Guest Blog by Mark Gulley
Mark Gulley is a principal at Gulley & Associates LLC.
Crop Inputs Pricing Underway
Sep 25, 2012
Harvest is in full swing- Conditions in the U.S. farm belt are ideal and corn is 39% harvested as of last week compared to an average of 13% over last year. Growers I've spoken to say they're about a month ahead of schedule. This is putting short-term pressure on cash crop prices which should ease when harvest exceeds 50% complete.
Fall spreading of P&K is also in full swing- Growers are taking advantage of ideal weather conditions to spread P&K. But with corn and soy yields 25% below normal, P&K application rates are likely to be down, subject to actual soil tests. This warm dry weather could delay ammonia application into later December since soil temperatures need to be below 50 degrees and sufficient soil moisture is required.
Growers pricing next year's inputs- While seed companies have not announced official seed prices, growers are budgeting a 7-8% increase in hybrid corn cost on-farm. This reflects a modest increase in corn hybrids carried over from last year plus the traditional 20% price-lift for brand-new higher-yielding hybrids, which replace lower-yielding four-year-old hybrids. There is also a positive mix effect for soy, but to a lesser extent.
Acreage mix 2013-14E- While the corn acreage forecast for next year remains 96 million acres, growers are frustrated by low yields, due partly to insect pressure on fields where they're doing corn-on-corn, and are thinking about going back to a more traditional corn-soy rotation. If so, it would reduce fertilizer use since corn requires more nutrients than soy. Still, the crop economics for corn remain superior to soy.
Investment Risks- Risks for agricultural input equities reflect the fact that the production agriculture business is subject to significant volatility owing to several factors that lie outside the control of the customer base of millions of individual growers that affect supply and demand for crop production, and therefore crop prices: (1) variable weather; (2) changing government policy; (3) varying crop yields (4) the relative value of the U.S. dollar.
PotashCorp (POT) $43.79; The Mosaic Co. (MOS) $59.20; Agrium (AGU) $101.72; CF Industries (CF) $217.64; DuPont (DD) $51.28; Monsanto (MON) $90.60; Syngenta (SYT) $74.30; Intrepid Potash (IPI) $21.88; Compass Minerals (CMP) $76.80.
MONSANTO: My current 12-month price target of $95 is based on 19.7x my current C2013E EPS estimate of $4.83 based on an arithmetic average of four valuation approaches: DCF, EBITDA multiple, P/E multiple, and sum-of-the-parts. I reiterate my cautious stance on crop nutrient equities but reaffirm my "Buy" rating on Monsanto (MON, Buy).