Investors, have another bite of corn

Taken together, the outlook for elevated corn prices looks strong. This means that although fertilizer and seed prices have increased markedly, newly enriched farmers can -- and indeed must -- continue to pay up to maximize crop yields.

A brokerage survey earlier this year indicated that farmers squeezed by higher prices in their business would give a pass on new machinery, since they can always get by with older equipment, but fertilizer was something they would be loath to eliminate. And new seeds, fortified with pest-controlling compounds, were at the top of their shopping lists.

Public opposition to ethanol may grow if corn prices stay stubbornly high, but it's very unlikely that government subsidies to the industry, or minimum fuel blending requirements, will be eliminated.

Republican Sen. John McCain voiced opposition to the ethanol industry for years as an Arizona lawmaker but backed off his criticism this year in an effort to corral farm-state voters. Democratic Sen. Barack Obama has enjoyed substantial financial backing from ethanol interests in his campaign and, moreover, represents Illinois, the third-largest corn-growing state.

Neither presidential candidate is likely to alienate Farm Belt voters by vilifying ethanol. An end to the extremely high tariff imposed on Brazil's sugar-cane-based ethanol would probably reduce corn prices substantially, but there is no significant move afoot in Congress to make that happen.

Grain gains

Unless the government steps into the Minneapolis Grain Exchange to halt dastardly corn speculators or, more realistically, there is a steep decline in the price in oil, most analysts expect corn prices to hold through the first half of next year, providing another in a set of windfalls for North American fertilizer and seed producers.

The fertilizer makers that I still suggest you buy in dips are the same ones I have recommended for four years -- Potash of Saskatchewan (POT, news, msgs), Agrium (AGU, news, msgs), CF Industries (CF, news, msgs) and Terra Industries Holdings (TRA, news, msgs) -- and, more recently, Mosaic (MOS, news, msgs). A recent initial public offering to consider is Intrepid Potash (IPI, news, msgs).

Based on his analysis of the prospects for a diminished 2008 corn crop and new plantings for next year, Yu has increased his 2009 forecast for key fertilizer ingredients potash and nitrogen by 17% and 38%, respectively. He also has boosted his 2009 earnings-per-share estimate on Potash of Saskatchewan to $21.50 from $18.55 per share, on Agrium to $12.25 from $10.43, on CF Industries to $24 from $23.10 and on Terra to $5.53 from $5.

Just to give you an idea of what that means, if you put a modest 20 price-to-earnings multiple on that POT estimate, you get a price target or $430, which is almost double the current stock price. A 20 P/E multiple gets you a $208 price on Agrium, which is also about double the current price. A 20 P/E for CF Industries gets you to $480, or almost three times the current price. For seeds, the top choices remain Monsanto (MON, news, msgs) and Syngenta (SYT, news, msgs). Both should be great buys on any 15%-to-20% dips over the summer.

Fine print

According to USDA weekly crop progress reports, only 59% of the current corn crops are rated good or excellent, way down from the usual 71% rated at that level around mid-June in most years. . . . As you can imagine, there is a ton of statistical information available on the Web about crops. This page is a hub for weather. This page is a hub for crop progress reports. See the June 23 weekly crop progress report here (.pdf file). . . . Learn all about the wonders of potash at this page.

At the time of publication, Jon Markman owned or controlled shares of the following companies mentioned in this article: Potash of Saskatchewan, Syngenta, Mosaic and CF Industries.

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