Food inflation, bad weather to lift agribusiness

(Reuters) — Shares of North American agricultural companies, from fertilizer makers to grain handlers, will likely surge this year as weather-related crop damage causes global food price inflation.

With grain prices already around two-year highs to start the year, fertilizer makers like PotashCorp and Mosaic are among the big winners, since the more money farmers make, the more they can spend on crop nutrients. 

This month’s surge by shares of grain handlers, equipment makers and fertilizer dealers, which are traditionally tied closely to crop prices, comes after wheat, corn and soybeans soared for much of 2010.

That drove up farm incomes, and made fears of food-price inflation into a headline story.

The United Nations’ food agency said Jan. 5 that food prices had hit record highs in December and that key grains could climb even further.

“Food inflation has moved from the 30th page of the newspaper to the third or fourth page,” said Robert Winslow, an analyst at Wellington West Capital Markets in Toronto, who covers Canadian ag companies such as grain handler Viterra.

“There’s some tipping point where investors realize there’s a theme here.”

PotashCorp shares in New York have shot up more than 20 per cent since mid-December to about $168, far exceeding the $130 per share offer it rejected last year in a hostile takeover bid by BHP Billiton (all figures US$).

PotashCorp CEO Bill Doyle said at the time that even $170 per share would be inadequate given the long-term prospects for commodities like fertilizer.

Wheat, corn higher

Chicago wheat and corn on Wednesday climbed another 1.5 per cent and four per cent respectively, after the U.S. Department of Agriculture forecast smaller-than-expected U.S. stockpiles, which highlighted grain-supply sensitivities.

Higher prices mean U.S. farmers have more reasons to plant corn — which requires heavy fertilizer applications  — and should drive up shares of other fertilizer producers such as CF Industries and Agrium said analyst Edlain Rodriguez of Gleacher and Co. in New York.

“We believe the upward momentum in corn prices can continue and that this is very positive for sentiment and fertilizer stocks,” Rodriguez wrote in a note on Wednesday.

Grain handler Viterra has gained 12 per cent in 2011, while others, like Archer Daniels Midland and Bunge, have gained steadily since late December.

“When you get strong demand and rising prices, everything else being equal, the ag companies should be doing better but that depends on the positions they take,” said Clinton Mayer, an analyst who follows ADM and Bunge at Burnham Securities in New York. 

Several analysts have raised their expectations for leading seed developer Monsanto as global food prices have surged, sparking expectations of increased plantings of key crops this year.

Even small companies such as Hemisphere GPS, a Canadian maker of farm global-positioning systems, have caught investors’ attention. 

Usually a lightly traded stock, Hemisphere soared 50 per cent in three days earlier this month, while volume jumped to near a two-year high of 1.7 million.

“It’s staggering what’s happening,” Winslow said. Retail and institutional investors are both likely piling into agricultural issues, moving capital in from the sidelines or other sectors, he said.

Wheat, corn and soybeans ended 2010 with strong yearly gains, driven by crop problems in Russia, Canada, Australia and Argentina, setting a trend markets have seen before.

In 2008, grain prices shot even higher, driving PotashCorp shares to more than $240, or 40 per cent higher than current levels.

Drought, flooding

The global recession as well as expanded farm production took the steam out of that rally. And, while the world’s farmers may want to sow more wheat this year to cash in on higher prices, harvest potential could be capped by drought in Russia and flooding in Canada.

With developing countries demanding more protein-packed diets, grains look to see strong demand in the long term, possibly extending the current upward trend beyond traditional cycles, Burnham Securities’ Mayer said.

“Over many years, if the world economy improves, it should benefit the Archers and Bunges, et cetera,” he said.

Grain prices also have further to rise to catch up to bigger two-year gains by other commodities such as copper, nickel and crude oil, Winslow said.

However, rising grain prices haven’t helped some companies in the broader food sector, since they represent higher production costs.

Shares of U.S. meat processors Smithfield Foods, Tyson and Hormel Foods, as well as Canadian food processor George Weston Ltd., have dropped this year, while Maple Leaf Foods and its bakery subsidiary Canada Bread are up slightly.

— Rod Nickel writes for Reuters in Winnipeg.

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