Crops Headed for a Tough Harvest

 |  Includes: ADM, CAG, DBA
by: Jim Delaney

Although it appears the prospects for the producers of porcine products have prettied, yes, lipstick included, that cannot be said for all of the ‘ole MacDonald’s in the country.

The U.S. Department of Agriculture reported recently that due to a late planting season and a cooler and wetter fall than normal, only 20% of the corn crop is out of the fields vs. an average of 58% during the years of 2004-2008.

“It’s getting scarier. The longer we go, the more mold keeps growing and the more ears fall off. Every day you wait, you lose more money,” said Larry Thorndyke, a farmer with 1,400 acres in Piper City, Illinois who usually has all of his corn in the bin by Halloween.

Additionally, only 44% of the soybean crop is in vs. an average of 88% for the previous 5 year span and the harvest, in total, is proceeding at the slowest rate since the Dept. of Agriculture started keeping records in 1985.

“Most of the farmers’ income is still out there in the field. They’re anxious to get it harvested and anxious to know where they stand for the year”, Loyd Brown, president of Hertz Farm Management, whose Nevada, Iowa (I guess they ran out of names going West) company manages more than 430,000 acres split among 1,800 farms across the Midwest.

The result has been a 36% rise in corn futures prices and a 17% rise in the contract price for soybeans over the past two months.

While corn and soybeans might comprise a majority of the acres planted in this country they are not the only crops being affected by the current weather patterns. All those things we love to eat at Thanksgiving are seeing harvesting delays as well. Illinois, which produces 90% of the pumpkins used for pie filling, is being affected by a moisture loving disease due to the soaking rains and cool temperatures.

It’s not just in the Midwest either, Georgia, the nation's leading pecan producer, is expected to see 20MM pounds less yield this year, an 18% reduction from the forecast at the start of 2009. Sweet potatoes, too, are being affected as “Scab”, a fungus that thrives in wet summer weather, has struck the Deep South.

The companies in the CEC Portfolio most affected by the current crops chaos would be Archer Daniels Midland (NYSE:ADM) and Cargill (NYSE:CAG). Interestingly, ADM’s fortunes seem to be on the rise recently in a year that has seen a fair amount of volatility in both its CDS level and equity price. A peak of $31.94 on July 27th actually preceded the trough in the CDS level of 60bps on 8/3 after which the CDS rebounded higher while the stock marked time moving mostly sideways. From 9/9 on, the negative correlation expected between these two asset classes reasserted itself and a low of 55bps in the CDS was complemented by a rise to $31.35 just a few days later. There has since been a correction and recovery in the stock while the CDS is taking its turn moving sideways. Closing levels last night were 58bps and $30.52.

CAG spent most of its year moving higher off the March lows peaking in the low $20s during mid-September. It’s been sideways to lower since, closing last night at $20.89 while the CDS has been making a concerted move higher from 30bps during that mid-Sept period to close last night at 40bps. If this pattern and empirical evidence hold the negative correlation should continue to assert itself.

There is a possible double whammy here as reduced income to the farm community, as propped up by Uncle Sam as they are, is still not a good thing when there are so many unemployed in other parts of the economy and the last thing we need is another round of farm foreclosures as was seen in the 1980s. (Anyone remember Farm-Aid?)

Additionally, the price increases seen as a result of the lower crop yields could feed into the PPI and CPI statistics in the coming months feeding the inflation fears that the Fed’s aggressive liquidity measures have people monitoring all too keenly already.

To the extent that you can be right for the wrong reason, the last thing we need at the moment is to add any fuel to the inflation fire regardless of the source.

Enjoy the week.