Farming, Fragility and Finance: A Case for Agricultural Stocks

Unsustainable Crop Prices and Overly Optimistic Yields Present a Massive Opportunity

Introduction

“It is said an Eastern monarch once charged his wise men to invent him a sentence to be ever in view, and which should be true and appropriate in all times and situations. They presented him the words, “And this too, shall pass away.” How much it expresses! How chastening in the hour of pride! How consoling in the depths of affliction!” - Abraham Lincoln September 1859

It is a feature of the human condition to adapt to whatever circumstances are presented before us. In the Great Depression despite mass unemployment and decaying standards of living many families moved in together and sought out additional work that may have even been below their qualifications in an attempt to survive.

While the adaptability of the human experience is admirable it tends to lead us to take many of our daily comforts for granted. In the last decade while we have all focused on the issues of the day, raising families and working to progress in our careers, we have all ignored the fact that we are living in a period of extreme abundance.

The ability to meet basic energetic and by extension caloric needs has been nothing shy of a miracle. While anyone who has read our work knows how we feel about energy, another commodity has been left for dead on the back of government agencies projecting yet another year of relative abundance, namely the USDA.

Agricultural prices are near record lows and costs to produce an acre of corn have only ever been higher in two periods between 1975 - 1985 & 2012 - 2016. On top of high input costs for corn and below break-even pricing, the USDA is projecting yet another year of record-breaking yields for corn of roughly 188.8-bushel p/acre (bu/ac) but has since been quietly revised down to 186.7-bu/ac. There is a narrative forming that even the 186.7-bu/ac could be too high and might need revised down further.

If the USDA is off by even 1-2 bushel per acre that would be a massive miss as corn is an inelastic commodity with 33% of the harvest we produce here in the states used in the production of Ethanol for renewable / clean fuels. At the end of the day economics are going to drive the price of any commodity or industrial business and right now the act of producing corn is simply uneconomic. It is our view that USDA figures are simply too rich, corn prices are too low to generate earnings for US Farmers, and that weather patterns are going to present challenges to farmers as we enter a seemingly drier part of the cycle similar to 2012.

USDA Projections & Ag Economics

The USDA in August came out with their projections of US Corn production. In that report they noted 97.3M acres planted (most since 1937), 188.8 bu/ac which is 9.5 bu/ac above the record in 2024 of 179.3 bu/ac. Finally, the report calls for an increase of 1.4B bu/ac increase from 2023 figures of 15.3B bu/ac. These numbers, understandably so, have pressured the price of agriculture products like corn and soybean.

While the numbers at face value look poor for grain related commodity prices, there are a few nuances to this report we want to touch on. When the USDA puts out figures for planted acres of 97.3M that does not mean that corn or soybean or any crop is planted. It means the land was simply set aside with the understanding that it was meant to be planted for insurance purposes but by no means is that a concrete figure, we will not know how many acres were actually planted until January of 2026. We would venture to guess actual planted acres and planted acres for USDA purposes will need meaningful revisions to the downside.

Part of our conviction for the revisions to planted acres and production per acre for that matter is that we are based in the corn belt. The best ground in the United States runs through the heart of our community and we have a good relationship with farmers around the area all the way down to Tennessee. What we are being told is that much of the best ground was simply not planted or was replaced with Soybean as it holds up better against the weather conditions experienced during this year’s planting season. This means that acres planted and actual yields are positioned to be meaningfully lower which the USDA and traders of agricultural commodities are not accounting for at all. Corn and Soybean prices today are priced for perfection, meaning, any hiccup or revisions to USDA figures from here would mean a price shock and higher prices in the medium to long term.

We saw a similar phenomenon in the 1970s as prices for Corn and Soybeans were nearly as cheap as the depths of the Great Depression. When corn and soybean prices corrected to provide for economic incentives to plant and produce more grains, Arthur Burns at the Federal Reserve blamed rising Ag prices for much of the inflationary pressures felt in the early 1970s. We think a similar dynamic is at play today.

Economics

The economics of producing corn today have rarely been worse. Low price per bushel coupled with high input prices are driving many farmers into dire straits. If we go based on the 16.7B bushels assumption of 188.8 bu/ac which was the original estimate, the implied price for a bushel of corn was revised from $4.20 bu/ac to $3.90 bu/ac. The USDA estimates average costs for an acre of corn to be $897 for the full year 2025 with the average cost to grow a bushel at $4.75 ($897 / 188.8). Therefore, at today’s price of roughly $4.25 p/bu a farmer producing today is working at a negative profit per bushel of $0.50. This would mark the third year of negative profit margins with 2024 operating at a $0.60 loss per bushel and a $0.58 loss per bushel in 2023. Earlier this year when corn prices touched $3.90 the loss per bushel was closer to $0.90. In comparison to historically tough markets in grains, 1975 - 1985 per acre costs for corn touched $1,082 on an inflation adjusted basis.

At a $4.75 breakeven price the market would need roughly $5.25 per bushel corn prices to earn an economic return assuming a 10% return is required. Some of the larger farmers in the country will accept lower returns so if we assume farmers would accept a 5% return corn prices would need to be around $5.10 per bushel. At the current price of roughly $4.25 prices would need to increase by roughly 18-25% to allow for an economic profit. That can come by way of reduced cost per acre or higher corn prices from a cut back in production and a right sizing of supply and demand.

In 2012 when pricing hit near all-time highs on the back of drought conditions and increased Ethanol requirements in the US bushels per acre were 123.4 with roughly $500 all in cost to produce an acre of corn implying $4.05 break even cost per acre. In the meantime, prices for corn per bushel were $6.89 on a national average implying a roughly 70% return per bushel which were unsustainable and quickly corrected with prices falling toward the $3-$4 range on average after.

Weather’s Impact

Drought conditions similar to grain prices or oil prices are cyclical by nature. While some point to the 88-year Gleissberg Cycle or the 11-year Schwabe sunspot cycle to be of increasing relevance today, we find such slow moving and large macro phenomenon to be interesting academically but unhelpful in making investment decisions. With that said, 1847 was a year of major draught conditions, followed 89 years later with the end of the Dust Bowl in 1936 and some are targeting 2025 89 years after as the start of another major draught cycle.

Despite the academic curiosity we have for finding large macro patterns, we would be kidding ourselves to think that studying 100-year solar patterns was a prudent way of trying to allocate capital and find opportunities in markets today. With that said, the market for grain prices does well when draught conditions are present as more capital is spent to improve irrigation and apply NPK nutrients to the crop to improve yield. While we do think human beings can, have, and will overcome whatever conditions we are presented with, taking a look at past weather cycles may be an interesting way to think about the macro set up for grain prices.

In 2012 53% of the US was in “Draught Conditions” with Moderate Draught (D1) Severe Draught (D2), Extreme Draught (D3) and Exceptional Draught (D4) conditions accounting for 17.2%, 16.0%, 14.3% and 5.05% respectively. Today in 2025 despite concerns over draught conditions the US remains just 36.68% in draught however, this is a significant increase from 2020 when the US was just 10.40% in draught. Some will immediately jump to climate change while cooler heads will find that weather simply has its cycles and it appears that from 2012 - 2020 (8 years) we decreased in draught conditions each year. Our observations show that from the 2020 low we saw draught conditions explode in 2022 to 46% from just 10% in 2020. This next cycle we think bottomed in April of 2024 at 15% and since draught conditions as a percentage of the US have over doubled.

Economics are enough to drive improvements in the price of grains and to do well owning grain stocks and grain adjacent stocks one does not need to rely on weather, though a full discussion on the market dynamics of ag stocks would be incomplete without it.

NPK Value Chain & How We are Playing

There are three macronutrients required for flush production of agricultural products. The first is Nitrogen (N), next is Phosphorus (P) and the final macronutrient is Potassium (K). Nitrogen or N supports leaf growth and chlorophyll production and without it yellowing leaves and stunted growth would take hold. Phosphorus or P helps to develop the root system and plays a critical role in energy transfer and plant maturation. Lastly, Potassium or K helps to regulate the plants intake of water and activates enzymes that protect the plants from disease. Together, NPK provide essential nutrients to crops and technological advances in the production of these fertilizer products has allowed mankind to feed its 8.2B population.

It is important to note from an investment case that none of these macronutrients have a viable alternative which is an essential theme that we look for in owning cyclical businesses. By owning a business that makes a critical product with no substitutes that supports a critical industry like agriculture one can be certain that even though demand and supply will be cyclical, that the companies within those industries will make acceptable returns at some time in the cycle to incentivize the continuation of the product or service to its customers.

As a result of the irreplaceable nature of these macronutrients and the poor pricing to date for grains across the board, we thought that owning the adjacent macronutrient providers would allow for buying assets at below replacement cost knowing that even though the business might experience periods of poor or negative earnings that the irreplaceability of what they provide coupled with the inelasticity of the market they serve would prove profitable. We typically lean toward services companies exposed to commoditized end markets therefore avoiding the direct leverage to a volatile spot price.

LSB Industries (LXU) & Intrepid Potash (IPI)

We own both LSB Industries and Intrepid Potash the Nitrogen (N) and Potassium (K) of the NPK value chain. These businesses provide a combination of valuation advantages, management quality and balance sheet strength that give us confidence in their generation of outsized returns over a 3-5 year holding period. The other piece that gives us comfort is given the importance of the market both LSB and Intrepid serve, if public markets cant properly value them then other players will buy them because the economics of doing so make sense even if done at significant premiums to the price of the business in public markets.

We put the bulk of our position on in LSB at roughly $6.75 per share and have been adding opportunistically on any weakness in price. Private market transactions as well as replacement cost estimates provide for a valuation anchor of roughly $20 per share vs a current trading price of roughly $9.25. In addition to a depressed valuation, the business has a modest amount of debt at just 2.0x Net Debt / EBITDA and $296M of net debt which is substantial for a business that was overleveraged and at risk of insolvency not long ago. The company continues to allocate capital intelligently by buying back its debt below par and investing in growth projects with attractive economics. There is a case to be made that the company should be retiring more stock but at the end of the day we think debt retirements make more sense as shares can be bought back at any time, but it may not always be the case that the businesses debt trades below par. We think that as the business reduces its debt load that buybacks with the excess free cash flow will occur.

Intrepid Potash is an even simpler story than LSB Industries in our view. The business has a net cash balance sheet and trades for roughly 25% of replacement cost given the companies latent earnings power and high-quality asset base and long reserve life in the Paradox Basin. This is a business that buys back its stock, operates with no debt and is poised to outperform as potash prices increase on the back of tightening supply/demand dynamics.

There is some fear that should the Russian and Ukraine conflict end both Russia and Belarus would ramp production and tip the market into a supply glut condition. It is our contention that sustaining capex is being ignored on a level needed to sustain and grow potash production in either market. In addition, Intrepid has roughly $100M of off-balance sheet assets via its 2023 Agreement with XTO which allows for the Exxon subsidiary to drill oil and gas on designated potash area (DPA). As it stands Intrepid has received $50M between December 2023 - January 2024 with another $100M on the table to be received should XTO participate in additional drilling activity.

Concluding Thoughts

As deep value-oriented investors doing bottoms up research in a market that rewards passive flows and momentum, we are often buying a combination of hate and indifference. While hate is easier to identify with an example being the Oil and Gas industry today, indifference provides for equally interesting opportunities. We feel that rather than being outright hated, the market for agricultural producers and adjacent services providers has simply been ignored as the industry struggles to even break even with no end in sight.

The truth is that when you are able to buy assets for as cheap as we are buying LSB and Intrepid, for example, the market can remain indifferent for a long time but as the value recognizes and that $0.25 becomes $1.00 we will generate really competitive returns throughout the life of the investment.

While this piece goes over USDA data and weather, things that are outside the scope of what we can control, the economics associated with farming today will drive the industry to right size supply and demand and earn an acceptable return. USDA figures in January being revised or draught conditions in 2026 worsening can be a catalyst for price realization, but we are allocating capital in this space based on valuation advantages and economics 101.