Commodities & Metals

Agriculture Report Good for Farmers, Not For Consumers (ADM, BG, MOS, MON, POT, DE, CNH, LIZ)

Jon C. Ogg

The US Department of Agriculture this morning released its January World Agricultural Supply and Demand Estimates, or WASDE, which projects world supply and demand for food products like wheat, corn, sorghum, soybeans, oats, rice, sugar and meat.  Overall, supplies look a bit tight, which means that farmers should see somewhat higher prices, which is bad news for consumers.

Large producers like Archer Daniels Midland Co. (NYSE: ADM) and Bunge Ltd. (NYSE: BG) should benefit from higher wheat and grain prices. Fertilizer makers such as The Mosaic Co. (NYSE: MOS), Monsanto Co. (NYSE: MON), and Potash Corp. of Saskatchewan (NYSE: POT) might get the biggest boost as farmers plant fewer acres but try to increase yields. In fact, we have already been given two very positive trend indications for fertilizer and planting outlooks in the last week.  Equipment makers like Deere & Co. (NYSE: DE) and CNH Global NV (NYSE: CNH) could also benefit as farmers use their increased profits to buy new equipment.

The USDA expects global wheat consumption to be 1.2 million tons below previous expectations, mostly on lower demand for feed. Wheat prices will be stronger, rising from an average price of $5.30-$5.70/bushel in the current marketing year to $5.50-$5.80. Global wheat imports and exports are expected to rise slightly, and the US is expected to export about 1.3 billion bushels of wheat, the most since 1992-1993.

US corn supplies are expected to be lower as a reduction in the national average yield lowers production by 93 million bushels even as acreage planted in corn increases by 183,000 acres. The primary support for added corn production is ethanol, which is expected to demand an additional 100 million bushels this year. Because supplies are slightly tight, ethanol makers like ADM, Valero Energy Corp. (NYSE: VLO), and Pacific Ethanol Inc. (NASDAQ: PEIX) could face higher prices for feedstock.

US consumers can also look forward to higher prices for beef, pork, and eggs, but they’ll get a break on chicken. Cotton production is expected to be down slightly, and the amount of cotton remaining in stockpiles at the end of January is expected to be just 1.9 million bales (a bale weighs 480 pounds).

In the 2008-2009 crop year, some 6.34 million bales were in stocks, at a price of $0.478/pound. The cotton price this year is projected at $0.78-$0.86/pound. This cost jump is already showing up in costs at apparel makers like Liz Claiborne Inc. (NYSE: LIZ), which are being squeezed by high prices for cotton and demand from customers for low-priced clothes.

From a producers point of view, the USDA report augurs well for the coming year. Consumers, however, are not likely to share the joy.  Clarence Beeks lives on…

Paul Ausick