If you’re thinking of bargain hunting as global stock markets reel under the impact of what is close to open war by the Gaddafi regime on the Libyan people—but would like a little near-term positive catalyst with those lower prices, might I suggest the farm sector. Stocks like Potash of Saskatchewan (POT), Deere (DE) and Yara International (YARIY) were all down hard on Tuesday, February 22, falling 5.5%, 4.2%, and 4.1%, respectively. Most of them dropped again today February 23.
And on Thursday February 24 the U.S. Department of Agriculture is set to announce another depressing crop report. Of course, bad crop reports are good for farm prices—and for the stocks of those companies that sell equipment and fertilizers to farmers.
Ahead of the report, analysts surveyed by Bloomberg are looking for a 3.5% increase in the U.S. Department of Agriculture’s forecast of U.S. corn planting. It will also forecast global a decline in global corn stockpiles to just 15% of global use, the analyst consensus says. That will bring corn inventories to the lowest level in 37 years.
In other grains—wheat, rice, and feed grains—bigger harvests have increased annual grain supply by 16% since 2000 but, Department o Agriculture data show, that hasn’t been enough to keep up with a 20% increase in demand. Thursday’s figures are expected to show that global inventories of all grains will drop by 13% before the next harvest.
There’s very little room for bad weather and bad harvests in a tight grain market already experiencing huge price increases. Corn prices, for example, are up 95% in the last year, wheat is up 71%, soybeans 44%, and rice 11%.
With prices higher, farmers in the United States are planting more acres. Analysts believe the Department of Agriculture will forecast a 2.1 million increase in acres planted to corn (or about 3.5%) and an increase in winter and spring wheat planting of 8.8%.
More acres being planted equals more fertilizer being applied and more tractors and other equipment out in the fields.
Of the stocks in the group, I’d favor companies with the biggest exposure to the strong North American farm market. Potash of Saskatchewan gets 68% of its sales from North America. Right now potash is in tight supply in North Americas with potash stocks in January 24% their five year average. Deere gets about 65% of its revenue from North America. When the company reported earnings on February 16, it raised its guidance for sales growth to 18% to 20% for the fiscal year that ends in October 2011. That was up from the previous forecast of 10% to 12% revenue growth. (For more on Deere’s earnings see my post http://jubakpicks.com/2011/02/17/update-deere-de-4/ )
On current trends Deere’s projections might need upward revision again this quarter.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund, may or may not now own positions in any stock mentioned in this post. The fund did own shares of Deere and Yara International as of the end of January. For a full list of the stocks in the fund as of the end of January see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/