Agricultural Stocks are in Play

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March 30 is a big day for farmers, commodity traders and grain prices all over the world. That is the day the USDA releases the prospective planting report, which will effect futures prices for corn, soybeans and other grains. There is more clarity in this report than the prior estimate just a few months back. Weather has been a major issue so far this year especially in South America where crop plantings have been slow to start. The spring planting season is the biggest of the year for farmers and as crop estimates for corn continue to decline the price for the commodity firms up.

Demand for corn is robust for several reasons -- a growing population, changing diets (more meat, chicken which requires feed) and ethanol (especially from China). A general number is about 1 million bushels a month of supply, but with the demand about that much that leaves little room for error. If the report Friday shows less acreage then corn prices will shoot through the roof, beans may follow. It may be a good time to look into buying futures on these grains.

Sometimes it is difficult to put two and two together, but in this case it's not so hard. Farmers will plant as the yield gets better (upwards of 3%) and it becomes profitable to grow the crops. Fertilizer helps the growth and is a critical input. Crop estimates started high and have been coming down somewhat keeping the price of grains elevated. Once the figures are known from the planting we can extrapolate futures prices. Weather is always the wildcard -- one big storm can wipe out entire crops and leave the supply chain damaged.

Fertilizer stocks are still sitting quiet, waiting for the moment. Last week China struck a fertilizer deal for the remainder of 2012 at a flat $470 per MT, a good price but certainly better than many expected. Now we have India, which I suspect once again will be paying up for its needs. If corn and bean prices do rise farmers will have no choice but to plant to get the good yield -- fertilizer is a critical input. Recently, the Indian Government decided to play the waiting game -- a dangerous one considering demand around the world is still strong (they did this last year and paid a hefty price for it). I believe it's still a matter of when and not if for names like Mosaic (MOS), Potash (POT) and Agrium (AGU), while nitrogen providers CF Industries (CF) and Terra Nitrogen (TNH) take advantage of the sharp rise in these prices. I still believe the back half of the year will be the time for all of these stocks to rise and become the leaders.

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At the time of publication Bob Lang held positions in MOS, POT, CF, AGU.

Bob Lang has been a private trader in equity and option markets for several years and manages separate accounts via Aztec Capital LLC. He has managed a $300 million pension and 401(k) plan for a Southern California cooperative. In early 2000, Lang started a hedge fund for private and institutional clients. This fund, Aztec Partners, was a top-performing fund that year relative to its peer group. In 2002, Lang worked with floor traders in the active bond-trading group of Countrywide Capital Markets. In May 2011, Lang launched an options trading service called Explosive Options.