Farm profits have entered 'new dimension'

Ther prospect of renewed strength in crop prices is leading US farmers' fortunes "into a new dimension", boosting the case for fertilizer industry shares, UBS said, as it lifted to "buy" its rating on stock in potash group K+S.

US farmers' margins – defined by revenues minus the cost of cash items such as fertilizer and seed – look set in 2011-12 to "dwarf" those of the last peak in agricultural commodities, three years ago.

Soybean and wheat farmers look set for margins double the recent average, and corn growers three times as much.

Cotton farmers' margins, at an estimated $394 per acre, are expected to come in at more than 20 times the $15 an acre the average achieved between 2002-03 and 2008-09.

"Consideration of the corn cash margin per acre chart above indicates that farmer profitability has entered a new dimension with strong pricing this year," UBS said.

'Potential consolidation targets'

Farm wealth was boosting prospects for fertilizer groups too, at a time of "tight" nitrogen and phosphate supplies and a "bullish" potash market, boosting pricing power.

"Agricultural market fundamentals remain strong with continued upside to fertilizer prices to spring 2012," UBS said.

Potash prices were seeing a "strong resurgence… clearly driven by the strength of end agricultural markets".

For share investors, the nutrients sector had the added attraction of possible takeovers, and the payment of acquisition premiums.

"Fertilizer names remain attractive as potential consolidation targets," the bank said, adding that the sector "continues its concentration exercise to maximise economies of scale".

'Low pricing power'

UBS named the potash industry, with Crode and Linde, as having the European chemicals sector's "safest" earnings outlook.

And the bank raised to "buy", from "neutral", its rating on shares in Germany's K+S, foreseeing the potash group would be able to raise prices to an average of E352 a tonne next year, from E308 a tonne in 2011.

The rating on Yara International, the Norwegian nitrogen group, was left at "buy", with that on Swiss seeds and sprays giant Syngenta kept at "neutral".

Syngenta, which faces stiff competition particularly in herbicides, is handicapped by its exposures ot markets suffering "low levels of pricing power".

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