ADM, Monsanto, Potash Corp. Rise as Wheat Climbs
Comment of the Day

August 06 2010

Commentary by Eoin Treacy

ADM, Monsanto, Potash Corp. Rise as Wheat Climbs

This article by Shruti Date Singh for Bloomberg may be of interest to subscribers. Here is a section
Archer Daniels Midland Co., Monsanto Co. and Potash Corp. of Saskatchewan Inc. rose in New York trading amid speculation that U.S. wheat exports will gain as the grain traded at a 23-month high and Russia banned exports.

Dry weather in Russia, Kazakhstan, Ukraine and the European Union, and flooding in Canada have also ruined crops and drove a surge in Chicago wheat prices of as much as 92 percent since June 9. Russia's drought is now threatening sowing plans for winter grain and damaging other crops including sugar beets, potatoes and corn, the national weather center said this week.

"It will increase our tonnage coming out of U.S.," said Roger Baker, head of the North American wheat-trading desk in St. Paul, Minnesota at CHS Inc., the largest U.S. cooperative grain marketer.

ADM, the world's largest grain processor, rose $1.64, or 5.7 percent, to $30.25 at 4:15 p.m. in New York Stock Exchange composite trading, the biggest gain since May 8, 2009. The shares have fallen 3.4 percent this year.

Monsanto, the St. Louis-based company which is the world's largest seed maker, advanced $1.86, or 3.1 percent, to $61.28. Saskatoon, Saskatchewan-based Potash Corp., the biggest maker of the mineral used in fertilizer, climbed $2.85, or 2.6 percent, to $114.24.

Eoin Treacy's view Fertilizer and seed companies have been slow to garner investor interest, primarily because the issue of food security was firmly off the table following the credit crisis. Some of the better performers in the sector benefitted from low natural gas input prices in ammonium nitrate production, but the sector has generally lagged other commodity related shares. I have maintained since at least May (also see Comment of the Day on May 27th) that agriculture shares were in need of firmer grain and bean prices to act as a catalyst to spur investor interest. This now

Potash Corp of Saskatchewan found support in early July at the lower side of the 16-month range and is currently rallying towards the upper side. A sustained move above C$130 is required to indicate demand has returned to medium-term dominance. Mosaic, K+S, Archer-Daniels Midland, Incitec Pivot and KWS Saat all share a relatively similar chart pattern.

Agrium is into its sixth consecutive week to the upside and is closing in on the March high near C$75. While it is somewhat overbought in the very short-term, a clear downward dynamic would be required to check momentum beyond a brief pause. Yara International which also benefits from low natural gas prices has a relatively similar pattern.

Dupont de Nemours is one of the shares most leveraged to both increased demand for agricultural chemicals and lower natural gas input prices. It has found support at progressively higher levels since March 2009 and continues to rally from the region of its 200-day MA. It broke upwards to new recovery highs this week and while it is somewhat overbought in the short-term, a sustained move below $33.50 would be required to question medium-term upside potential.

Viterra, which is leveraged to wheat prices is rallying from relatively depressed levels and has completed a reversion towards the mean. It encountered resistance at the lower side of the 15-month range today and will need to hold at least half the recent advance if the medium-term bullish outlook is to be sustained. Monsanto has a relatively similar pattern but has been less explosive.

Provided the relevant commodity prices continue to attract investor interest, related shares should do the same, but this also applies in reverse so prices for the raw commodities are well worth monitoring. Wheat now appears to be entering a period of consolidation of recent gains and will need to hold approximately half its recent gain to sustain the medium-term bullish outlook.

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