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ADM, Potash, Eagle Bulk to Reap Rewards of Wheat Ban

A John Deere combine harvests wheat
A John Deere combine harvests wheat near McPherson, Kansas, June 30, 2009. Photographer: Larry W. Smith/Bloomberg

Archer Daniels Midland Co., Potash Corp. of Saskatchewan Inc. and Eagle Bulk Shipping Inc. stand to benefit after Russia, the fifth-largest wheat grower, banned exports of the grain because of its worst drought in 50 years.

ADM, the world’s biggest grain processor, can step in to ease the shortage in Russia, Credit Suisse Group AG said. Fertilizer producers will gain from higher sales of crop nutrients to farmers, said Joe Needham, a vice president at grains processor The Andersons Inc. Cereal producers Kellogg Co. and General Mills Inc. may raise prices to pass on higher costs.

“This is good for U.S. farmers and U.S. agribusiness,” Needham said in a telephone interview. “If you ramp up production, they will have to buy seed, they will use more fertilizer and elevators will handle the grain.”

Wheat futures in Chicago surged to a 23-month high as a record heat wave in Russia was predicted to cut the country’s grain output by 28 percent from a year ago. Flooding has ruined wheat in Canada while dry weather has damaged crops in Kazakhstan, Ukraine and the European Union.

The U.S., the world’s fourth-biggest grower and largest exporter of wheat, will produce 2.2 billion bushels in the year that started June 1, the Department of Agriculture forecast July 9. That compared with a June estimate of 2.1 billion bushels.

“You have a situation unlike anything that I’ve seen in the 35 years I’ve been trading in the grain markets,” said Dennis Gartman, an economist and editor of the Gartman Letter. “This is going to be one of the great years for American agriculture probably in history. Let’s not mince words here.”

Corn Gains

Wheat for December delivery fell 60 cents, the most allowed by the exchange, to close at $7.5525 a bushel at 1:15 p.m. on the Chicago Board of Trade. Earlier it reached $8.68, the highest intraday price since August 2008. Corn and soybeans both gained for the second straight week.

“Strength in wheat futures is already spilling over into the other commodity pits,” said Mark Gulley, a New York-based analyst with Soleil Securities who covers Potash Corp. “As corn and other crop prices go up, affordability improves, and that’s a direct benefit to fertilizer producers.”

Shares of Saskatoon, Saskatchewan-based Potash Corp., the biggest maker of the mineral used in fertilizer, fell 70 cents, or 0.6 percent, to $113.54 at 4:15 p.m. in New York. Competing potash suppliers Mosaic Co. and Agrium Inc., also declined.

Arbitrage Opportunities

Eagle Bulk Chief Executive Officer Sophocles Zoullas said in a conference call yesterday that the New York-based shipper is seeing a stronger market for moving grains. Decatur, Illinois-based ADM’s shares will rise because of “outsized arbitrage opportunities” in the wheat market, Credit Suisse Group analyst Rob Moskow said in an Aug. 3 note.

ADM fell 7 cents to $30.18 in New York a day after gaining the most since May 2009. Eagle Bulk dropped 2 cents to $4.95 on the Nasdaq Stock Market.

“Any industry that touches on grains, especially from a production standpoint, and from an input supply standpoint for instance, are going to benefit,” said Kenrick Jordan, chief economist at BMO Financial Group in Toronto. He said Deere & Co., the largest farm equipment maker, will gain from the increase in production spurred by the price rally.

U.S. wheat exports may be as much as 4 percent above the 1 billion bushels forecast for the year that started in June by the USDA after Russia banned grain exports from Aug. 15 to Dec. 31, said CHS Inc., the largest U.S. cooperative grain marketer.

‘Sad Situation’

Saudi Arabia and Turkey generally buy wheat from Russia and Canada, where production is expected to drop because of wet weather, said Roger Baker, head of CHS’s North America wheat-trading desk in St. Paul, Minnesota. Both countries will now switch to the U.S., increasing the company’s exports, he said.

“In order for farmers to capitalize, another farmer has to take a loss,” said Ron Suppes, a farmer who grows wheat on 3,000 acres in Kansas. “It’s a sad situation.”

The European Union is the world’s largest wheat producer followed by China and India in the 2010-2011 crop year, according to the USDA.

“If there is a poor wheat crop, the world will have to come back to the U.S. for wheat exports” as it did in 2007 and 2008, Steven R. Mills, ADM’s chief financial officer, said in a conference call Aug. 3. ADM spokeswoman Beth Chandler declined to comment.

Still, the rally in wheat prices will be limited as farmers globally likely will ramp up production, Needham said.

Bread, Cookies

“It’s the only crop in the world that’s planted somewhere in world every day and a new crop is harvested somewhere in the world every day,” Needham said. “In wheat, it’s generally a temporary shortfall.”

Food companies may raise retail prices on surging wheat costs. Wheat is a “big factor” for companies such as Kellogg, where wheat makes up about 8 percent of its total costs, said Christopher Growe, an analyst at Stifel Nicolaus in St. Louis.

“If wheat prices stay up around $7, it would likely prompt price increases in categories such as bread, cookies, and crackers,” Growe said.

Kirstie Foster, a General Mills spokeswoman, said the company doesn’t comment on commodities or pricing. Kris Charles, a Kellogg spokeswoman, said the company doesn’t address how it manages specific commodities.

“The question is how long wheat prices will stay where they are,” Bob Lindon, executive vice president at Connell Commodities, a Naperville, Illinois-based advisory firm for food companies, said in an interview. “Food companies may wait this out and see how the market settles before they have price increases.”

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