How to Thrive Amid a Stock Market Meltdown: Sell Soybeans

(Bloomberg) -- While Brazil’s stock market and currency are suffering through a drought, one farming company is proving to be a bumper crop for investors.

SLC Agricola SA, which cultivates an area bigger than Rhode Island with soybeans, corn and cotton, has seen its shares rally more than 67 percent so far this year compared to the Ibovespa benchmark index’s 5.5 percent drop. The company is accelerating expansion after posting a record profit in 2017, and expects to reap even better results in coming years on improved pricing prospects and a decline in the Brazilian real, Chief Executive Officer Aurelio Pavinato said.

"We are seeing upside for the two main revenue drivers: prices and currency," Pavinato said in an interview at Bloomberg’s Sao Paulo office.

The good news comes thanks to greater demand for commodities. Higher U.S. interest rates, weaker growth forecasts for Latin America’s largest economy, a slumping currency and the chaos of an impossible-to-predict presidential election slated for October are a boon for SLC, even if they don’t help Brazil as a whole.

Global demand for soybeans, which is used for everything from livestock feed to fuel, should continue to rise by almost 15 million tons a year for the next 10-plus years, keeping prices attractive enough to encourage planting expansion, Pavinato said. The appetite for corn and cotton should also keep rising.

Soybean export prices in Brazil rose by 20 percent in the past year, prompting SLC to increase sowing by 10 percent to 450,000 hectares (1.1 million acres) in the season starting in September (flipped this). That would be at the fastest pace since 2013.

"Better commodity prices are necessary so supply can meet demand," Pavinato said. That means soybeans and corn should stay above $10 and $4 a bushel, respectively, and cotton at the 80-cents-per-pound level, he said. Soybeans and corn futures in Chicago traded as high as $9.7925 and $3.89 per bushel respectively on Wednesday. Cotton touched 93.69 cents in New York.

Brazil’s currency has a significant impact for SLC: For every 0.10 centavo per dollar of depreciation, about 30 million reais gets added to the company’s earnings, Pavinato said. So far this year, the real has lost 11 percent against the dollar.

SLC has also seen a jump in productivity with the use of higher-yield seeds and precision agriculture techniques, the executive said. The company’s soybean harvest reached a record 3.76 tons per hectare this year, up 14 percent from 2017 and 30 percent above the average for the previous five years.

©2018 Bloomberg L.P.

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