Here’s Why the Drought Hasn’t Sucked for Agriculture Stocks

Higher grain prices and insurance payouts in the face of massive drought are expected to earn farmers a record profit of $122 billion this year. Because of this, demand for seeds, crop chemicals, and services is expected to rise, and Citigroup (NYSE:C) analyst P.J. Juvekar expects Agrium (NYSE:AGU) to benefit.

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Over half of Agrium’s wholesale profit stems from nitrogen sales. Compared to other nutrients like phosphates and potash, nitrogen is a more reliable product because it needs to be applied annually. Based on this reliability, Juvekar upgraded Agrium’s stock from Neutral to Buy at a price target of $118. So far today, the stock is up 1.52 percent.

Citing concern about weakness in the potash market, particularly in China and India, Potash (NYSE:POT) was downgraded by Citi from Buy to Neutral. Its shares have seen a 2.4 percent drop so far today. CFO Wayne Brownlee disagrees with this assessment. This year India, the world’s second largest potash market, has cut subsidies, but Brownlee still says “it looks pretty good.” In the United States, he said that farmers will seek potash after the drought which reduced levels of the nutrient. “You’ve got the income, the balance sheets for farmers, and high crop prices,” he said. “Everything is pointing to a very robust year in the United States.”

The Mosaic Company (NYSE:MOS) is down over 1 percent today as it was removed from Citi’s “Top Picks Live!” list, but maintained a Buy rating.

This year’s drought has put a spin on the market in more than one wayTitan Machinery (NASDAQ:TITN) took a blow earlier this week when they dropped over 23 percent on news of low earnings and expected profits. Larger manufacturers like Deere (NYSE:DE) and AGCO (NYSE:AGCO) were also affected, although more lightly. However, many of fears have been washed away by strong equipment sales numbers from the Association of Equipment Manufacturers. The revenue streams for large manufacturers like CNH Global (NYSE:CNH), Caterpillar (NYSE:CAT), and Kubota (NYSE:KUB) have been mostly unaffected.

The United States Farm Bill, which provided $288 billion in agricultural subsidies, is also set to expire at the end of the month. Whether or not lawmakers decide to reiterate this bill will affect how farmers decide to spend their money.

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