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Sector Snap: Agriculture Cos.

The Associated Press

NEW YORK (AP) — The worst drought in Argentina in 40 years means that a big chunk of the world's demand for corn, wheat and soybeans will move to U.S. suppliers, an analyst said, at the same time grain prices are rising.

"The worst-case scenario in the agricultural processor universe appears to be abating," Citi Investment Research analyst David Driscoll said in a note to investors Friday.

He upgraded agribusiness company Archer Daniels Midland Co. to "Hold" from "Sell" and raised his price target on agriculture processor and fertilizer maker Bunge Ltd. to $65 from $55.

Bunge shares gained $2.94, or 5 percent, to $62.29, while Archer Daniels Midland jumped $1.69, or 6.6 percent, or to $27.54.

Earlier this month, Archer Daniels Midland said stabilizing crop prices caused its sales to sink by 21 percent and profit by 98 percent in its fiscal third quarter.

Analysts then had questioned the company's ability to post high profits such as those last year when a crush in the global food supply helped drive food prices higher.

Driscoll had downgraded Archer Daniels Midland to "Sell" in April after meeting with managment, saying his belief that "fundamental trends are deteriorating across ADM's major businesses" was confirmed.

Now, thanks to a "dramatic improvement" in profit margins of soy products, "what looked like a dismal outlook now appears more reasonable" for both Archer Daniels Midland and Bunge, he said.

Still, Driscoll said, Bunge will need to post record second-half earnings to meet its 2009 guidance.

But Argentina's woes will help the agribusiness giants. The Latin American country's severe drought means its soy crop will likely be down 26 percent, Driscoll said.

Meanwhile, the USDA says US crop supplies are tight as well, which is driving corn and soy prices higher.

Corn prices are up 16 percent, wheat up 9 percent and soy prices up 30 percent since March, he said.

Tightness in global crop supply is good for Bunge and Archer Daniels Midland, Driscoll said, as it could also create opportunities for their grain trading divisions.

Bunge's fertilizer division also stands to benefit as higher crop prices for farmers means they have more money to spend on fertilizers, Driscoll said.