A Profitable Play For Troubled Times

Weeks of record-setting temperatures and widespread drought this summer have clobbered the US Corn Belt.

As of early July, the US Dept of Agriculture (USDA) considered only 40 percent of the US corn crop to be in good or excellent con­dition, compared to 70 percent in a normal year (see “Corn Comes a Cropper”).

To make matters worse, half of the US corn crop has now “silked,” compared to less than 20 percent in an average year at this point in the growing season. When corn silks, it has reached the pollination stage and is most vulnerable to drought. Even if the Midwest does see relief, much of the crop damage is irreversible.

The USDA has sharply lowered its estimates of the size of the crop for this growing season. And it’s not just corn; poor growing conditions are pushing up prices for other key agricultural commodities such as soybeans and wheat.

Corn prices have already surged nearly 50 percent from their May low to a recent high of more than $7.30 per bush­el. This year’s drought is the worst in the US since 1988, when prices almost doubled be­tween May and July.

Drought now plagues roughly 56 percent of the contiguous US, the most extensive water shortage in the 12-year history of the USDA’s Drought Monitor.

Although farms may not produce as large a crop this year, the surge in prices should more than compensate for any loss in volumes, bolster­ing US farm incomes.

In the near term, weather conditions will drive the bull market for ag­ricultural commodities. However, the long-term outlook appears equal­ly sanguine, thanks to surging meat consumption in emerging markets, epitomized by China (see “China Takes to Meat”).

As I said in Global Food Crisis, consumers increase their meat consumption, there’s a mas­sive multiplier effect. It takes 7 kilograms (15.4 pounds) of feed grain to produce 1 kilogram (2.2 pounds) of beef; 4 kilograms (8.8 pounds) of grain to produce 1 kilogram of pork; and 2 kilograms(4.4 pounds) of grain to produce 1 kilogram of chicken.

Surging prices for agricultural com­modities fuel demand for products that enable farmers to boost crop yields, including genetically modified (GM) seeds, fertilizer and farm equip­ment. Here’s how to play the coming boom in agriculture stocks. CF Industries (NYSE: CF), the largest North American producer of nitrogen-based fertilizer, is a direct play on surging corn prices.

Natural gas prices account for up to 90 percent of the cost of producing nitrogen-based fertilizers. US natural gas prices are by far the lowest in the world and should remain depressed over the next few years.

This cost advantage gives CF Indus­tries a considerable leg up on overseas competitors.

Corn is the most nitrogen-intensive major field crop; increased US corn acre­age relative to soybeans and wheat will boost demand for the nutrient.