Lower Crude & Commodities Double Whammy Part 2

Continued Nattering on both the Commodities Double Whammy and the ramifications of lower crude oil prices..

From Part 1: Usually declining commodities means contracting economies. Currently we have a double whammy, add on a strengthening dollar, this means further declining prices in dollar denominated commodities.   This is a good thing as we should see lower prices for goods requiring these inputs.

Below some nascent observations on the Ag sector, as Bret Jensen points out logical stock plays resulting from the implosion in commodities in All Is Not Well Down On The Farm:

The strong dollar and concerns about slowing global growth have cause significant falls in commodity prices and has crushed commodity stocks especially those of miners and small energy exploration & production companies.

(Corn) has been fallen to five year lows on higher expectations of supply, the strengthening dollar and curtailing of orders from Russia in retaliation for sanctions. 

AGCO Corporation (NYSE:AGCO) plunged more than 10% in trading Tuesday. The company cut full year 2014 guidance from $4.80 to $4.10 - $4.30 a share.

This warning from AGCO bodes ill for fellow ag equipment manufacturer Deere (NYSE:DE) which fell in sympathy in trading yesterday.

In addition, fertilizer maker Agrium (NYSE:AGU) also issued tepid second half guidance on Tuesday. This follows Mosiac (NYSE:MOS) stating it is forecasting Q3 phosphate sales at the lower end of previous guidance. 

The stock of Tractor Supply Company (NASDAQ:TSCO), a specialty retailer which serves the farm and ranch communities across the nation, has come down $15 a share over the past few months to just under $60 a share.

Falling corn prices are a positive for a variety of industries including beverage makers where corn syrup is a major input cost as well as ethanol producers. It is also a huge tailwind to livestock and poultry producers where feed makes up their biggest operating cost.

Poultry processor Sanderson Farms (NASDAQ:SAFM) might be worth a look even though the stock has had a very impressive run in 2014.

The farm and energy sectors have been two of strongest parts of the U.S. economy since the country emerged from recession in June 2009. Both are now under pressure due to falling prices for their main products. 

This just adds to my overall worries on the overall market and economy. It is also why I continue to have a cautious stance on equities at the present moment.

The Nattering One muses...  We've disproved the "Peak Oil" canard and substantiated the manipulation of crude prices through futures markets... here and here and here...That said...

Also in Part 1 we Nattered about the Saudis cranking up the pumps to put the screws to the Russians and how the price of oil getting under $75 a barrel for a prolonged period would be a major factor to help resuscitate the economy.  

Some recent coverage: Forbes analysis of declining oil hurting Putin's economy more than US sanctions and from Reuter's Privately, Saudi's tell oil market - get used to lower prices.

OPEC’s largest producer, will accept oil prices below $90 per barrel, and perhaps down to $80, for as long as a year or two... prices should stop falling at around $76 to $77 a barrel, citing production costs in places such as the United States, where a shale oil boom has unexpectedly reversed dwindling output and pushed production to its highest level since the 1980s. Another source suggested that $80 a barrel may now be an acceptable floor for the kingdom.

The Saudis appear to be betting lower prices – which could strain the finances of some members of the Organization of the Petroleum Exporting Countries – will be necessary to pave the way for higher revenue in the medium term, by curbing new investment and further increases in supply from places like the U.S. shale patch or ultra-deepwater.

The math test below makes it readily apparent why the Saudi's are over pumping.  Note the estimated price needed to balance 2014 government budgets within OPEC...  

Iran $140,  Iraq $106, Saudi's at $93 (they are the largest % OPEC producer and are sitting on a boat load of reserves and CASH.)  Brent fell below $88 a barrel on Monday, hitting its lowest in almost four years.

And its not just OPEC producers who are feeling the economic strain. From WSJ: Russian Officials Say Ruble to Stabilize.  

Thus far in October, the Russian Central Bank has spent $4.2 billion to prop up their currency. However, that didn't stop the currency hitting an all-time low of 45.27 on Friday. Sliding oil prices have hurt the ruble, as has the need for Russian companies to pay back foreign debt. 

With a stronger dollar and oil being a dollar denominated commodity... Putin's Russia is at $100 per barrel to balance and stated they will not raise taxes to make up the difference. 

If crude stays around $80 for a prolonged period, well, you do the math, tip o the hat to Langley.