July 2, 2008

Fertilizer companies to benefit from increased US corn planting

Fertilizer companies should benefit from a greater-than-expected rise in US corn acreage, but the outlook for ethanol producers remains grim even with more land slated to the grain, analysts said.

Though tight supplies and a crop smaller than last year's will sustain high prices, analysts regard USDA's acreage report released Monday as mostly good news for corn-dependent industries, suggesting US$10-a-bushel corn prices may be averted.

The USDA raised estimated 2008 corn plantings to 87.3 million acres, an increase of 1.3 million acres from its March prospective plantings report. Of that area, growers expect to harvest 78.9 million acres for grain, down 9 percent from 2007, the USDA said. On average, analysts predicted a drop in plantings to 85.3 million acres. Soy and wheat plantings slipped slightly from the USDA's March estimates.

Although the report temporarily eliminates a worst-case scenario for corn, the situation for the ethanol industry remains difficult as corn prices remain high, wrote Citigroup analyst David Driscoll in a research note following the acreage report.

However, corn's acreage gains means better near-term US demand for fertilizers, especially nitrogen, said Citi analyst Brian Yu. Corn is a fertilizer-intensive crop, consuming nearly three times the amount needed for wheat and seven times that for soy.

While JP Morgan analyst David Silver said domestic ethanol producers "face a prolonged period of higher costs and lower cash margins due to a smaller projected corn harvest", BB&T Capital Markets analyst Heather Jones thought the report could provide ethanol companies a bit of a break.

While the effects of widespread flooding on late planting remains to be seen, Jones wrote that the plantings report "is definitely better than the market had anticipated and should put some (downward) pressure on corn prices."

The rebound in corn acreage should be a positive development for ethanol-related companies such as VeraSun Energy Corp, The Andersons Inc. (ANDE), as well as pork producer Smithfield Foods Inc. (SFD), Jones said.