A disappointing corn forecast and rising demand from China add up for ag stocks

07/12/2010 4:11 pm EST


Jim Jubak

Founder and Editor, JubakPicks.com

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.
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