Monday, October 11, 2010

Crop Report 'Shocker' Ripples Through Agriculture Sector

CHICAGO (Dow Jones)-- Government forecasters slashed estimates for the U.S. corn harvest Friday, causing futures prices to surge while igniting shares of many agriculture companies. 

U.S. corn futures soared to a daily trading limit on the Chicago Board of Trade when the market opened, rising 30 cents, or 6%, to $5.82 1/4 a bushel -- near a two-year high. Soybean and wheat futures also hit their exchange-imposed trading limits at the market opening. 

"Shocker may be an understatement," said Jason Britt, president of Central State Commodities, a Kansas City brokerage. "It's very out of character for the USDA to lower the corn yield so much." 

The crop report spilled into equity markets with tractor makers such as Deere & Co. (DE) climbing on the news along with seed and fertilizer companies such as Monsanto Co. (MON). Livestock and poultry producers such as Smithfield Foods Inc. (SFD), meanwhile, traded lower on expectations that higher crop prices would increase feed costs. Longer-dated future contracts for cattle and hogs rose as well. 

The U.S. Department of Agriculture projected a national corn yield of 155.8 bushels an acre, well below last month's projection of 162.5 bushels and lower than analysts' average forecast of 159.9 bushels per acre. 

The USDA was projecting a record crop a couple months ago. But farmers have largely been disappointed as harvest progresses. The crop faced problems from excessive rains early in the season that washed away supplies of nitrogen, a crucial nutrient, and was also stressed by unusually hot night-time temperatures all summer. 

While many traders and analysts could see this year's corn crop yield drifting down to 155 bushels an acre, few expected the USDA to make such an aggressive revision so soon. The U.S. harvest is roughly 50% complete. 

"This is a very tight balance sheet we now have to live with for a long time," said Sal Gilbertie, lead manager of the Teucrium Corn Fund, an exchange-traded fund based on corn futures. 

Other agriculture commodities followed corn higher. Wheat and soybeans surged in part because both, like corn, serve as an animal feed. Livestock futures also climbed because feed is a major cost for producers. 

Stocks for farm machinery manufacturers and other agribusiness companies rose on prospects that higher prices for corn will provide farmers with more money to spend on equipment, fertilizer and seed. Tractor makers Deere, CNH Global (CNH) and Agco Corp. (AGCO) are all higher, along with seed and fertilizer companies Monsanto, CF Industries Holdings Inc. (CF) and Potash Corp. of Saskatchewan (POT). 

Shares for crop processors Archer Daniels Midland Corp. (ADM) and Bunge Ltd. (BG) also moved up as tight supplies of crops provide them with leverage to raise their prices. But meat and poultry producers, including Smithfield Foods, Tyson Foods Inc. (TSN) , Pilgrim's Pride Corp (PPC) and Sanderson Farms Inc. (SAFM), were lower in morning trading. 

Analysts said Friday's report reignites concerns that the market needs higher prices in order to discourage demand and stave off a supply crisis. The report could have other ramifications, since the government has yet to rule on a request to increase the amount of ethanol that can be blended in gasoline to 15% from 10%. 

"This could (heighten) the debate on moving ethanol blends higher, and 'food versus fuel,'" debate, Britt said.
-By Ian Berry, Dow Jones Newswires; 312-341-5778;

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