Goldman doubts nutrient shares, as crop hopes grow

Prospects for a bumper US harvest look poor news for shares in fertilizer groups, but a fillip to stocks in agricultural traders, Goldman Sachs said, as commentators reacted to raised US forecast for crop supplies.

The bank said that "opportunities still exist in the equity markets" to exploit hopes for strong US, and world, harvests which gained further traction on Friday when the US Department of Agriculture in its monthly Wasde report upgraded its forecasts for domestic and world supplies of corn, soybeans and wheat.

Goldman said it was "bearish" on shares in fertilizer groups, "on impending farm cuts" to spending as the prospects of low crop prices undermine growers' margins.

"In fertilizers we maintain our cautious view, with 'sell' ratings on Mosaic and Intrepid Potash, as lower grain prices point towards lower 2015 acreage and farmer spending."

However, strong harvests would provide opportunities for grain trading companies, in raising volumes for sale and handling, besides cutting the capital, per tonne, tied up in working capital.

"Prospects for record production are bullish for Archer Daniels Midland and Bunge, where they are set to benefit from increased asset utilisation and lower working capital costs," the bank said.

ADM vs Mosaic

In fact, since the slide in corn prices began in early May, fertilizer stocks have underperformed the average, with shares in Mosaic, for instance, falling 2.3% compared with a 3.2% increasing in the Dow Jones Industrial Average.

Conversely shares in Archer Daniels Midland have risen by 9.4%.

However, the divergence has not been as clear as this picture might imply, with shares in PotashCorp, for instance, rising by 1.2% in New York, nearly keeping up with the stockmarket average.

Meanwhile, Bunge shares have fallen by 3.6%. And much of the rise in Archer Daniels Midland shares, which hit a six-year high of $48.33 on Monday, came in the past week, after the announcement of the purchase of Wild Flavors.

Citigroup restated a "buy" rating on the shares after the deal was announced, and raised to $53, from $50, it target price for the stock.

Yield upgrades ahead?

In grain markets, Friday's USDA data have been viewed universally as downbeat, especially given that the raised forecasts for US corn and soybean stocks at the close of 2014-15 have come before any revision to yield expectations, which are broadly seen as ripe for upgrades given near-ideal growing conditions.

For corn, an upgrade of 5 bushels per acre to the current yield estimate of 165.3 bushels per acre "would propel corn stocks to 2.22bn bushels", compared with the current estimate of 1.80bn bushels, Richard Feltes at broker RJ O'Brien said.

For soybeans for which the 90m-bushel upgrade to 415m bushels in the forecast for end-2014-15 was the largest on record for a July Wasde report an increase of 0.8 bushels per acre in the yield estimate, taking it to 46.0 bushels per acre, would take inventories up to 482m bushels.

Harvest underestimated

And the prospect of an upgrade to the soybean yield has only been made more likely by the apparent acknowledged by the USDA that it underestimated the size of last year's soybean harvest.

The USDA introduced a negative number, of 69m bushels, in the so-called "residual" line of the US soybean balance sheet, a move which typically precedes an upward revision of the previous harvest.

At Benson Quinn Commodities, Kim Rugel said: "That means not only did USDA understate last year's production," a factor probably related to the government shutdown in October, "but they also underestimated yield".

There is talk that the figure for last year's soybean crop will be upgraded by 1.0 bushel per acre to 44.3 bushels per acre.

"And if last year's yield was understated, after an adverse spring and dry and warm August, what is the potential for this year's yield [reaching] 46+ bushels per acre from current record yield estimate of 45.2 bushels per acre?" Ms Rugel asked.

'Soybeans below $10.00 a bushel'

At Allendale, Paul Georgy said: "Many are thinking ending stocks will go up once USDA makes yield adjustments."

This would be imply even further declines in prices, with the broker saying that "after Friday's report traders are now focused on the $3.50-a-bushel level for corn and soybeans below $10.00 a bushel."

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