Monsanto, Potash Shares Set Records as U.S. Farmers Favor Corn
By Jack Kaskey
Jan. 23 (Bloomberg) -- Missouri farmer Mike Geske is doubling the acreage he plants with DuPont Co.'s corn seeds this year to 1,000 acres, betting that surging U.S. ethanol production will keep corn prices near a 10-year high.
``It's exciting to be able to look at making a profit,'' Geske, 56, said in a telephone interview from his 2,300-acre farm in Matthews.
Similar decisions are being made across the U.S. Midwest, and shares of seed producers DuPont and Monsanto Co. and fertilizer makers Potash Corp. of Saskatchewan Inc. and Terra Industries Inc. are soaring. The gains have further to run, even though the stock prices exceed their five-year average relative to earnings, said Frank J. Husic of Husic Capital Management.
The amount of U.S. farmland used for corn may rise 10 percent this year, the most since 1949, and another 5 percent in 2008, the American Farm Bureau said this month. Corn futures doubled in the past year and on Jan. 17 reached $4.21 a bushel, the highest in a decade.
Ethanol, a fuel additive that has seen surging demand as oil prices rose, is mostly made from corn in the U.S. Ethanol production in the U.S. rose more than 25 percent last year to 4.9 billion gallons, said the Renewable Fuels Association, an industry trade group.
``The whole ethanol boom is generating additional demand for corn-related products,'' said Husic, chief investment officer at Husic Capital, which oversees $600 million in San Francisco. He owns shares of Monsanto and Potash and added Terra late last year in anticipation of increased U.S. corn acres.
Surging Shares
Seed makers can charge more for domestic corn than for other crops because it typically contains more genetic modifications. Corn also is the most fertilizer-intensive crop, boosting sales of nitrogen.
Shares of St. Louis-based Monsanto, the world's largest developer of genetically modified seeds, climbed 33 percent in the past year. Syngenta AG, a corn-seed maker in Basel, Switzerland, and the world's biggest maker of agricultural chemicals, rose 40 percent. Wilmington, Delaware-based DuPont, the largest U.S. producer of corn seed, gained 27 percent.
Saskatoon, Saskatchewan-based Potash, the world's largest fertilizer maker, is up 77 percent. Terra, based in Sioux City, Iowa, has more than doubled. Among other fertilizer producers, CF Industries Inc. rose 80 percent, Mosaic Co. gained 46 percent and Agrium Inc. climbed 52 percent.
Monsanto's sales of corn seeds and genetics jumped 35 percent in the quarter ended Nov. 30 from a year earlier as U.S. farmers placed unusually early orders for 2007. Corn seeds are $3 an acre more profitable than soybeans because farmers are buying seeds with more genetic modifications to protect their yield, Monsanto says.
Nitrogen Prices
Corn requires 30 times more nitrogen fertilizer than soybeans, the crop it often displaces, Merrill Lynch & Co. analyst Don Carson said. Nitrogen prices in key markets are the highest in 25 years in anticipation of extraordinary spring demand, he said in a Jan. 18 report. Rising ethanol production could keep corn and fertilizer prices higher than normal for several years, Carson said.
U.S. prices for urea, a form of nitrogen, jumped 41 percent in the fourth quarter, according to Green Markets, a weekly newsletter.
Terra and CF Industries stand to benefit the most, because so much of their sales come from nitrogen that small price swings can have big earnings effects, Carson said. Each 10 percent rise in nitrogen price roughly doubles projected profit for the two companies. Nitrogen is made from natural gas, so the companies also benefit as energy prices fall, he said.
Not Cheap
Natural gas futures prices in New York have fallen 15 percent in the past year.
Seed and fertilizer stocks are too expensive for some investors. Monsanto sells for 38 times earnings, about 58 percent higher than its five-year average, according to data compiled by Bloomberg. Mosaic has a price-earnings ratio of 52, versus an average of 36 since the company was formed in 2004.
Shares of Potash, Monsanto, CF and Syngenta reached records in the past month.
Those valuations already reflect the near-term benefit of higher corn acreage, said Tom Uutala, who helps manage $60 billion at Victory Capital in Cleveland. Victory Capital owns shares of DuPont, which trade at 20 times earnings, below its five-year average of 22. DuPont, the third-biggest U.S. chemical maker, gets less than a quarter of its sales from agriculture products, while Monsanto's sales are entirely farm-related.
Even Husic, who owns the stocks, said investing now in smaller fertilizer makers such as Terra has become riskier after their surge.
Analyst Forecasts
``It's kind of hard to know how high they can go, because the earnings can be so explosive,'' Husic said. ``There are a lot of things going in their favor now.''
Some analysts are more optimistic. Carson on Jan. 18 raised his price targets for all five fertilizer stocks, boosting Terra to $16 and CF Industries to $34. Citigroup Investment Research's Brian Yu on Jan. 11 increased his target for Terra by 25 percent to $17. He raised his target for CF Industries by 27 percent to $33. Terra shares closed yesterday at $13.50 and CF closed at $28.67.
Goldman, Sachs & Co. added Monsanto to its ``Americas Conviction Buy List'' on Jan. 16, citing expectations for increased corn acreage, with a $59 price target. Merrill's Carson expects Monsanto's stock to reach $60. The stock closed yesterday at $53.31.
Seeds Sold Out
In Missouri, so many farmers are planting more corn that some DuPont seed varieties were sold out when Geske placed his order in November, two months earlier than normal.
Tight supplies stand to benefit Monsanto, which has adequate inventories of seeds with three genetic modifications, the company's most profitable product, Soleil Securities analyst Mark Gulley said. DuPont's supplies are constrained, he said.
``The seed companies weren't able to anticipate this increased demand,'' Geske said. ``We don't usually make swings that wild, but we are getting strong signals from the market and we are trying to respond to those.''
To contact the reporter on this story: Jack Kaskey in New York at jkaskey@bloomberg.net .
Last Updated: January 22, 2007 19:01 EST
bloomberg.com |
