Corn prices in 2011 have ruled above $6 per bushel due to lower than average yields, dwindling surpluses and higher usage in ethanol production. Corn enjoying a price premium to its soybeans counterpart and warm weather setting in early in the Midwest has led to farmers planting extra of this commodity in the current planting season. USDA has forecasted farmers in the US to plant 96 mn acres of corn in the 2012-13 marketing year. This would mark the largest corn plantings since 1937 (97.2 mn acres) and a 4 million acre increase from the previous year. Also, the "trend line" corn yields are predicted to touch 160 bushels per acre, compared to 148 and 153 for the years 2011 & 2010 respectively.
To get a view of how realistic the consensus expectations are, we will look at the USDA forecast for the past 10 years and how they have fared. In each of the past two years, the USDA has been overly aggressive in its preliminary corn acreage target, by an average of 450,000 acres. However, prior to 2010 the USDA underestimated corn plantings in 6 of the preceding 8 years.
In each of the past two years, the USDA has been overly aggressive in its preliminary corn acreage target, by an average of 450k acres. However, prior to 2010 the USDA underestimated corn plantings in 6 of the preceding 8 years.
Now, how to benefit from higher corn acreage coupled with higher 2012 projected yields (7% over 2011 levels)? I believe the biggest beneficiary of this trend would be the seed and crop protection companies.
- One can take exposure in seed companies by investing in Monsanto (MON) and Dupont (DD), which control around 55% of the global corn seed market. Monsanto , the world's largest seed company, expects to gain market share in the U.S. corn seed for a second year as farmers buy more SmartStax, which has eight genetic changes enabling it to tolerate herbicides and kill bugs. Also, management has raised 2012 earnings forecast and reported strong second-quarter earnings growth that exceeded analysts' estimates, supported by an early U.S. spring that boosted corn plantings.
- DuPont's seed subsidiary "Pioneer Hi-Bred, is also on a strong wicket. The subsidiary's strong focus on innovation leading to a robust production portfolio has helped it gain 2-3 percentage points of market shares in 2009 & 2010 respectively. DuPont's management recently reaffirmed their strong outlook for its business growth and provided 2012 earnings estimate in the range of $4.20-$4.40 (7-12% growth over 2011 guidance midpoint).
- In the crop protection space, the diversified specialty and agricultural products company American Vanguard Corporation (AVD) would be an attractive bet, whose earnings is forecasted to grow 34% in 2012. AVD is the market leader in the below-ground insecticide product category (rootworm resistance solution) with around 50% market share. Farmers in IA, IL, NE, and MN, who account for roughly half the corn acreage, prefer insecticides to combat the resistance, instead of switching to hybrids or other seed brands. Continuous corn planting (the practice of not rotating corn/soybeans) tends to intensify insect and weed pressure as well as the potential for resistance issues to build. Given the favorable corn yields and resulting corn growing economics in these states, I believe the bulk of this increased acreage will come in the form of continuous corn, which in turn creates additional demand for insecticides and herbicides. AVD is in a better position to benefit and has also seen increased hedge fund investor's interest with funds like Driehaus Capital and D E Shaw recently increasing their position in the company.