I went to a restaurant the other day, and the menu had a little white sticker on which was written: “Corn Chips and Salsa: Market Price.”
That's something you don't see every day.
As you know, corn has reached a record price per bushel this year based on the driest summer since the Dust Bowl.
The USDA said this week:
The proportion of the U.S. corn crop rated in 'good' or 'excellent' condition as of Sunday was 22%, unchanged from last week. The proportion in 'poor' or 'very poor' shape was unchanged at 52%.
For soybeans, the proportion of the U.S. crop rated in good-to-excellent condition was 30% as of Sunday, unchanged from last week.
Those are bad numbers.
They mean cattle ranchers are selling their herds early and at a loss, because they can't afford to feed them. They mean importers like India, Egypt, and China will have to pay high prices to feed their people. They mean breadbaskets like the Ukraine, Russia, and Argentina, which are going through droughts of their own, could halt exports to ensure they have enough food for themselves.
Extreme hunger, famine, and political upheaval are real possibilities.
It was high food prices and hunger that set off the so-called Arab Spring.
Global coarse grains projections — which include corn — have been reduced by a massive 56.5 million tons.
Trade has dropped.
The USDA reports:
Global 2012/13 corn trade is projected sharply lower this month in response to tighter U.S. supplies and higher prices. Corn imports are lowered for China, EU-27, Indonesia, Japan, South Korea, Mexico, Vietnam, Israel, Colombia, Peru, and Syria. In addition to the United States, corn exports are reduced for Ukraine, EU-27, and Serbia.
No one doubts this is a very real problem — but as always is the case in the trading business, what is bad for one sector is good for another...
We Don't Need No Stinking Water
Two companies are now trying to solve the problem of feeding humanity by creating genetically modified corn to withstand low rainfall.
Monsanto's DroughtGard hybrid corn — the first-ever hybrid genetically engineered for drought tolerance — was planted this spring in initial field trials.
DuPont Pioneer's hybrid AQUAmax corn, developed using advanced breeding techniques rather than biotechnology, debuted last year with five different versions.
About 250 farmers on close to 100,000 acres across the western Great Plains planted DroughtGard in the spring. The anecdotal evidence is promising, but there are no specific numbers.
Last year, yields of AQUAmax corn were observed 8,000 times, with 680 of those considered to be in a stressed environment...
AQUAmax yields were 7% higher in the stressed environments compared to conventional hybrids.
Monsanto Ramps Higher
Monsanto (NYSE: MON) has a market cap of $46 billion, a forward P/E of 20.21, and 16.90% revenue growth. They also pay a 1.70% dividend. Insiders have been selling, but the company sold a lot of corn seeds this year (up 35%).
As you can see, the stock has more than doubled over the past two years — and continues to hit higher lows and higher highs, the very definition of a bull market. It seems a bit pricey to me, but DroughtGard sales next year could launch it.
Dupont (NYSE: DD) has a market cap of $45.48 billion, a forward P/E of 10.79, a quarterly revenue growth rate of 6.4%, and pays a 3.50% dividend. It has some insider buys (5,290), but has more sells (358,214) over the past six months.
You could make a case for buying Dupont for its dividend on the dips...
But quite frankly, there are much better dividend players out there. My associate Brian Hicks can tell you about one of the best.
Corn by Market Price
If you want to play the drought, the best way to invest is with nitrogen fertilizer companies.
As farmers go into the next round of planting, they will be hard-pressed to increase yields to make up for this year's lack of production. This means a heavy dose of fertilizer.
And the company that's winning the fertilizer game seems to be CF Industry Holdings (NYSE: CF), the largest nitrogen producer in North America.
CF has a $13 billion market cap with a P/E of 8 and price-to-earnings growth (PEG) of 0.71. EPS was up 24% year over year due to strong demand.
This compares well to Augrium Inc. (NYSE: AGU), which has a 15 billion market cap, a P/E of 10.54, and a PEG of 1.21.
CF is the most undervalued of the lot with the most upside.
All the best,
Since 1995, Christian DeHaemer has specialized in frontier market opportunities. He has traveled extensively and invested in places as varied as Cuba, Mongolia, and Kenya. Chris believes the best way to make money is to get there first with the most. Christian is the founder of Crisis & Opportunity and Managing Director of Wealth Daily. He is also a contributor for Energy & Capital. For more on Christian, see his editor's page.