It may seem counter-intuitive but bad news on corn supply is usually good news for the stocks of companies that sell stuff to farmers. The dynamic works like this: lower supply means higher prices for the crops that farmers do harvest and that means they’ll have more profit to spend on things like tractors, seed, and fertilizer. If demand is growing as supply is falling, the dynamic can get supercharged.
And that’s what’s happening right now. On July 9, the U.S Department of Agriculture reported that farmers had planted less corn because of excess and untimely rains at the same time as demand, especially from China, is climbing.
The result is that U.S. corn inventories are projected to fall 7% by August 2011.
What stocks will benefit?
Not surprisingly stocks such as tractor-maker Deere (DE); fertilizer producers Yara International (YARIY), Potash of Saskatchewan (POT), and Mosaic (MOS); and seed giant Monsanto (MON) all soared on the day.
With corn reserves now projected to fall to 1.373 billion bushels by the end of August 2011 from a projected 1.478 billion in August 2010, corn prices have started to climb. Corn for December delivery rose by 7 cents to $3.9625 a bushel on July 9.
This isn’t just a U.S. story. World production for the crop year that ends on September 30, 2011 is now projected to fall slightly to 832.4 metric tons from a projection in June of 835.8 million metric tons.
And it isn’t just a supply side story either. Global demand is projected to climb by 1.7%, a huge jump when you’re talking about 800 million metric tons of corn. China is a major reason—the country, the second largest corn-consuming country after the United States, will swing to a net importer of corn in 2011 for the first time since 1996. In the crop year that ends in September 2011, the U.S. Department of Agriculture projects, China will import 100,000 metric tons of corn.
Rising demand and falling supply isn’t good for every company, of course. Higher corn prices mean higher costs for poultry and pork producers and for ethanol makers.
NB: I had dinner on Saturday with one of my super-secret farm sources. Fred (not not his real name) told me, very hush-hush that the Eastern garlic crop looked terrible this year and there could be shortages of supply come fall. (Unfortunately, I don’t know any way to go long garlic.)
Full disclosure: I don’t own shares of any company mentioned in this post in my personal portfolio.
POT filled the 6/28/10 gap and is trying to go above the 50 dma. $95 is the open on the gap down day. $94 – $95 looks like a good resistance/new support level. If it goes above $95 and the market holds a day or two then sub-95 may be a goner and we’ll have new resistance.
I’m still long. This stock moves fast and tends to leave people wishing they had made a decision. I’d rather be early than not at all. Corn prices up, population up, world income up, arable land down, Walmart creating useful markets for farmers in lower income countries (significantly less farmer guessing/gambling)= lots of potential in fertilizer.
Still in POT too and never found a good exit either. Just watching and waiting.
francolargo
Thanks. That link to garlic – I need to get rid of the oil/garlic in the fridge for safety. I was always given jars of the homemade oil/garlic stuff and used it promptly but lately its just been sitting. Who would know I would read something about safety here. Even a funny humor line may really have saved some serious illness. 8+)
DJ,
That effect is down the line. That is next year at the earliest, and that is assuming supply drops against demand (a logical assumption). But why buy the supplier stocks now? They could easily drop significantly more before they see increased profits next year.
Ed-
I believe thats why Jim pointed out that “This may seem counter-intuitive”
Less output and growing demand=more farmers planting to get in on the higher prices. This will go on untill there is more corn then demand, then prices will even out and, depending on demand, drop…
Less output and growing demand=more farmers planting to get in on the higher prices (and more fancy seed, fertilizer and tools to maximize land use). This will go on until there is more corn then demand, then prices will even out and, depending on demand, drop…
Illustrating why commodities tend to be cyclical..
(Just ask Alcoa…)
Reuters in Shanghai
11:41am, Jul 13, 2010
Agricultural Bank of China (ABC) reported a net profit rise of 40 per cent for the first half, news likely to lift market sentiment ahead of the dual listing of the country’s No 3 lender later this week.
The Shanghai Securities News reported on Tuesday that ABC saw profits rise to 46 billion yuan (HK$53 billion) for the first half, a far more blistering pace of growth than the 26.3 per cent last year, due to strong lending.
The results are expected to be higher than other major mainland banks.
“Agricultural Bank earnings should have grown at a higher pace than its peers, largely because of solid lending growth in the first half,” said Sheng Nan, an analyst with UOB Kay Hian.
ABC, whose shares are scheduled to start trading on the Shanghai exchange on Thursday and in Hong Kong on Friday, could break all IPO records by raising more than US$22 billion if over-allotment shares are added in.
Its commission charges for the first half hit 23 billion yuan, up 60 per cent from a year earlier, while new lending grew 11.2 per cent, the newspaper said quoting unidentified sources.
Mainland banks extended 4.63 trillion yuan in new loans in the first half of this year, compared with 7.37 trillion yuan a year earlier, figures released by the central bank last week showed.
ABC’s core capital adequacy ratio was expected to rise beyond 10 per cent after collecting its IPO proceeds, Moody’s said in a report on Monday.
After the massive fundraising, the Beijing-based bank, the last of mainland’s big banking institutions to go public, still has to confront hurdles managing its vast network and concerns about non-performing loans.
Jim,
You’re missing the big picture in this. The corn farmers are the ones who will walk away with higher profits from this, not the companies that supply them. The corn farmers are REDUCING production, which means they will need less fertilizer, fewer new tractors, etc. The corn farmers are tightening their belts due to economic uncertainty, just like most small businesses. Now if a corn farmer goes public, then you have a buy.
jamba,
The problem with PM is they are in the upper half of their trading range. I’d like it a lot better down around $43.
POT has been forming a solid bottom around the 85-86…. Would love to get in below 90
edit: Like TC, I doubt that POT will disappoint.
creativekev, I’m with you on holding POT. Not only could I not find a decent exit point, but I have also been more comfortable with long term prospects for the CDN $. Like TC, I doubt that POT will disappoint in the …
Jim, if you can’t find futures then this is one way to go long garlic:
http://cecalaveras.ucdavis.edu/garlic.htm
Your direct marketing infrastructure is almost set up: a pound of preserved garlic with every paid newsletter subscription. I’ll just avoid the W. 57th St. area while you’re “in production”… 😉
Ed,
Off subject what is your take on PM? Would it be a good time to buy?
All need to be careful here because there is a large carry over in the corn crop from last year, so some of these numbers might be inflated and not last.
Jim,
What is your thoughts on AGU? They seem to be the most diversified fertilizer company out there.
Jim – Speaking of POT (and other fertilizer stocks), how much of a threat to potash prices and prospects is the BHP Billiton’s Jansen Mine project? I’ve read varying analyses: from Jansen Mine will be a definite threat … to it isn’t even sure BHP will fund it. And the year the mine is supposed to start potash production is 2015 or 2018 or somewhere in between, depending on the source. Just wondering what your take is on this and its impact on potash (and other fertilizer) stocks for the next 2 to 3 years? Thanks.
Jim – Thanks for the analysis. I’ve been long POT and holding through the recent dip. Finally you give me some good news that hopefully will set the stage for an up cycle for the fertilizers and seeds.