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

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

China, the world’s largest wheat producer, is facing a severe drought in areas of the North China plain that account for 67% of the country’s wheat crop. China’s wheat production fell to 114.5 million tons in the 2010 harvest from 115.1 million tons a year earlier. This year the harvest could drop another 4 million tons.

This is a big deal since China is also the world’s largest consumer of wheat and accounts for about 17% of global wheat consumption.

The government is working to provide additional irrigation to mitigate the drought.

In Western Australia—across the continent from Australia’s worst floods—drought has put the wheat crop in Australia’s largest wheat producing state in doubt. The impact of the decade-long drought itself is intensified by a battle for Western Australia’s scarce water supplies between farmers and miners. There are about $170 billion in new mining projects on the books for the next five years. All those mines need water to help dig out and process ore, to remove waste rock and to suppress dust. Mining is already the largest user of water, taking 27% of licensed water, compared to 22% for agriculture. Six years ago the proportions were reversed with farming getting 37% of water and mining 26%.

I think you can see where I’m going with this, right?

No, no. Not more about the increasing global squeeze on food supplies. I’ve dealt with that quite enough recently, thank you. (See my posts http://jubakpicks.com/2011/01/14/food-prices-are-back-to-2008-peaks-here-are-10-stocks-that-tap-into-the-trend/ and http://jubakpicks.com/2011/02/01/egypt-has-escalated-the-food-crisis-and-shifted-global-economic-policy-on-inflation-too/ )

This time I want to talk about water scarcity, the trend that everyone sees but that it is so difficult to invest in. Read more

Update Potash of Saskatchewan (POT)

In a presentation at the Bank of America/Merrill Lynch Global Industries conference on December 15, Potash of Saskatchewan (POT) offered a modestly optimistic view on potash fertilizer demand for 2011—and a very bullish view for global agriculture.

Potash first.

The company affirmed its guidance for 2011 of sales of 9.3 million metric tons. That’s roughly at the low end of Merrill’s projected global demand of 55 to 60 million metric tons in 2011.

The company said that it had seen a strong fall season in North America and believed that most of the fertilizer it sold went directly onto fields rather than into inventories. That should produce strong sales in the spring application season in 2011.

In China inventory draw down has been completed and the company expects consumption in 2011 to return to the 11 million metric ton level that the industry saw before the global economic crisis.

Nothing has convinced the company that it needs to invest in a new Greenfield potash mine. With current capacity, Potash can produce 12 million metric tons and expansions of existing capacity would take that up to 17.1 million tons by 2015. To justify a Greenfield project, Potash said it would need to see roughly a doubling of prices from the third quarter levels.

That should be reassuring to competitors who are building Greenfield mines or expanding existing sites.

Potash was actually much more bullish on global agriculture in general than it was on its own markets. Read more

This week or next will see a bid from China for Potash Corp. of Saskatchewan (POT), Canada’s Globe and Mail is reporting.

The newspaper’s sources say Beijing is now deciding which of the proposed bids from China’s state-owned companies it should back. Pending Chinese national holidays beginning on October 1 argue for a decision this week or next.

Among the Chinese companies interested in topping the $38.6 billion bid by Australia’s BHP Billiton (BHP) for the Canadian fertilizer company are, according to the Globe and Mail, the state-owned chemical group Sinochem, which has proposed paying as much as $60 billion, and China Blue Chemical, a division of China National Offshore Oil Corp.

A Chinese bid has become more likely in recent weeks, in my opinion, as news reports have confirmed China’s swing this year to a corn importer from previous self-sufficiency in corn, and as the price of corn has climbed to $5 a bushel on forecasts of a slightly smaller harvest in the United States. Read more