The correlation in overall trend is historically strong and reasonably supported by fundamentals, and so in the absence of evidence to the contrary, we expect the relationship to continue to hold. That suggests that, if corn prices don't rebound shortly, the price of Deere's stock should follow suit in the not-too-distant future.
Of course, the fundamental thread that connects the fate of grain prices and equipment manufacturers is the basic return on investment of operating a farm, which is intimately connected to the value of farmland. So ultimately the million-dollar question comes down to where the price of corn and other major grains is headed.
After a summer of record corn yields, the answer is likely that prices will stay low short term. On the other hand, in a previous
, we made the case that the overall trend is overwhelmingly positive due to rapidly increasing consumption in developing countries. We believe that is still the big picture outlook, and will continue to be for years to come.
Our final analysis is that investors interested in purchasing agricultural land may want to hold off until the market weakens, and be prepared to strike when it does. Likewise, investors looking to gain exposure through agribusiness stocks should wait until levels are in line with lower commodity prices.
Because agricultural land will continue to be a strong overall performer in the coming decade, a potential pullback in the coming year should be seen as an excellent opportunity for investors looking at a horizon of 10 years or more.
At the time of publication, the author had no position in any of the stocks mentioned.
This article was written by an independent contributor, separate from TheStreet's regular news coverage.