Replanting Soybeans Should Drive Need for Seed, Fertilizer

Farmers in Iowa and other regions across the U.S. are deciding if they plan to replant after recent flooding wiped-out entire crops. Not unexpected, prices for the soft agricultural commodities reacted to the news of the flooding with higher prices as traders began worrying about whether supply would be anywhere close to current demand levels.

Fortunately, many farmers now take out crop insurance, allowing them to recover at least some of their initial investment (covering up to around 85% of average recent production). Since the floods of 1993, the number of acres of USDA-insured land has more than doubled. This leaves many farmers with a dilemma - take the insurance, or replant? If farmers take the insurance, supply will be down and prices are sure to stay high into the fall, and could potentially go higher. If farmers decide to replant, the potential exists for getting closer to a normal supply-demand balance, and preventing further prices increases.

As reported at the WSJ, the high price of soybeans, currently near $16.23 a bushel for July contracts (see additional WSJ story), is turning out to be too tempting for some farmers. As corn prices rose last year, many farmers switched from planting soybeans to planting corn. Even with the corn crop damage, recent USDA reports showed that farmers had planted 87.3 million acres of corn, compared to the original forecast of 86.0 million. The extra 1.3 million acres of supply caused the price of corn to sell off some this week. Of course, this also means that less soybeans had been planted.

A farmers strike in Argentina, a major global supplier, has also put upward pressure on soybean prices. Ironically, the current high prices may actually be the catalysts needed to cause some farmers to forgo crop insurance and take the risk of replanting. For some farmers, even if the soybean yields are below 50% of normal levels, and soybean prices approach $10 a bushel, they can still make enough profit that it is worth taking the risk. But there are risks. In addition to the risk of new weather issues, crops planted this late are also at risk of being damaged from an early frost. Furthermore, corn planted after June 25th, and soybeans after July 10th, receive less coverage from insurers.

So what is an investor to do? Outside of investing directly in soybeans, where the risk of weather and other factors affecting supply and prices levels will still be volatile and somewhat unpredictable, another potential area for investment could be the fertilizer companies. Given the late planting, and issues with land and weather, farmers will no doubt be looking for ways to increase yields. This should help companies such as Potash (POT), Agrium (AGU), and Mosaic (MOS), each of which continues to have the ability to raise fertilizer prices.

In addition to fertilizer, farmers will also need to purchase new seed. Companies that could benefit include Monsanto (MON), Dupont (DD), and Syngenta (SYT). If farmers are enticed by the high prices to replant soybeans, each of these companies should benefit. Furthermore, returns from this new round of planting will not be as sensitive to commodity price if there were to be any future crop damaging issues, such as additional harsh weather. Profits from the sale of fertilizer and seed will for the most part have already been made.

One caveat to this would be any special offers given by companies working to help farmers replant. The CEO of Monsanto mentioned recently on CNBC that his company will not be charging full price for seed that is replanted as a result of flood damage. This is certainly a nice corporate gesture in a time of loss for farmers, and a time of higher food prices for all.

Disclosure: None

Comments

[legmaker]

Excellent article, Im right with you.

[blink0404]

as the market continues to go down, agriculture, which used to be a safe haven, now looks like it may be subject to a downward trend. Here's a pretty good podcast that discusses what to during this down market and what's going on with coal, steel, bulk shipping, and agriculture.

the main idea is that individual investors dont have to act like institutional investors and this market and may be better holding cash than trying to beat the market.
www.greenfaucet.com/sh...

[andyn]

the selloff in these shares should be bought as the fundamentals have NOT changed...buy AGU, POT and MOS on the dips
not just the midwest, India's sowing season starts during the monsoons... expect big fertilizer buys from the indians in the next few months...
see news article from the BBC on this
news.bbc.co.uk/2/hi/bu...

[ramankandola]

this is a big buying opportunity before the USDA Crop report for Monday afternoon. Looking to see a big move for the upside, with 3 weeks before the earnings.