Morgan Stanley's Vincent Andrews and Ted Drangula make a pretty good — and at some times funny — case that agricultural stocks, especially Potash and Mosaic are set to boom thanks to imminent, nationwide droughts.
"All Ag equities broadly look attractive to us here relative to core chemicals as ongoing drought in the corn belt should predominate global macroeconomic concerns (i.e., Europe cannot change the US weather pattern good/bad/indifferent ).
The main reason is that corn prices are going to shoot upward as crop yields decline on dry weather — and they have the maps to prove it.
But first, their thesis:
"US corn crop conditions are the worst then have been in the past ten years and are nearly as bad as they were during last July and August (i.e., the conditions that ultimately caused last year’s ~147 bushel per acre crop) probability at the time. We also believe there is a better than 50% probability of a 2012 yield at or below 155 bu./acre."
"The Bull Case from here would be that dealer sentiment indeed changes on a dime and North American inventory levels move below the 5 year average by the time we reach September [as a result of droughts]. In the mean time, China will have settled early with a larger than expected order, though likely at another price rollover. The $30 per tonne price increase that has been unsuccessful in Brazil for almost a year goes through. Finally, the India government would become uncomfortable with its potash stance and decide to reallocate capital from its overall budget away from something else towards potash, in the process restoring the subsidy back to levels where Indian farmer potash consumption was increasing."
Potash and Mosaic stand to benefit the most — the analysts have a $60 price target on Potash and a $70 price target for Mosaic.
And now the maps. Here's last year's drought figure. Heat was intense, but mainly concentrated in The South:
And here's the drought map for June of this year:
The heat has spread everywhere...
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