Drought boosts agribusinessDrought, flood and locusts have wrought havoc on the global agricultural sector this year, but surging wheat prices put a rocket under fertilizer shares yesterday and have boosted prospects for everything from tractors to grain processors.
Wheat prices rose 7% to a 22-month high of US$7.25 per bushel, as Russia's worst drought in a 130 years continued and the United Nations' food agency cut its global wheat forecast by 4%.
Shares in fertilizer Potash Corp. rose 4.02% to $113.13, Viterra Inc., Canada's largest grain handler, spiked 4.4% higher to $8.51, while Agrium Inc., rose 3.6% to $67.41, boosted also by solid earnings.
Calgary-based Agrium posted its second-best earnings yesterday on record profit of US$506-million, or US$3.20 a share, a 37%increase from with the second quarter of 2009.
The catalyst for rising grain prices is a severe drought in the Black Sea region.
That drought yesterday prompted UN's Food and Agriculture Organization to chop 25 million tonnes from its last global wheat estimate wheat in June before the drought. But flooding in Canada, which cut plantings, and locusts in Australia have also dented global supply.
"Investor confidence has really been strengthened by the recent strength in grain prices," Joel Jackson, analyst with BMO Capital Markets, said in an interview Wednesday. "And if the prices persist, we're likely to see some uptick in fertilizer prices."
Fertilizer companies such as Agrium and Potash are likely to continue to benefit if the uptrend in grain prices continue. Peripheral businesses, such as farm equipment makers Deere&Co. and Agco Corp., have also seen double-digit share increases.
Edlain Rodriguez, analyst with Gleacher & Co. in New York, said an extended fall application season will also drive fertilizer prices, especially in the United States where many farms will harvest ahead of schedule. This leaves farmers with extra weeks of nice weather.
Many stocks are also lagging the grain price increases, Mr. Jackson said.
For example, while corn prices are up about 10% and wheat 35% so far this year, Potash stock has lagged.
As for the farmers, the high prices will really only benefit those who managed to get their seeds in the ground and harvest enough crops to sell. With the wild and wet weather affecting some regions in Western Canada, it is difficult to tell which grain producers are in the best position to take advantage, Mr. Jackson said.
"There will be winners and losers. It's a real race to see who can get their crops in the ground, harvested, and sold to market, assuming you didn't sell your wheat forward."
Meanwhile, Christine Healy with Scotia Capital launched coverage of five Canadian agricultural companies with plenty of upside thanks to increasing global demand for food, especially from emerging markets. The group is expected to generate a one-year return of 23%, she said.
The new companies include grain storage maker Ag Growth International Inc. ($38 price target), grain processer Alliance Grain Traders Inc. ($35), protein maker BioExx Specialty Proteins Ltd. ($2.80), organic foods supplier SunOpta Inc. ($6.50) and agribusiness stalwart Viterra Inc. ($10.50).
Scotia rates BioExx, Sun-Opta and Viterra "sector outperform," although both BioExx and SunOpta are considered relatively high-risk as newer businesses.
Ag Growth and Alliance Grain get "sector perform" ratings as their share prices are considered "fair value."
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