The worst drought in over 50 years has led to diminishing crops that have pushed up grain prices to new peaks.
According to a report by Reuters, corn, soybean, and wheat prices have reached fresh new highs since August 10, as financial investors, such as hedge funds try to jockey for shrinking supplies ahead of end-users who may be late to the party and shell out even higher prices.
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Corn yield in the important Ohio belt is expected to record its lowest level in a decade, because of drought and the high temperatures that damaged crops during the crucial pollination period.
Wheat was driven up by apprehensions that Russia, itself suffering a poor crop, may curtail exports to conserve domestic supply. These fears were sparked by reports that crop estimates for 2012 for grains and wheat were cut by leading analysts in Russia.
High grain and agricultural prices may work positively for suppliers of agricultural inputs such as fertilizers.
A research report by TD Securities concludes that fertilizer company equities may benefit from increased off-take, as a result of strong crop prices.
Specifically TD views the following companies to have a bullish tenor going forward:
Agrium Inc. (TSE:AGU) – BUY – PT $115 (Trading today at $99.10 down 2%)
Potash Corp./Saskatchewan Inc. (NYSE:POT) (TSE:POT)– BUY – PT $60 (Trading today at $43.21 down 1.26%) Potash Corp./Saskatchewan Inc.announced another production curtailment, but TD Securities expect further cuts this year of 0.85-1.65 million tonnes.
Migao Corporation (TSE:MGO) – HOLD – PT C$2.75 (Trading today at CAD 2.41, unchanged)
The Global X Fertilizers/Potash ETF offers an interesting and a very focused vehicle for taking a position in agro-input equities. According to the investment literature, emerging markets would be major consumers of nutrients, such as potash and other fertilizers, in their drive to increase food output to feed rising populations.
The top holdings in the ETF are:
% FUND NAME MARKET PRICE ($) SHARES HELD MARKET VALUE ($)
5.83 CF INDUSTRIES 215.58 8,276.00 1,784,140.08
5.46 AGRIUM INC 101.02 16,542.00 1,671,103.50
5.37 MOSAIC CO/THE 58.88 27,943.00 1,645,283.84
5.29 NUFARM LTD. 5.95 272,361.00 1,619,620.72
5.13 TERRA NITROGEN 224.05 7,012.00 1,571,038.60