USDA Grain Report Sparks Selling

Zurich, Switzerland

The United States Department of Agriculture (USDA) released its crop estimates for June 5 yesterday. The news triggered waves of selling in the grains complex.

Corn, soybean and wheat futures all declined more than 3% on Monday. Peripheral trades in the agriculture space, including fertilizer companies and grain processors, were also hit hard.

Archer Daniels Midland (NYSE-ADM), has seen its stock price decline more than 15% since late April. I doubt ADM’s business is 15% worse since May 1st.

Though crop conditions did improve for corn, soybeans and wheat over the latest period, the bigger picture shows a marked decline in most grain segments.

Grain production is down compared to 12 months ago and in most cases, this year’s harvest is significantly below the long-term average.

The U.S. grain-belt has been plagued by dry weather in southwest and flooding in the plains this spring; this ranks as one of the worst growing seasons in years.

Global grain inventories remain at historically low levels and won’t improve much despite a better than expected Russian wheat harvest this summer. China has now begun to import American corn at a time when net supplies are declining. Corn remains the most favorable crop in 2011.

Agriculture equities, all the rave just six weeks ago, have suddenly become contrarian. Sentiment in the sector has deteriorated over the last few weeks driving stock prices to attractive levels.

The bull market in agriculture remains in its infancy; this is the time to start accumulating great companies at lower prices. Secular events, including falling water tables and volatile climate change, won’t disappear. Agriculture remains vulnerable and higher food prices are here to stay.

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