Crops are circling, so dive in

A new grain forecast is bringing down farm-related stocks -- and creating a good buying opportunity.

By Jim J. Jubak May 13, 2011 3:47PM
Jim JubakThe 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 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 May 12 (that’s two days in case you’re counting), and Potash of Saskatchewan (POT), down 5.7% in the same 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: The USDA’s case for larger stockpiles is built on three assumptions.Image: Combines in field (© Mark Karrass/Corbis/Corbis)

(Unfortunately, for clarity and simplicity, when we talk about "years" with grains, we’re talking harvest years and not calendar years. And harvest years themselves vary from grain to grain -- the corn year, for example, begins Sept. 1. The wheat year ends May 31.)

First, higher grain prices will depress demand. That will show up in lower U.S. exports, for example, as overseas customers cut their orders because of higher prices.

Exports of corn, for example, will drop to 1.8 million bushels in the harvest year that begins Sept. 1. That would be the lowest level of exports in nine years. Exports will be lower in the harvest year that ends Aug. 31, too. Lower exports will result in bigger U.S. stockpiles.

But the USDA isn’t projecting bigger harvests in the United States.

For example, for wheat the USDA says that US stockpiles will total 702 million bushels in the year that ends May 31, 2012. That would be a big increase from the 683 million bushels projected before this most recent revision. (It is still 16% less than the stockpiles projected for May 31 of this year.)

That increase in stockpiles will come from lower exports, according to the USDA, since it is also projecting that the harvest in 2012 is likely to be hurt by bad weather. For example, the winter wheat crop, where the harvest starts next month, will be down 4.1% from the previous year, thanks to drought.Image: Farmhouse (© Mark Karrass/Corbis)

Second, the USDA forecast assumes that the weather for the next crop will be not much worse than normal. That’s not the case at the moment, because spring weather has been truly terrible in North America.

Corn planting in the United States is only half as far along as it was at this time last year, because of heavy rain. In Canada, wheat fields are so muddy that only 3% of the crop has been sown. Normally 40% has been sown by this time of year.

If the weather breaks right, there’s still time for farmers to catch up on planting. The winter wheat crop in Kansas -- the biggest grower of winter wheat -- doesn’t have that much time. The crop is forecast to fall by 29% from last year.

The total U.S. winter wheat harvest is projected to be the smallest in five years.

But it’s not just in the United States where the weather stands a good chance of being worse than the USDA forecast seems to assume. France and Germany have had unusually dry springs, and the United Kingdom experienced its hottest April ever (well, actually only in the last 352 years).

That’s not good news for wheat farmers in the European Union, the producer of 20% of the world’s wheat. Parts of Western Australia are in month 16 of a drought. A second straight year of drought is also in the forecast for China’s wheat-growing areas.

The weather is nothing if not changeable, so there’s no reason current conditions can’t change for the better. No reason that they have to either, though.

And third, the USDA forecast assumes that Russia will recover from last year’s drought -- the worst in 50 years -- and resume wheat exports. The politics here are at least as iffy as the weather.

Last year, Russia reacted to the drought by banning all grain exports through at least July 1. This year, the USDA projects Russia will not only resume exports, but also increase them to 10 million metric tons from the 4 million shipped last year before the ban.Image: Corn field (© Bob Rashid/Brand X/Corbis)

The Ukraine, which last year matched Russia’s export ban, is projected to increase exports to 8.5 million metric tons, from 3.5 million.

I think the likelihood that Russia will go from ban to unlimited exports this year is just about nil. Right now, Russia is in the run-up to elections for the national legislature in December, as well as president in March 2012.

All indications are that Vladimir Putin intends to run for president again in 2012. And I doubt a man as savvy as Putin would run any risk of a return to full-bore exports -- which could produce grain shortages in the event of a spotty harvest -- in the months leading up to the election. It would be completely unlike Putin to leave any part of his election success at the mercy of something like the weather.

A 4% to 6% dip in farm-related stocks doesn’t qualify as a big buying opportunity. But the drop of May 11 and 12 just accelerated a decline that reaches back to April 29, and reaches to near double digits for many stocks in the sector.

And commodity prices are so volatile right now that we certainly could see the current 7% to 10% drop turn into a 10% to 15% correction relatively soon. I’d look to pick up Deere, Potash, Agrium (AGU), Mosaic (MOS), and Yara International (YARIY). As of the close on May 12, the stocks were down 7.3% (Deere), 9.4% (Potash), 9.5% (Mosaic), 12.4% (Agrium), and 8.1% (Yara) from their April 29 local highs.

At the time of this writing, Jim Jubak didn't own shares of any companies mentioned in this post in personal portfolios. The mutual fund he manages, Jubak Global Equity Fund (JUBAX), may or may not own positions in any stock mentioned. The fund did own shares of Agrium, Deere, Potash, and Yara International as of the end of March. For a full list of the stocks in the fund as of the end of the most recent quarter, see the fund's portfolio here. 
May 16, 2011 1:00PM

Yes, Jim, the world weather is changing.  When Allen Bard made that famous film, "The Inconvenient Truth" a few years ago, forecasting that the ice fields in Greenland and Antarctica were going to melt because of excessive CO2 in the air, people scuffed.  Some even today claim that this is part of nature natural cycle, I say baloney.  All we have to look is that more and more people are driving to get to shop, to movies, to wherever.  All these cars spew out CO2 and nitrous oxide into the atmosphere.


I quite believe that the number of cars on the road will increase as China and India will want to emulate the US as the beacon to try to get to.  Become a country like to US.  More cars, air conditioners and stuff, claiming more electric power to run them. Nuclear plants and such.  Even though the French developed the breeder nuclear plant that consumes plutonium, no other country wanted to embrace that system.



May 15, 2011 7:30PM
I would not invest in any of the above companies without first doing a 5 year averaged P/E, compare it to the current P/E, and compare that to average P/E for the past 10 years.  Than take into consideration their last 5 year growth rates on revenue and earnings.  The article only mentions the percentage they are down right now.  It does not mention the percentage of run up they have had.  Look at the charts of price.  The elitists of the world wants to keep the world hungry.  It makes them easier to control and easier to take advantage of in other ways.  This is why there is so much food product being turned into energy.  With these genetic companies, it is about controlling food planting, and the price of those plantings.  Do not reward these type of companies with buying their stock.  If it is a good deal, buy them.  Do the research first though.  Ask your local farmer what he is doing.  They are a wealth of information.  Food is getting expensive, the world over.  That does not mean the farmers can afford all of the input costs.  The third world will be stealing the bio-genetic technology, you can bet on that.  Farmers here do the same.  They save a certain percentage of grown grains and mix it with the new genetics.  They are not allowed to do this and will probably not tell you though.  They are and I know it to be fact.  I know a lot of farmers.  Control of energy and control of food is almost as powerful as control of information.  Don't think for a minute that this is not going on as well.  These elitists control who gets elected and how you are going to think about certain subjects.  Think for yourself, watch your elected and how they vote, and lets get some fresh faces elected.  It takes longer to corrupt them.
May 31, 2011 5:04PM

If grain is in such demand why are we wasting money subsidizing farmers to raise corn for ethanol. Why can't we let the free market work and let the farmers grow whichever crop will produce the most money for them.


What the heck is our government doing getting involved in deciding which crops to grow anyway? If I remember correctly the Soviet Union tried that once and it didn't work. Farmers can make better decisions than a politician anyday.



May 13, 2011 8:46PM
Why not send our surplus to North Korea...? 
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