Today we're going to take a look at a stock that will likely
benefit from the recent wheat ban in Russia. What's the catalyst
for such a dramatic move by the country?
Last Thursday, Russia's Prime Minister, Vladimir Putin,
announced that Russia will ban all grain exports for the rest of
2010. The announcement came after wildfires swept across the
country and destroyed a large amount of the country's crop. The
crop was extremely susceptible to fire since Russia is experiencing
a severe drought this summer.
Following this announcement last Thursday wheat prices surged 12
percent in Europe and wheat futures reached a two-year high to
trade at $8.41 a bushel.
The question remains as to whether or not wheat prices will
continue to rise. Many believe they will. Richard Feltes, of
brokerage MF Global, commented on rising wheat prices saying, "
Bottom line - no sign of a top as yet
Take a look at the chart below which shows the price of wheat
over the last 2 years. Clearly, the effect of the fires on the
price of wheat has been dramatic.
So where will the world's replacement supply of wheat come
The U.S. is the largest exporter and the fourth-largest grower
of wheat. The Department of Agriculture estimates the U.S. will
produce 2.2 billion bushels of wheat in the 12 months from June
Dennis Gartman, an economist for the Gartman Letter said, "
You have a situation unlike anything that I've seen in the 35
years I've been trading in the grain markets…This is going to be
one of the great years for American agriculture probably in
***There are a few companies that will be negatively affected by
the probable high prices for wheat - and they have already seen
their stock prices decline. One reason is that investors remain
nervous that some of the largest food companies could struggle to
pass higher wheat costs onto consumers. Shares of
General Mills Inc. (
fell 2.7 percent last week.
So how can you make money off these recent developments?
For starters, wheat producers need to purchase seed and
fertilizer to replace the 'lost' crop - so these fertilizer and
seed stocks will likely benefit from recent news. That said some
crops, such as corn, require more fertilizer than wheat. If growers
replace corn with wheat, greater demand for fertilizer may not pan
But like I said earlier, the ban is currently in effect until
the end of this year - and may extend into 2011. This means there
will most likely be a larger planting season for winter wheat and
next year's spring wheat.
Archer Daniels Midland Co. (
Deere & Co. (
both of which have exposure to the agriculture sector, will likely
benefit from the wheat ban.
But these are large-caps, so while interesting potential
investments they are beyond the purview of this letter. Let's take
a look at a small-cap agriculture company, with a marker cap under
***Terra Nitrogen Company (
sells nitrogen fertilizer to crop producers. If US wheat producers
crank up production over the next year, the demand for fertilizer
products from companies like Terra Nitrogen will most likely
This Iowa based company has a market cap of $1.77 billion and
saw its stock price jump 14.3 percent last week. The timing (for
lack of a better word) of the fires couldn't have been better.
Terra Nitrogen also reported results from the second quarter of
fiscal 2010 last week, and reported that net earnings had increased
to $66.7 million, up 9.7 percent from the same quarter of last
year. Terra Nitrogen Company also saw its top-line revenue grow
16.9 percent from the second quarter in fiscal 2009.
The company had a gross margin of 42 percent last quarter and
offers a $9.44 dividend. That's a healthy 10 percent yield with the
stock at current levels.
Take a look at the company's stock performance over the last two
years and you'll see that investors who got in around $65 - $70
this summer just got the ride of their lives.
Although the company's stock price has recently skyrocketed, I
still like this stock for the rest of 2010. From a technical
perspective, both the 50-day and 200-day moving average are turning
up, and if the stock breaks through $100 that level could once
again become solid support.
The added potential demand from the Russian wheat ban, and the
solid quarter both should help to support the stock's recent
breakout- at least in the near term. Plus, the company's dividend
is huge, so value investors may hold the stock, even if the price
However, this stock has recently surged so be careful if you
start to establish a position. Wheat prices are extremely volatile
right now, and many investors (and traders for that matter) are
trying to cash in. Always use stop losses, and only invest after
doing your own research.