Farmers Get Rich as Wheat Drives Deere Profits: Freight Markets

The biggest U.S. wheat shipments in a generation mean record income for farmers, the most profit ever for Deere & Co. (DE) and the nation’s lowest jobless rate in North Dakota, the largest grower.

The U.S. will control 28 percent of global wheat exports this year, up from 18 percent in 2010, the U.S. Department of Agriculture says. With prices averaging about $8 a bushel this quarter and the next, the most in three years, farms will earn $94.7 billion, according to analysts’ forecasts compiled by Bloomberg and a USDA estimate. North Dakota’s jobless rate was 3.6 percent in March, compared with 8.8 percent nationally.

The surge in income is spurring lawmakers to propose farm- subsidy cuts and aiding President Barack Obama in his goal of doubling exports in five years. It also means Deere, the largest farm-equipment maker, will report a 42 percent rise in profit this year, and Monsanto Co. (MON), the biggest seed producer, will earn 38 percent more. Shipping lines may benefit the least because the U.S. is replacing lost supply from Russia and Ukraine, and global exports will drop 8.6 percent in 2011, the USDA says.

“We’re the supplier of last resort,” said Jerry Fruin, an agricultural economist at the University of Minnesota in St. Paul, specializing in logistics. “The U.S. generally has stuff in the bins, and we have the logistics system to get it to you, since we face both oceans.”

Photographer: Larry W. Smith/Bloomberg

The U.S. will control 28 percent of global wheat exports this year, up from 18 percent in 2010, the U.S. Department of Agriculture says. Close

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Photographer: Larry W. Smith/Bloomberg

The U.S. will control 28 percent of global wheat exports this year, up from 18 percent in 2010, the U.S. Department of Agriculture says.

Wheat rose 71 percent in the past 12 months to $8.21 on the Chicago Board of Trade, as flooding from Canada to Australia last year hurt crops. Russia, once the second-biggest exporter, banned shipments in August and Ukraine followed with curbs in October. That gave the U.S. an opportunity to expand in markets across northern Africa and the Middle East, traditional buyers of grain from the Black Sea region.

Middle East Protests

U.S. shipments to Egypt, the world’s biggest wheat buyer, reached 3.27 million metric tons in the marketing year that began in June, seven times more than a year earlier, USDA data show. Countries including Jordan, Lebanon, Saudi Arabia, Oman, Libya and Syria have purchased U.S. wheat this year, after buying none at the same time last year, the data show.

Buyers in the Middle East and northern Africa accelerated purchases this year to bolster stockpiles and damp prices that contributed to protests across the region.

“Russia has hurt its image of reliability as a supplier,” said Dan Manternach, a wheat economist with Doane Advisory Services, an agricultural research company in St. Louis. “The countries that had been dependent on Black Sea-region wheat will no longer allow themselves to stay dependent, so they’ll diversify sources. Even if Russia has a monster crop this year, I expect we’ll lose some market share, but not all of it.”

Ban on Sales

The U.S. will ship 34.7 million tons of wheat in the crop year ending May 31, compared with almost 24 million tons a year earlier and the most since 1993, USDA estimates show. Russian exports slumped to 4 million tons, from 18.6 million tons, and the government said March 25 it would maintain the ban on sales until after the harvest that begins in September.

That means more opportunities for U.S. growers. Agriculture accounted for 8.3 percent of North Dakota’s economy in 2009, more than any other state, the most recent government data show. Agriculture employs more than 29,000 people, compared with about 7,000 in natural resources such as oil and gas production, according to the state Commerce Department.

Wheat generated almost $7 billion for North Dakota last year, according to Erica Olson, a marketing specialist with the Bismarck-based North Dakota Wheat Commission. About half of the state’s wheat crop is exported, with 25 percent of that going by rail to ports in the Pacific Northwest, where it’s loaded onto vessels bound mostly for Asia, she said.

Equipment Dealers

“The farm economy has been strong, and equipment dealers are having a good year because producers are updating equipment,” said Harlan Klein, who farms 15,000 acres of wheat, canola, sunflowers and corn in Elgin, North Dakota. “Probably the biggest place we’re seeing competition is in labor. It’s to the point where it’s difficult to find people to work.”

Cargill, the Minneapolis-based grain exporter that’s the largest closely held U.S. company, reported a 30 percent jump in third-quarter profit April 13. Deere, based in Moline, Illinois, will report record earnings of $6.21 a share in its fiscal year ending in October, compared with $4.35 a year earlier, according to the mean of 10 analysts’ estimates compiled by Bloomberg. Monsanto, based in St. Louis, will make $2.83 a share in the year ending in August, up from $2.01, the mean of six estimates shows.

Growing profit for agricultural producers contrasts with slumping earnings for the shippers companies that haul the wheat. Grains are most commonly carried on panamaxes, the largest vessels able to transit the Panama Canal.

Daily Rates

Returns on the carriers fell 21 percent this year to $11,666 a day because of a glut of vessels, according to data from the Baltic Exchange in London, which publishes daily rates for more than 50 maritime routes. Rates are volatile, moving 34 percent or more in 10 of the last 11 years.

The surge in U.S. wheat exports “helps a bit, but if you look into what’s driving the bus, it’s iron ore, then coal,” said Steve Rodley, co-managing director of M2M Management Ltd., a hedge fund that operates vessels and trades freight derivatives used to bet on or hedge future transport costs.

Global grain and soybean shipments will advance 3.5 percent to a record 355 million tons this year, according to Clarkson Plc (CKN), the world’s largest shipbroker. Iron-ore cargoes will rise 7.4 percent to 1.06 billion tons, with coal gaining 6 percent to 954 million tons, the London-based company estimates. About 90 percent of global trade moves by sea, according to the Round Table of International Shipping Associations.

Shipping Shares

The 12-member Bloomberg Dry Ships Index, in which Seoul- based STX Pan Ocean Co. has the biggest weighting, fell 9.8 percent this year. That compares with a 6.6 percent advance in the Bloomberg World Agriculture Index of 32 companies.

Almost 40 percent of last year’s U.S. wheat shipments moved through ports on the Columbia River, including the Port of Portland, Oregon, which handled the most grain since 1995, USDA data show. The Port of South Louisiana, located in LaPlace, ships grains and soybeans carried from the Midwest on the Mississippi River.

In North Dakota, the state government is forecasting a $122 million budget surplus for the two-year cycle ending in June, more than the $79.6 million anticipated in November. The Congressional Budget Office is projecting a federal budget deficit of $1.5 trillion for this year.

Higher commodity prices “really extend all throughout the state,” said the North Dakota Wheat Commission’s Olson. “The local elevator companies work directly with exports, so the increase is beneficial for them, and that creates jobs. Even with the trade part aside, the farm economy is going to produce a lot of jobs.”

To contact the reporter on this story: Whitney McFerron in Chicago at wmcferron1@bloomberg.net

To contact the editor responsible for this story: Steve Stroth at sstroth@bloomberg.net

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