Wednesday, January 16, 2008

Corn prices shoot up; Bullish on Monsanto India

Corn prices shoot through the roof

Bloomberg has an article on the recent spurt in the international prices of corn (commonly known as maize in India). A brief excerpt:

"Jan. 14 (Bloomberg) -- Corn rose to the highest ever in Chicago on speculation that global demand for feed and biofuel will exceed production for the seventh time in the past eight years.

World inventories of corn will fall to the lowest since 1984 on Sept. 30, the U.S. Department of Agriculture said Jan. 11. Inventories in the U.S., the world's largest producer and exporter, will be 20 percent smaller than forecast last month, the USDA said. Prices have jumped 49 percent in the past five months, even after last year's record harvest.

Corn futures for March delivery rose 17 cents, or 3.4 percent, to $5.12 a bushel on the Chicago Board of Trade. The price earlier jumped the exchange's 20-cent limit to $5.15, topping the record for a most-active contract of $5.135 reached in May 1996. The highest price for any contract was $5.545 for July futures in 1996.

Corn rallied 17 percent last year after surging a record 81 percent in 2006, on increased demand to produce ethanol and feed livestock and poultry."

What is driving up international corn prices?

The USDA estimated world corn output in the 2007-2008 season, which began Oct. 1, at 766.7 million metric tons, down from 769.3 million forecast in December. That compares with an estimated 703.9 million tons harvested last season. Global consumption will rise to 772.7 million tons, up from the 766.4 million forecast last month and 721.7 million consumed last year, the department said. This will turn things dramatically, i.e. from a surplus of around 48 million tonnes to a deficit of 6 million tonnes.

Factors driving up international corn prices are:

- Passage of the New Energy Bill that requires that around 25% of total energy consumption in the US be met through renewable sources, e.g. ethanol (from sugar or corn).

- higher demand from feed livestock & poultry

Impact on domestic corn prices?

As has been the case in most of the other commodities (agri or non-agri), a sharp increase in international prices have pushed up domestic prices too. Corn is no exception to this. Corn prices have moved up by over 50% in the past few months. They are currently quoting at around Rs.900 per quintal, compared to around Rs.500-600 per quintal a few months ago.

Higher domestic corn prices mean?

Higher corn prices have improved realizations dramatically for the farmers. As a result, more farmers are sowing corn today than at any point in the past. This has resulted in a substantial shift in the sowing pattern, from some of the other cash crops to corn. The area under cultivation this year amounted to a 74.6 lac hectares, compared to the normal area of 62.2 lac hectares. This is a substantial jump in the agriculture sector.

Those directly affected (i.e. the poultry sector which is the largest consumer of corn in India) have started voicing their concerns (link 1 & 2) about the incessant rise in corn prices.

What does this mean for Monsanto India?

Higher area under cultivation will result in a significant jump in demand for hybrid corn seeds, of which Monsanto is a clear leader. The company’s ‘Dekalb’ brand of corn seeds is a market leader and overall Monsanto has close to 30% share (which is expanding with every passing year). This should result in a healthy topline and an even better bottomline expansion.

Rally in corn prices augurs well for companies like Monsanto, which supply the seed for sowing. Monsanto is the largest supplier of corn seeds in the US (it is so in India too....with close to 30% share).


Disclosure: I have an open position in Monsanto in the portfolios that I manage.

I’ve written about this stock a few times in the past. You can read about it – first, second and third.

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