China, Agriculture and Corn (ADM, DE, POT, MOS, CORN, MOO, DBA)

About 94% of the US corn crop is now in the ground, and that fact, along with other news, has put some recent pressure on corn prices and on stock prices for some of the companies and funds that depend on agriculture. The 600-pound gorilla could be China.  There are some new factors in the corn market that could have a significant bearing on stocks like Archer Daniels Midland Co. (NYSE: ADM), Deere & Co. (NYSE: DE), Potash Corp. of Saskatchewan (NYSE: POT), and Mosaic Co. (NYSE: MOS). ETFs that could be affected include Teucrium Corn Fund (NYSE: CORN), Market Vectors Agribusiness ETF (NYSE: MOO), and PowerShares DB Agriculture Fund (NYSE: DBA).

Cash grain prices have fallen recently and one reason could be that farmers are now selling off their stored 2010-2011 “old” crop inventory. Potential flooding along the Missouri River may have caused farmers to sell now rather than risk having the stored bushels damaged by floodwaters. The irony is that much of the flooding is being caused by the Army Corp of Engineers as it seeks to protect populated areas by flooding rural areas. Given the high-water conditions now and the amount of snowpack still left in the mountains at the headwaters of the Missouri, the threat of man-made flooding could be with us through July.

This round of selling has begun to replenish inventories at grain terminals and processors. If inventory builds continue, then harvest shortages in the fall could be mitigated somewhat. That would tend to keep the price of corn under some pressure.

In China, the government’s National Grain and Oils Information Center has declared that it is very unlikely that China will become more dependent on corn imports to meet its growing demand. The Center noted that China has about the same amount of acreage planted in corn as does the US, but that Chinese yields are only half US yields.

That sounds like very good news for fertilizer makers such as Potash Corp. and Mosaic, but there’s a catch. China is widely suspected of cooking its data on almost everything it produces, and data on agricultural production is no different. For example, China claimed a corn crop of 160 million metric tons in 2009, though there were several analysts inside the country who pegged production at less than 140 million tons.

In 2010, China imported about 1.6 million metric tons of corn. The UN Food and Agriculture Organization estimates that the country will import about 1 million metric tons this year, based on expectations of another bumper crop. But what if the 2010-2011 and 2011-2012 crop totals were juiced?

There are two possible reasons for China to fiddle with the numbers. First is to keep international market prices lower so that when the country does have to buy the prices won’t be sky-high. Second, provincial governments are rewarded for large harvests, so exaggerating production pays off.

If China’s statement about its yields being just half US yields is true, that is potentially very good news for fertilizer makers and equipment machinery makers. Potash Corp., Mosaic, and Deere, among others, could benefit as China seeks to improve its yields.

The Teucrium Corn Fund invests in corn futures traded in Chicago, and intends to replicate daily changes on weighted averages of closing prices three futures contracts.

MOO’s largest holding is Deere and its second largest is Potash Corp. It’s next four largest holdings are also fertilizer makers. DBA is like CORN and holds futures contracts in a variety of liquid and widely traded ag commodities.

In trading today, ADM is nearly flat at just after noon ET, at $30.25, within a 52-week range of $24.42-$38.02. Deere is also essentially flat, at $81.76, in a 52-week range of $52.73-$99.80.  Potash Corp. is also flat, at $54.02, within a 52-week range of $27.95-$63.97.

In the realm of ETF products… CORN is up more than 1%, to $45.51, in a 52-week range of $23.79-$48.77.  MOO is up slightly, at $53.12, within a 52-week range of $35.62-$57.93.  DBA is up about 0.70%, to $32.48, in a 52-week range of $22.87-$35.58.

Paul Ausick