USDA Cuts Corn Crop Yield, Propelling Fertilizer Stocks

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Includes: AGU, CF, MOS, POT, TNH, UAN
by: Chris Damas

The USDA cut its estimate for the 2011 US corn crop by 3.6% due to extreme weather conditions and delayed planting this year. Harvested acreage was dropped by 500,000, resulting in a crop that will be 12.9 billion bushels down 4.1% versus the July USDA estimate of 13.47 billion. Although this was is up 3.8% from last year’s 12.45 billion bushel corn crop, the trade was looking for an estimate just north of 13.0 billion.

This is only moderately bullish for corn in my view, because estimated usage of corn and US corn exports were also dropped by the USDA by a total of 360 million bushels. Therefore, the key number of 2011 corn carryout was only down by 156 million bushels. The stock to use ratio is still very low at 5.4% and is supportive of higher corn prices.

Other important US crop production was also estimated down year over year by the USDA, with soybeans down 8%, cotton down 9% and wheat down 1%. Note the drought in Texas has increased cotton acreage abandonment to levels last seen in 1933.

However, global cotton production (big global producers include China, India, Australia and Brazil) is expected to be strong, and US cotton prices have dropped below $1/lb.

Notably, the resurvey of flooded crop acreage in several Midwest US states did not reduce the USDA’s estimate for planted corn acres which remains at 92.3 million.

Corn futures, which opened 15 minutes ago at 10:30 EST, are up 30 cents (limit) with September bid $7.08/bushel, up 4.4%. Soybeans and wheat are also up about 3% with November beans at $13.39 and September wheat at $7.08.

The CME has asked the Commodity Futures Trading Commission for permission to raise the corn futures limit move to 40 cents effective August 22, as the old limit seems out of sync with the much higher corn price. The USDA has raised its forecasted range for the 2011 harvested corn price to $6.20-$7.20.

North American fertilizer stocks are rallying, egged on by the DJIA, which is up 260 points in a relief rally in Europe, caused by a rally in Italian bonds and less anxiety over the status of major European bank balance sheets.

My favorite nitrogen fertilizer stock, CF Industries (NYSE:CF), is up $12.90 at $162.89. That is ex a 40 cent dividend today too.

We sold some CF at $160.40 at the opening and bought it back at $156.50 area before the corn market opened.

Our October price target for CF was $178 but this is under review for a possible upgrade.

Other fertilizer stocks are also responding due to the twin relief of bullish crop report and bullish stock market bounce.

  • Agrium Inc (NYSE:AGU) $83.11 up $3.17 (US)
  • CVR Partners (NYSE:UAN) $23.50 up $2.45
  • Mosaic Company (NYSE:MOS) $64.50 up $5.00
  • PotashCorp (NYSE:POT) $53.68 up $2.60 (US)
  • Terra Nitrogen (NYSE:TNH) $163.50 up $5.24 (ex $3.75 dividend)

These days you have to trade US stocks to make a consistent profit.

We would be selling these fertilizer stocks on this bullish USDA report, but give it a day or two for the enthusiasm to waiver and farmers to start selling into the corn rally. My view is that Friday afternoon is always a good day to lighten up on a trend - never mid-week.

We would be buying CF and Agrium back on weakness as the market starts looking at the impact of cooler weather alleviating the hot conditions in the corn belt, going forward. We are revising our targest for all US fertilizer stocks, incorporating the recent panic in the financial stocks and instability in world credit markets.

Disclosure: I am long CF.

Disclaimer: The information above was disseminated to clients and subscribers of The BCMI Report and/or The BCMI Flash anywhere from 12-48 hours before appearing on Seeking Alpha.