COMDX New weather forecast bearish for ag futures; shipping stocks may see higher demand on faster harvest; propane demand may rise on drying needs

A new weather forecast proves correct, corn, wheat and soybeans prices will likely decline in the near-term as the dry weather would allow farmers to harvest their long-delayed crops.

Currently, the U.S. harvest season is facing its worst delay in over 30 years due to unfavorable weather conditions up to this point. The USDA has reported that, as of the week ending October 25, corn harvest was only 20% completed compared to 37% at this time last year and the 5-year average of 58%. This delay has led to increased ag futures prices, with corn gaining ~12% and soybeans gaining ~7% in recent weeks, and threatened the crops of farmers across the midwest. The delayed harvest has in turn led to less shipping demand for select dry bulk shipping cos, as Panamax ships are used to transport the crops as they are harvested. Cos with this exposure includes DRYS who leads the pack with 29 panamax ships, EXM 21, NM 16, DSX 13, GNK 8, PRGN 7. Others in the group include (EGLE, TBSI, SBLK, ULTR and FREE).

While uncertainty around this year's harvest is still very high, a forecast for a much-needed dry spell could have several implications. According to T-storm Weather, a Chicago-based agri-weather company, a dry spell is expected to occur on October 31 and last 10 days. If this occurs, farmers can drastically catch up on harvesting crops. This would allow farmers to produce their crops rather than lose them, but a decline in futures prices (on increased supply) and higher input costs (primarily due to drying costs) would lower farmers' margins and income on a YoY basis. While this leaves a mixed picture for the ag group (DE, CNH, AGCO, POT, MOS, CF, TRA, AGU, MON), it should be positive for propane prices, due to the increased demand for propane to dry crops.

If crops are wet, farmers will need to dry them immediately after harvest, and that requires the use of a lot of propane. This would represent incremental increase in demand for propane, which could drive up the price of propane and benefit suppliers. While propane producers (APU, FGP, SPH, UGI, NRGP, NRGY) only derive ~5-10% of revenue from the agriculture market, that range can vary significantly. If harvest is on time and weather is favorable, very little propane would be used. However, when farmers are seeing very wet and cold conditions, as they are now, propane use can go from a very small proportion of revs to a more material level in years with extended periods of bad weather.

Additionally, the dry bulk shipping stocks (DRYS, GNK, EXM, NM, DSX, PRGN, EGLE, TBSI, SBLK, ULTR, and FREE) should benefit as farmers should be able to harvest a decent amount of its crop in the near-term, which should boost demand and thus daily time charter equivalent rates for the smaller and mid-size vessels. This increased shipping activity will primarily affect panamax ships. Therefore, the shipping cos mentioned above with panamax exposure will be the largest beneficiaries. Overall, the impact to shipping cos earnings is notable because grain shipping makes up over 10% of total world trade.