FAO Report: Agriculture Commodities Stock 2011 in China

Agricultural commodities prices in 2011 will depend on crop prospects, according to a Food and Agriculture Organization (FAO) report. A sharp deterioration in crop outlook will affect price movements adversely. The FAO's index of 55 food commodities rose for the fifth straight month in November, touching two-year highs. Unless the global output of agricultural commodities improves in 2011, food prices will continue to spiral up, according to FAO.

Prices of agricultural commodities will rally next year, driven by rising demand from emerging markets, as per Rabobank Group. In addition, surging crude oil prices, depleting global food stockpiles and a weakening dollar may push prices higher.

If energy and food prices surge, it would raise the attractiveness of biofuels, made from farm commodities, pushing fertilizer prices higher. Down the value chain of commodities, any upward movement in energy prices affects sugar and corn prices.

A recent Chinese commerce ministry statement said as pressure mounts due to escalating prices and tight supplies, acquiring new supplies will play a key role in softening inflation and curbing speculation. For this, China has decided to tap international markets for sugar, cotton and meat, especially from India and the U.S., among others.

While China's CPI closely correlates to food prices, the country recorded a 5.1% CPI growth in November, with food and household expenses contributing 92%. Among agricultural commodities, as grain prices increase, food production costs and beverage processing costs rise.

We have identified three China agriculture stocks that will likely provide attractive returns to investors. These stocks are stacked base on upside potential.

China Agritech(CAGC), operating through its subsidiaries, manufactures and sells organic liquid compound fertilizers, organic granular compound fertilizers, and related agricultural products in China. Of all the analysts covering the stock, 75% recommend a buy. The stock has a 32.5% upside based on the consensus target price.

During the first nine months of 2010, the company posted a 41% year-over-year increase in net revenue, while cash equivalents more than doubled, indicating a strong financial base. Looking ahead into the fourth quarter and upcoming year, Agritech said prices of agricultural products are on a roll and it is leveraging the favorable trend to achieve its annual target. Analysts at Bloomberg estimate Agritech's fourth quarter revenue at $31.3 million, compared to $23.9 million recorded in the third quarter.

Agritech recently opened the first branded large-scale distribution center in Henan province and plans to construct more such facilities in 2011. Each of these would cover 85-100 franchised stores, which will sell 50% of the company's products and 50% of third-party products. On one hand, the cost of building one distribution center is almost $1 million, while on the other, annual revenue contribution is estimated at $3.7 million, once the plant becomes operational.

Zhongpin(HOGS) is engaged in the processing and distribution of meat and food products in China. Of all the analysts covering the stock, 78% recommend a buy. While there is no sell rating on the stock, the remaining analysts recommend a hold. Zhongpin has a 36.4% upside based on the consensus target price. Based on the positive trend in pork prices and the company's significant capex plans, the stock seems attractive and is likely to generate handsome returns in 2011.

Zhongpin has filed a registration for a potential equity offer, debt, and/or other instruments to raise up to $250 million, as per company sources. The main aim of the registration is gaining additional flexibility for raising funds from equity in 2011, in the event of interest rate hikes and a credit crunch. Meanwhile, timing and offer price have not been disclosed in the registration filed.

Zhongpin recently announced plans to build a production, research and development, test, and training complex in its home city Changge in Henan, China. The company plans to invest $58.5 million on the facility and construction for the first phase with a capacity of 50,000 metric tons is scheduled to start in the first quarter of 2011 and will be completed in third quarter of 2011. With this facility, the company will be adding 100,000 metric tons of capacity for prepared pork products.

Yongye International(YONG) operating through its subsidiary, is engaged in the manufacture, research and development, and sale of fulvic acid-based liquid and powder nutrient compounds used in the agriculture industry. Of all the analysts covering the stock, 80% recommend a buy. Yongye has a 85.4% upside based on the consensus target price.

At the end of 2010 third quarter, the company had a gross margin of 58.7%, sales growth of 145.1%, and a trailing 12-month sale of $196.2 million. Among peers in the fertilizer and agricultural chemical industries, Yongye has the highest gross margin, indicating investment potential. In comparison, Monsanto(MON) and Potash Corporation of Saskatchewan(POT) have gross margins of 44.1% and 35.8%, respectively.

After reporting third quarter results, the company achieved its set target for the full year 2010 within a span of three quarters. For 2010, the company sees revenues ranging between $200 and $205 million, and adjusted net income to increase in the range of 90.8% to 98.4% from prior year levels. Looking ahead, the company estimates at least a 50% annual growth rate in its revenue in 2011 and 2012.

Market Outlook for commodity in 2011

It was no news to the participants in the GrowingOn 2010 conference held at the National Field Archery Association sponsored by the South Dakota Corn Growers Association, South Dakota Corn Utilization Council and Farm Credit Services of America. Compared to last year, corn prices are at a profitable rate as are soybeans and the crop is in the bin and out of the field.

A presentation given by Steven D. Johnson, Ph.D., Farm and Ag Business Management Specialist, Iowa State University Extension, discussed Controlling the Crop Controllables.

Johnson used an archery bow and quiver to remind the farmers they need to shoot for the gold in the center of the bulls-eye target.

?You need to try to get the best net profit per acre despite the struggle you have right now with prices and market volatility,? said Johnson.

He added farmers should not be like the Rockefellers who always wanted just a little bit more. Prices are high now and expected to be around until next year?s corn crop.

?You can?t control the weather in China, global commodities or the rain in Australia, but you can control your operation and make it grow,? said Johnson. ?Drive your fixed costs down.?

The wheat crop in Russia did not have a banner year and there are hopes China may be forced to import corn by spring or next summer he said. Internal inflation in China has caused inflation in the food market so the signs are there the prices of corn will hold and even improve by that time.

The reason behind the rally seen in the market in August, September and October was the growing conditions in the northern hemisphere. No one is a wizard; no one can predict the future; but the fact is 800 million bushels of corn did not make it to harvest. There are many demands on this year?s corn crop in the U.S. from livestock production, ethanol production and the export market but the U.S. corn market is the only game in town with a 42 percent share in the world corn production. Also, there is a smaller corn crop than what was expected.

Johnson?s PowerPoint presentation showed the corn cash crop for 2010-2011 would be strong. There will be no cheap corn. His sources estimate 65 percent of this year?s corn crop will be sold for $5.10/bushel or higher. That hasn?t happened since 1995.

On the farm storage with little or no interest accruing will be the most profitable but there will be profit and a lot of it mainly because the demand is larger than last year.

?We are in a place we?ve never been before,? Johnson said. ?The USDA predicts average cash crop anywhere from $4.80-$5.60 and that has never happened before.?

A survey was completed on 1,900 corn fields across the Midwest from August to October. Johnson said the report shows, for whatever reason, the crop matured faster than normal and the ears were smaller. There is speculation among the experts it was the warm summer nights which caused the smaller size. Certainly the dry fall saw the crop dry down quickly which made for a successful harvest but the ears just weren?t there like last year.

?With the volatile prices, I recommend you sell smaller increments of your crop more often,? said Johnson. ?When you need cash flow, sell enough to cover it.?

He advised when next year?s big payments come due in February and March, sell enough of the 2010 crop to cover the expenses. Generate the cash you need when you need it. At this point in the winter months, cash flow should be driving marketing decisions.

?Another thing I suggest you do is enjoy the good prices you are getting this year and forget about that corn you contracted for $3.50,? Johnson said. ?That?s in the past; get over it. Start thinking about next year.?

Income strategies, while being a reluctant seller, should be the winter?s philosophy said Johnson. Experts are watching crude oil prices and higher fuel costs are expected for next year?s planting season. Monthly storage costs for corn will run four to seven cents per bushel and that expense will drop the value of the corn slightly.

Johnson advised farmers to remember there is only one corn crop in a year?s time but with soybeans, two crops are harvested. Brazil and Argentina are not far behind the U.S. in soybean production for the 2009-2010 crop year. But it is extremely dry in Argentina now and the next crop production cycle may be affected by that. The USDA projects an average farm price for the 2010-2011 crop year at $10.70-$12.20, average midpoint at $11.45 per bushel of soybeans.

Soybeans futures look promising and there is little incentive to carry the crop any length of time without on-farm storage and little or no debt load to the farmer. Monthly storage costs may run six to nine cents per bushel beyond harvest. The price on Dec. 2 was $11.97 and the futures looked strong: Jan. - $12.80; Mar. - $12.88; May - $12.89; and July - $12.91.

?Right now, global influence is driving the market for soybeans,? Johnson said. ?The world is demanding more soybeans than we can produce.?

For a period of time, high corn and soybean prices are here. Take advantage of the soybean prices now for in the months of April through June, another crop will be harvested in the southern hemisphere.

?We have never had $12 beans off the combine,? Johnson said. ?Sell that crop; don?t be like the Rockefellers and want just a little bit more.?

There are five row crop challenges for the upcoming planting season Johnson believes. The first being global economic uncertainty and price volatility. Next farmers will be haunted by variable crop yields and uncertain farm financiers. Farmers need to consider pre-harvest crop marketing strategies and also the new crop insurance products available this year. Johnson also advises to pre-pay expenses but know who you are dealing with and make sure they are a reputable business. The ultimate goal is to grow your operation.

Risk management is a major facet of farming and Johnson told the farmers crop insurance is a very successful tool to use to protect a farmer?s investment of time and money. There are some changes this year in the crop insurance program which will make it do an even better job of protecting a farmer?s crop. All crop insurance will be converted to revenue protection instead of yield protection and this will give the farmer more bang for his buck. Also crop hail insurance has its place in a planting strategy and he encourages farmers to understand what all the policies can do for them.

A farmer is right on schedule if he has completed fall tillage and fertilizer application; developed a 2010 income tax strategy; sold 2010 crop from storage; developed a cash flow for 2011; purchased spring fuel and fertilizer; and, finalized 2011 crop input decisions. If he has used his cash flow to drive his marketing strategies, he should be able to take care of the land, machinery and tax payments and finalizing the 2011 crop insurance decisions in March will keep him on track for next season?s crop. That?s controlling the controllables.

Keep in mind, Johnson said, when crop prices go up, up goes the cost. Fertilizer costs are already expected to be higher so he recommends booking fertilizer now. Profit margin is at a record high and after a year like this one, there is an attraction to grow more corn.? He also advises to watch cash rent prices and also real estate prices. A recent land sale in Sioux County in Iowa saw the land go for $13,900 an acre.

?There is debt in Europe, inflation in China, mad men in Iran and North Korea,? said Johnson. ?Don?t worry about it. You can?t change it. The market price has some volatility, at least 20-30 cents a day so selling smaller quantities on a regular basis will be very helpful in reaching your goal.?