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
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
Conversely shares in Archer Daniels Midland have risen by
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.
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
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."