Oil Prices Rev Ethanol Demand, Put Agribusiness Into Overdrive
BY VANCE CARIAGA
INVESTOR'S BUSINESS DAILY
Posted 6/6/2007
When the high price of crude oil turns out to be a boon to farmers and fertilizer salesmen, you can say with a certain confidence that these are different times we live in.
That's what's happening as demand for corn, a key ingredient in the production of ethanol, continues to push up shares of leading agricultural and fertilizer stocks.
Two of those stocks — Monsanto (MON) and Potash Corp. of Saskatchewan (POT) — reached all-time highs last month. Another, Mosaic, (MOS) hit a nine-year high. A fourth, CF Industries Holdings, (CF) neared the all-time high it established in late April.
Gains have been reported across the board. The 14 stocks in IBD's fertilizer group reached an all-time high on Friday, while the 23 stocks in the agricultural operations group set a fresh peak on May 22.
Agribusiness stocks have been rising for years, though many hit a higher gear in recent months as corn producers in the U.S. and abroad expanded acreage.
U.S. farmers plan to plant 90.5 million acres of corn this year, according to Department of Agriculture reports. That's a 15% increase from last year. Similar expansions are planned in other countries.
"With higher corn prices we've seen rapid expansion in South America," said Jerry Norton, grains analyst at the USDA. "We expect them to have record crops this year and next year."
All that corn isn't heading to the dinner table. Much of it will go toward the production of ethanol, which can be used as a motor fuel or fuel additive. With crude prices still well above historical levels and gasoline prices skyrocketing, biofuels are considered a key alternative source.
"Demand for corn is increasing because the consumption of ethanol is ramping up," said Greenwich Consultants analyst Michael Judd. "We're also seeing high demand for corn exports because global supplies are low."
Corn farmers are working overtime to keep customers stocked with product. A recent report from the USDA showed that 97% of the nation's total corn crop was planted as of May 27. That was 1 percentage point ahead of last year's pace and 4 points ahead of the five-year average.
The preliminary estimate for average corn prices in May was $3.48 a bushel, the USDA said, up 9 cents from the prior month and $1.31 from May of 2006.
In terms of volume and acreage, corn is the "dominant crop" in the U.S., Norton said. That means it's also a key market for suppliers of herbicides, fertilizer and other agricultural products.
Sales of corn seed and traits — which are used to improve tolerance to herbicides, among other things — accounted for more than 45% of Monsanto's sales during the fiscal second quarter, which ended Feb. 28. Quarterly sales in the category rose 47% year over year, compared to 19% growth in overall sales. The category's gross profit also gained 47%.
Monsanto grew earnings 23% during the quarter and is expected to post a 25% increase for the quarter ended in May. According to analysts, corn production will continue to be an earnings driver.
"Potential for increases in U.S. corn acreage creates upward tension in (Monsanto's) earnings as trait penetration rises," Banc of America Securities analyst Kevin McCarthy wrote in a May 21 note.
Fertilizer supplier Mosaic reported a 19% sales increase during its fiscal third quarter ended Feb. 28. The company earned 5 cents a share vs. a 19-cent loss the prior year. In SEC filings it credited part of the turnaround to "strong agricultural markets, including high corn prices."
The next couple of years should bring robust earnings growth for leading agribusiness firms. Analysts expect Mosaic to post triple-digit earnings gains in fiscal 2007 and 2008. Double-digit increases are projected for Monsanto and Potash.
The USDA's Norton doesn't see the ethanol market softening anytime soon.
"The high crude and gas prices support ethanol prices, so there are high levels of return," he said. "Demand for ethanol is going to keep the supply/demand balance for corn very tight over the next few years. You also have all these ethanol plants coming on line, which means production will only increase."
