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Drought alert: Take profits in agriculture

A farmer poses with a handful of corn kernels in DeWitt, Iowa July 12, 2012. In Iowa, the top U.S. corn-growing state, about 13 percent of the state is now in severe drought, with the worst-hit areas in the east-central section and southeastern corner of the state.

ADREES LATIF/REUTERS

U.S. producer prices were released this morning well ahead of expectations at 0.1 per cent. A feed-driven surge in the price of meat was a major driver of the upside surprise, highlighting drought conditions in North America that have caused a sharp spike in corn prices.

Drought conditions in the U.S. Midwest have reached dire proportions, raising comparisons with 1988 when lack of rain decimated the North American corn crop and pushed the commodity price higher by 130 per cent between February and June. Corn prices have already jumped 35 per cent in 2012, causing economist Barry Ritholz of Fusion Analytics to recommend reducing positions in corn futures and fertilizer stocks.

In a report released Friday, Mr. Ritholz predicts that "the news likely doesn't get much worse than this [which] also suggests corn prices may be getting toppy here." He notes the historically high correlation between fertilizer stocks and corn prices, concluding that they "could be vulnerable in any weak tape," advice with clear implications for Canadian investors in Potash and Agrium.

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Headlines like today's "Corn Belt prays for rain to rescue crops" at agprogessional.com illustrate the extent of poor crop conditions. The U.S. Department of Agriculture has already reduced corn yield expectations by 20 bushels per acre and, in a recent panel discussion at the Chicago Mercantile Exchange experts reported soil moisture levels at the lowest since 1895.

Mr. Ritholz was among the first with a bullish call on corn and agriculture stocks which affords him the luxury of taking profits now, and risk leaving money on the table. He remains optimistic regarding soy prices in the short term, and recommends Agrium for longer term investors.

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About the Author
Market Strategist

Scott Barlow is The Globe's in-house market strategist. He is a 20-year veteran of Canadian investment banks, including Merrill Lynch Canada, CIBC Wood Gundy and Macquarie Private Wealth (MPW). He was a highly ranked mutual fund analyst for 10 years and then, most recently, the head of a financial adviser support team at MPW. More

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