Farm stocks drop on what is, in my opinion, an overly optimistic forecast from the USDA–buying opportunity ahead

The May 11 crop forecast from the U.S. Department of Agriculture knocked the chaff out of the grain market. Corn fell in price by the most allowed on the Chicago Board of Trade and wheat and soybean prices followed downward.

The cause of the plunge? The USDA said that grain inventories at the end of the harvest year will be larger than expected. Corn stockpiles will climb to 900 million bushels, for example. That’s a significant 23% higher than the 730 million bushels this year. Of course, this year’s 730 million bushels is the lowest stockpile in 15 years.

You can understand why that kind of switch would have sent some commodities traders scurrying to take profits. The price of corn has doubled in the last year as traders bet that the slim margin of error represented by that 15-year low in stockpiles would generate enough fear of shortages to keep prices rising.

What’s less easy to understand is how the USDA got to its new projections. I think they include some wildly optimistic assumptions. And if I’m right, the current sell off in farm-related stocks such as Deere (DE), down 4.4% from the May 10 close to the close on May 12 (that’s two days in case you’re counting), and Potash of Saskatchewan (POT), down 5.7% in those two days, could turn what was already a pretty good buying opportunity into a great buying opportunity in the sector.

Here’s what the USDA said that leaves me scratching my head. Read more

Pork prices threaten higher inflation in China and promise higher farm profits in South America

This little piggy went to market. This little piggy stayed home. This little piggy had roast beef. This little piggy had none.

Well, actually China’s 689 million pigs will have none—unless China imports 68 million tons of soy beans a year by 2014. That would be 17.7 million tons more of soybeans than China imported in 2010. (Just to put this in perspective, the entire soybean crop in Iowa in 2010 came to just 13.5 million tons in 2010.) And would mean that China consumes one ton out of every four produced in the world.

The cause is rising incomes in China. Meat consumption has doubled in China in the last two decades and it takes about 2.8 pounds of feed to produce a single pound of pork. The average person in China will consume a record 86.6 pounds of pork this year, compared with 43.3 pounds in 1990, according to the U.S. Department of Agriculture. Since 1990 China has also added 182 million people.

U.S. farmers won’t be the biggest beneficiaries of rising Chinese soybean imports. Read more

Looking for bargains? Look down on the farm

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. Read more

Update Deere (DE)

Good times for the world’s farmers and for Deere (DE) will continue, Deere said in its fiscal first quarter 2011 earnings report released on February 16, before the New York stock markets opened.

The company’s earnings reports get scrutinized as much for Deere’s projections on farm prices as they do for the company’s own financial results. And Deere’s news for farmers was all good. The company raised its forecast for the 2011/12 price of corn to $4.90 a bushel from its earlier forecast of $4.35 and its forecast for wheat to $6.35 a bushel from $5.50.

Not that the company’s own results were anything shabby. Read more

Update Deere (DE)

Valuing a cyclical stock such as Deere (DE)—which reports fourth quarter fiscal 2010 earnings on Wednesday, November 24–is always difficult. You have to figure out where the company is in the revenue cycle from peak to trough and back again. And you have to figure out how long the cycle will last.

In Deere’s case, the Wall Street projection is that the company is about to hit the top of the cycle. Earnings growth, according to Wall Street, will hit an astonishing 311% in the fiscal year that ended in October 2010 and then head downward, as the cycle peaks to 35% in the quarter that ends in January 2011 on its way to just 16% growth for the fiscal year that ends in October 2011.

That projected peak seems early to me, considering that the company’s business really only bottomed in late 2008 through late 2009, and considering that farm prices seem to be headed higher, not lower, for the foreseeable future. According to the Association of Equipment Manufacturers, sales of four-wheel drive tractors were up 83% in October 2010 from October 2009 and sales of large row-crop tractors climbed by 54%.

That sounds like acceleration rather than a peak to me. Read more