Fast Money's First Trade for Monday No. 3 - Amber Waves of Pain
Agriculture trade is plunging amid the commodity selloff. Shares of fertilizer firms are down more than 20% from record highs in June. Deere shares are down a quarter this year ahead of earnings Wednesday. Is this pain in the agricultural sector short- or long-term?
The government is releasing crop production data at 8:30am Tue, which is expected to show first yield and production estimates for this year's corn and soybean crops. Corn and soybean futures fell today on expectations that the report will show a bumper crop. Agricultural equipment maker Deere's shares are also down 25% ahead of earnings next Wed.
Fast Money Farmer Roger Neshem, who owns and operates a 7,500-acre farm in North Dakota, where he grows grains like wheat, soybean, corn, canola and dry peas, calls in with his experience of the current agricultural sector. Dylan asks Neshem if he has taken steps to grow less crops that rely on fertilizer and simultaneously seeing a price decline, like corn and wheat.
Neshem responds that while fertilizer firms like Potash and Monsanto have dropped in the last month, fertilizer prices haven't followed yet, and farmers' margins have been squeezed by those high prices for a while now, especially now that the price of corn and wheat are dropping as well. He plans to plant food this year that isn't heavily fertilizer-reliant, such as soybean, which has a lower input cost.
Neshem explains that in the past, farmers would order X amount of fertilizer from their sources in the fall for spring planting, but now they get quotes from sellers starting as early as mid-July, and if they agree to the price, they need to pay for it immediately.
Dylan asks what percent he sees his farm cutting back on fertilizer consumption for the remainder of the this year, going into the next. To increase his margins, Neshem plans to cut back his acres of wheat by 20% and use that land for soybeans and dry peas instead -- both which don't require fertilizer.
Most farmers are in the same position, according to Neshem, who tells of a Corn Belt farmer acquaintance who also is looking at decreased margins and is "scared to sell corn right now" due to uncertainty of the price of fertilizer in the near-term. He calls it a game of "cat and mouse" -- deciding the amount of more profitable (but fertilizer-dependent) crops like wheat and corn to grow versus less valuable crops that don't rely on fertilizer. "It's going to be tough this coming year."
Macke's last word is that Potash and like firms can't sustain their growth by taking "every incremental dollar" from farmers that depend on their product.
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On Aug 7, 2008, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders: Macke Owns (WMT) (COST) (DIS) (MSFT) (EMC); Adami Owns (AGU) (C) (BTU) (GS) (INTC) (MSFT) (NUE); Karabell Owns (FMCN) (AAPL) (AGU) (GOOG) (JPM) (GLD) (SLB); Finerman's Firm Is Short (IYR) (IJR) (MDY) (SPY) (IWM) (XLF) (BBT) (COF); Finerman's Firm And Finerman Own (C) Leaps; Finerman Owns (GS); Finerman's Firm Owns (MSFT) (SUN) (TSO) (VLO); Finerman's Firm Owns (ANF) And (ANF) Call Spreads; Gartman Is Short (TAP) (TM) (MA); Gartman Owns (AFFY) (FLO) (PLL) (IBM) (HOG) (SDS); Gartman Owns (ANDE) And Is Short (ADM); Gartman Owns (QQQQ) And Is Short (TLT); CIBC Gartman Index Owns Copper, Aluminum, Wheat, Corn, Soybean, Natural Gas, 10yr Canadian Bond, Australian Dollar; CIBC Gartman Index Is Short Crude Oil, Sugar, Euro; Roger Neshem Has A Business Relationship With Monsanto; Roger Neshem Owns (DE). PRE-PRODUCED: Finerman Owned (CSCO) On 7/14/08, Finerman's Firm Owned (ANF) Call Spreads On 8/5/08, 8/6/08, Macke Owned (INTC) On 7/10/08.