July 20, 2012
US farmers may pull out corn crop early for cattle feed
US farmers are considering pulling out their corn crop early to feed the stalks to cattle as the country grips its worst drought in 25 years, while the World Bank is watching global food supplies.
And fertiliser companies are set to reap huge profits.
The pounding heat and dry conditions that are crippling corn crops are wreaking havoc with supplies. That''s driving prices for the commodity higher. This growing season is already a write-off, but for the next one, farmers will plant more seed and use more fertiliser and insecticide as they chase those higher corn prices.
That means bigger profits- and soaring stock prices- for companies such as Agrium Inc., Potash Corp., and Mosaic Co.
"It was only six weeks ago that most observers were fearful of a blockbuster US plan and record yield forecast that suggested domestic corn stocks (inventories) were poised the surge. Corn prices were in sharp retreat as a result- until Mother Nature turned up the head," Steve Hansen, an analyst at Raymond James who covers Potash Corp, wrote in a research report issued last week.
Prices for corn have increased dramatically- 38% since June 1. The price of a bushel now stands at US$7.88.
"Sharply higher corn prices should incentivise farmers to maximise their fertiliser applications (this fall and next spring) in order to reap the highest possible return on their future crop."
Calgary-based Agrium is poised for a record-setting second quarter. On Wednesday (July 18), the company boosted its earnings estimate for the April-June period by a whopping 15%.
That''s on top of the bullish estimate it provided last month, and would bring the range for its estimated earnings up to US$5.40 to US$5.50 per diluted share. The boost in earnings is due in part for the huge demand for seed at the start of the season, the company said.
Agrium chief executive Mike Wilson also indicated that Agrium could be a beneficiary of the prolonged drought affecting much of the US- the world''s biggest producer of corn and soy. Conditions in Canada''s Prairie region to the north of the US Midwest haven''t been as severe.
"The outlook remains very positive, supported by the significant increase in grain and oilseed prices globally due to adverse weather in the US and an expected tightening in international crop input markets," Wilson said in a release. Its full second-quarter results are slated for release on August 2.
Agrium stock moved up sharply on the announcement. Shares gained US$2.78 to close at US$96.69 on the Toronto Stock Exchange.
"We believe that Agrium''s diverse set of crop input assets are well positioned in this period of elevated grain prices and tight channel inventory levels," analyst Michael Cox of Piper Jaffray wrote in a research note.
Pesticide use will likely drop in the second half of this year if farmers pull stunted corn out of the ground early, but then demand for seed and fertiliser will go increase as farmers chase higher prices the following season, Cox wrote.
"While drought conditions may weigh on crop chemical inputs in the very near term, we believe an early harvest could spur high fertiliser application levels in the fall as farmers prepare for another big corn planting season next year."
Potash shares, too, are riding high. The stock has climbed from below US$38 to nearly US$46 since the beginning of June. Mosaic, a Minnesota-based producer of phosphate and potash-based crop nutrients with a market cap of nearly US$25 billion recently announced plans to double its dividend yield.
Consumer food prices are not expected to rise immediately, but the World Bank has said it is watching how the drought impacts global food supplies, after sharp surges in food prices in 2008 and 2010 dealt harsh blows to poor, food-importing nations.