential farming supplies, particularly fertilizers, which are heavily sourced from the Middle East.
• Ethanol Correlation: The direct link between oil prices and corn prices, as ethanol serves as a major energy input.

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1. The Macro Thesis: A New Agricultural Cycle

Ryan Ishurwood, co-founder of Significance Capital, argues that the agricultural sector is entering a new 18–24 month "up cycle."

• Cycle Dynamics: Following a post-2022 down cycle, the market is bottoming out. Current indicators, such as clean machinery inventories, suggest the sector is primed for growth.
• Geopolitical Drivers: The conflict in the Middle East and the potential closure of the Strait of Hormuz are identified as primary catalysts. These disruptions threaten the global supply chain for fertilizers, 50% of which are sourced from the Middle East even for U.S. factories.
• Historical Precedent: Ishurwood draws a parallel to the 1973–1974 oil crisis, noting that inflationary effects in agriculture often lag behind energy shocks by 6 to 9 months.

2. Commodity Correlations and Market Behavior

• Corn as the Bellwether: Corn is the most significant exposure in the sector. Because ethanol is tied to the energy complex, corn prices tend to track oil prices closely.
• Farmer Behavior: Due to fertilizer shortages and rising costs, farmers are shifting planting strategies, moving from corn to soybeans.
• Market Sentiment: The market is beginning to embrace this thesis, evidenced by the positive stock reactions to recent earnings reports, such as those from Archer-Daniels-Midland (ADM).

3. Top Stock Picks and Rationales

Archer-Daniels-Midland (ADM)

• Rationale: High exposure to the agricultural cycle and significant improvement in profitability.
• Key Data: Crush margins increased by 47% in Q1 and are forecasted to rise another 40% in Q2.
• Outlook: The company is well-positioned to benefit from crop inflation and potential upside to earnings estimates.

Deere & Company (DE)

• Rationale: As the largest player in the machinery space, Deere benefits from farmers’ increased capital expenditure during profitable cycles.
• Technical Edge: Deere is leading in AI integration and technology platforms, which provides higher margins on their products.
• Backlog Indicators: Typical backlogs of 3 months have stretched to 4–5 months, a classic signal of an early-stage up cycle.

Bunge Global (BG)

• Rationale: Broad-based exposure to global grain markets.
• Performance: Bunge shares similar macro correlations to ADM and Deere, benefiting from the same tailwinds in the global supply chain.

4. Synthesis and Conclusion

The agricultural sector is currently an overlooked macro trade that is poised for a sustained upswing. Driven by geopolitical instability in the Middle East, the sector faces significant supply chain risks that are likely to manifest as long-term food and input inflation. Investors are advised to focus on companies with strong market positioning, such as ADM, Deere, and Bunge, which are already showing signs of momentum. Ishurwood emphasizes that while the market is currently focused on oil, the "long tail" of agricultural disruptions suggests that the current cycle is only in its early stages.