NEW YORK — After historic floods devastated Midwestern agricultural states this spring, some fund managers are evaluating how climate change will affect the long-term value of companies that make or sell products ranging from tractors to fertilizer.

The issue is not simply the unpredictability of weather. Instead, fund managers say, they are struggling to model how extreme weather events from droughts to more powerful storms will affect commodity prices and, in turn, spending by farmers on equipment or seeds.

In November, the US government published a report that found climate change will boost costs in industries including farming and energy production by increasing the frequency and severity of storms. The US-China trade war has also clouded the outlook for US farmers.

Early estimates of crop and livestock losses from this year’s floods are approaching $1 billion in Nebraska alone, and damages are expected to climb much higher for the region. The US Department of Agriculture, meanwhile, has no way to compensate farmers for crops that were damaged when floods overtook their record-high stockpiles of grain.

“I just don’t know how to value these companies now,” said Christopher Terry, a portfolio manager at Hodges Capital in Dallas. “It’s harder to invest around a theme when you’re talking multi-decade impacts.”

More extreme weather in the Midwest, for instance, will boost the cost of grains for feed, which will cut margins of egg producers like Cal-Maine Foods Inc, he noted. Barge companies such as Kirby Corp that move commodities down the Mississippi River may have more days that operations are out of service because of flooding, he added.

Other fund managers said they were seeking agricultural companies that might actually benefit from more severe weather.

Michael Underhill, chief investment officer at Capital Innovations, said he is focusing on midstream companies such as grains merchant Archer Daniels Midland Co and production companies like equipment maker Deere & Co that may benefit from greater volatility in commodity prices. ADM has a proven track record of hedging commodity bets, he said, while Deere may benefit if higher crop prices following extreme weather prompt farmers to invest in new machinery.

“If you think the next 10 years will look like the last 10 years you are in a for a rude awakening,” he said.

LOOKING FOR WINNERS
Incorporating the impact of climate change on agricultural stock valuations is something Wall Street analysts from firms including William Blair, Wedbush and R.W. Baird have largely avoided because it is hard to predict the impact on any one quarter or season. Analysts at these firms follow companies ranging from Bayer AG to retailer Tractor Supply Co.

“If weather conditions continue to have a more unforeseeable impact on agro business the best way to model this would be … to increase the beta-factor within the discounted cash flow model used by me. And no, I have not yet done so,” said Ulrich Huwald, an analyst who covers Bayer.

Private research companies like Four Twenty Seven have stepped into that void by providing quarterly climate risk scores for specific companies that focus on the impact of climate change events ranging from wild fires to rising sea levels on supply chains, operations, and trading markets.

Lucas White, a portfolio manager at GMO, runs one of the few actively managed mutual funds that target companies that may be significantly affected by climate change. While his fund has outsized positions in solar companies such as SolarEdge Technologies Inc and First Solar Inc, he also focuses on potash and phosphate producers that may see increasing demand as more severe storms wash away soil nutrients.

“Nobody knows what will happen with commodity prices and it’s more or less impossible to predict,” he said. “But farmers spend all this time getting their soil to be very productive and all of a sudden a huge downpour comes and they have to start from scratch again. It’s very difficult to produce agriculture in a world that is increasingly impacted by climate change.” — Reuters

OTTAWA — The Canadian government, as expected, on Wednesday offered more financial assistance to canola seed farmers who have been hit by a Chinese ban on imports and said it was looking to diversify into other markets.

China is blocking imports of canola seed from two companies on the grounds that it discovered pests. The ban threatens to cause major problems for farmers, given that China is Canada’s biggest export market for canola.

Agriculture Minister Marie-Claude Bibeau said that for 2019 an existing aid program would offer all farmers as much as C$1 million ($745,000), up from the current C$400,000. The interest-free portion of loans to canola farmers only will rise to C$500,000 from C$100,000.

Trade Minister Jim Carr said he would lead a trade mission to Japan and South Korea in early June in a bid to boost existing canola exports.

“Our government is taking action both at home and abroad to find lasting solutions to this situation. We will not rest until this issue is resolved for our Canadian producers, workers and their communities,” he told a news conference with Bibeau.

Canada-China ties turned icy last December when police in Vancouver arrested Huawei Technologies Co Ltd Chief Financial Officer Meng Wanzhou on a US warrant. She is awaiting an extradition hearing and is next due in court on May 8.

An expanding list of Canadian farm exports such as soybeans, peas and pork is hitting obstacles at Chinese ports.

Ottawa said in a statement it was “prepared to respond to support producers of other commodities should further trade actions occur.”

Although the government of Prime Minister Justin Trudeau is under increasing pressure to retaliate against China, Carr said Ottawa wanted to focus for the time being on the scientific aspects of the case. Canada dismisses the suggestion of pests in its canola exports.

China accounts for about 40 percent of Canada’s canola seed, oil and meal exports, according to the Canola Council, with seed exports to China worth some C$2.7 billion ($2 billion) a year. The council said the federal aid was good news.

Mike Ammeter, who farms near Sylvan Lake, Alberta, said the assistance would help farmers finance the cost of planting this year’s crop.

“Cash flow has been a concern. It’s a welcome announcement,” he said by phone.

Farmers intend to plant their smallest canola crop in three years, down seven percent from 2018, according to a recent Statistics Canada survey. — Reuters