Farmers have cultivated corn for about 9,000 years, and for
about 9,000 years they've cursed the weather for refusing to do
what it's supposed to do.
That tradition holds true this year, as frigid weather in the
Midwest and cold, wet weather in the South have complicated the
start of this spring's corn-growing season. The U.S. Department
of Agriculture is also drawing some choice words, after reporting
at the end of March that corn stockpiles were nearly 400 million
bushels higher than previously estimated. The sudden change sent
corn prices down 15% in just a few days.
How these factors will play out in this season's corn
production and prices won't start to gel for a couple of months.
Hanging in that balance are the 2013 outlooks for companies
making fertilizers, farm equipment and other goods dependent on
corn crops and the farm economy.
The March 28 report from the USDA said corn farmers expect to
plant 97.3 million acres this year. That's even with last year's
plantings and much lower than the 98 million to 99 million acres
many industry analysts had expected.
Even more important than acres is the question of yield: Will
the acres planted this year produce more corn than last year,
when a severe drought ravaged the crop and sent corn prices
There are already concerns about delayed planting in the South
as well as unease about how a cool spring in the Midwest could
impede the start of its corn growing season.
"The Southern belt has seen late planting due to the wet, cold
weather there," said Shawn Hackett, president of Hackett
Financial Advisors and author of the weekly Hackett Money Flow
But the heart of the corn and soybean belt is in the Midwest.
Recent news reports suggest soil there remains unseasonably cool,
which could delay plantings in Illinois and other key states.
The region doesn't generally plant until the middle of April,
Hackett said, "so it's still too early to make a judgment."
There is also concern over the ongoing impact of last year's
drought. Recent USDA data show more than half of the country
still faces drought conditions.
"People in some areas have really dry land from last year's
drought. They haven't gotten enough snow or rain for the soil
content to return," said Gabelli & Co. analyst Amon Wilkes,
who follows fertilizer stocks such asCF Industries Holdings (
) andAgrium (
Such problems are most prevalent in Nebraska and parts of
Kansas, Wilkes says. Some of the more productive corn states like
Iowa and Illinois have gotten more snow and rain.
"But the snow needs to melt into the ground," he said. "Even
though the situation is better than last year, drought conditions
haven't really gone away."
A Dry Season = High Prices
Crop production has been under pressure for three straight
years, with last year's drought among the worst in decades. The
U.S. National Oceanic and Atmospheric Administration reported the
stretch from May to August was the driest four months in the U.S.
Hackett compares the 2012 drought to the one that took place
during the mid-1930s, when hot, dry weather turned many farms to
"Last year there were blisteringly hot temperatures and no
rain for months," he said. "When that happens, you don't get a
lot of corn."
Around 97 million acres of corn were planted in the U.S. last
year. Normally, that should yield abut 14 million bushels. With
the drought conditions, however, the yield came in at 11 million
Low yields helped push corn prices to a record $8.40 per
bushel last summer. Prices have since gradually pulled back,
ending March just above $7.30, then toppling to their lowest mark
since early last June following the March USDA report.
A Down Cycle For Fertilizer
As corn prices have fallen, the share price of fertilizer
companies has followed.
IBD's Chemicals-Agriculture group reached record highs in
mid-September and late January. It then pulled back 21% through
In terms of profit and sales, the industry has been hurt in
the last couple of quarters, running up against tough prior-year
comparisons and suppliers grappling with a challenging operating
CF Industries (
), the largest U.S.-based producer of fertilizers, has recorded
three straight quarters of sales declines. Earnings growth has
slowed five quarters in a row. Alberta, Canada-basedAgrium (
), the largest revenue generator in the group -- $16.7 billion
last year -- has logged two straight quarters of earnings
Potash Corp. of Saskatchewan (
) reports results on Thursday. It has posted profit and revenue
declines in three of the last four quarters and, like most in the
group, is looking at highly cautious forecasts. Analyst consensus
calls for a 5% earnings gain and a 13% increase in revenue for
the first quarter. For the year, analysts see EPS up 7% on a 4%
gain in sales.
Similar views hold for most of the group. The only exceptions
areCVR Partners (
), a Sugarland, Texas, company that uses petroleum coke as a raw
material, andAmerican Vanguard (
), a Newport Beach, Calif.-based insecticide and herbicide maker.
Analyst consensus forecasts see both growing earnings more than
30% this year.
Outside of those specialty categories, expectations are
suffering from a drought of their own.
"It's hard to see where the demand for fertilizer will come
from in this coming crop cycle," Hackett said. "We are in a down
cycle for fertilizer."
Wild Card: Mother Nature
Coincidentally, many fertilizer companies are set to increase
production thanks to growth initiatives bankrolled by strong
performances in 2010, 2011 and part of 2012.
"Fertilizer producers have been getting a lot of cash and
putting that to use for capacity expansion, which means they can
increase volumes," analyst Wilkes said.
Higher volumes -- even at lower prices -- might help
fertilizer companies increase their top lines, analyst Wilkes
"When CF was producing at nearly 99% capacity, its sales
growth was based on pricing," he said. "Once you see increased
capacity, that means they can sell more, so sales would be
predicated on volume as well as pricing."
The wild card, as always, is where corn prices will go in
coming months. Again, that depends on Mother Nature.
"If we turn hot and dry later this summer, that could stress
the crop and fall short of expected yields just as we've seen the
last three years," said Darin Newsom, a senior analyst at
Lower yields mean less corn and higher corn prices. That's
good for companies that store, transport and sell corn. These not
only control the largest storage facilities and stockpiles, they
can also fetch higher margins.
Potential beneficiaries in this sector includeArcher Daniels
Midland (ADM) andBunge (BG), both of which have large operations
that store and transport corn and other grains.
"They make money when there is a lot of grain supply," Hackett
said. "The more they store, the more they move and the more they
At the other end of the spectrum are farmers, as well as the
distributors that supply fertilizer and other farm supplies. Farm
incomes had climbed to record levels through a string of recent
years, but the drought may have broken that spell.
"After a drought, farmers spend less money the following
year," Hackett said. "Even if prices go up, it never compensates
for having a terrible crop."
Farm equipment retailers, and manufacturers likeDeere (DE),
are braced for a slowdown in growth after raking in sales during
the industry up cycle.
From 2010 to 2012, Deere saw annual sales rise at least 13%
and earnings gain at least 15% -- its best three-year run in at
least a decade. Analysts expect EPS to rise 13% this year, then
fall back to 4% in both 2014 and 2015.
The farm-equipment stock with the highest earnings
expectations this year isLindsay (LNN), an Iowa-based maker of
large-scale crop irrigation systems. Analysts see the thinly
traded stock's earnings up 57% for the year. Sales are projected
to grow only 3%, however, the company's smallest gain since
Newsom says that flattening curve might extend across most of
the farm equipment industry.
"Equipment has really been moving the last few years," Newsom
said. "The question is, will producers continue to buy a lot of
equipment this year? My feeling is they may slow down from what
we've seen over the last number of years."