Agribusiness stocks lag on oil drop

Oil prices are falling, which might be bad news for U.S. farmers and agribusiness firms because of their growing dependence on selling biofuels.

Traditionally, a drop in petroleum prices would mean that farmers paid less to grow their crops, helping boost production and increase supplies for big corporations like Archer-Daniels-Midland Co. More crops also meant higher demand for seeds and other herbicides from the likes of Monsanto Co.

But the growing market for biofuels means that dropping energy prices can pull the rug out from under the agricultural sector. Demand for fuels like ethanol has pushed corn prices to near-record highs this year. But if oil gets cheaper, ethanol might lose its status as rock star of the energy world, and corn prices could drop.

"The agricultural sector and the energy sector are much more closely tied than they have been before," said Pat Westoff, research associate professor with the Food and Agricultural Policy Research Institute in Columbia, Mo.

That close tie might help explain a sharp drop-off of agricultural stocks over the last week. Shares for Monsanto and ADM began to plunge last week, days before a global sell-off sparked fears on Wall Street. Ethanol stocks have also dropped this week while oil prices fell.

Westoff and other analysts said its unclear exactly what caused the drop in agribusiness stocks. The market is still fluctuating wildly and specific reasons behind any stock's fall might not be know for some time. But the impact on farming companies has been clear.

Monsanto's stock, which reached record-highs this year, lost roughly 14 percent of its value over the last week of trading, falling from just over $122 a share last week to close at $104.49 Wednesday. The stock had fallen as much as 22 percent before a late afternoon rally Wednesday.

ADM's stock dropped nearly 8 percent in the same period from $44.50 to $39.40.

Both stocks declined more than the Dow Jones Industrial average, which fell just over 2 percent in that period. The index was down as much as 5 percent Wednesday before the rally, which boosted it nearly 300 points to 12,270.17.

Monsanto spokesman Lee Quarles declined to comment on the stock price's drop, saying its the company policy not to speculate on short-term market fluctuations. ADM spokesman David Weintraub declined to comment for the same reason.

Monsanto and ADM weren't the only farm-related companies affected. Market Vectors Agribusiness Exchange Traded Fund — an investment fund that specializes in agribusiness firms — has seen its value drop nearly 14 percent over the last week. Fund managers declined to comment Wednesday.

The drop in agricultural stocks is corresponding with a drop in alternative fuel and ethanol stocks.

Pacific Ethanol Inc. dropped 18 percent over the last week to close at $5.31 Wednesday, Verenium Corp. dropped 6 percent to $3.93, and BioFuel Energy Corp. fell about 1 percent to $6.39 although it had been down as much as 7 percent Wednesday.

Analysts seemed caught of guard by the drop in agribusiness stocks — many were praising Monsanto's and Market Vectors' stock just a week ago.

But corn farmer Keith Witt wasn't all that surprised.

"I'm sure not no stockbroker," Witt said from his farm in Warrenton, Mo. "It's just ... we're extremely vulnerable."

Witt said the economic pressure on farmers is enormous this winter. Demand for ethanol has pushed corn prices more than $4.50 a bushel higher, which could surpass record-highs set in the mid-1990s if prices don't drop.

But costs have been surging as well, Witt said. Anhydrous ammonia, a critical fertilizer, has jumped from $270 a ton two years ago to roughly $785 a ton this spring.

"When your inputs triple, and what you're selling less than doubles or close to it, it's not nearly as appealing," Witt said. "We're just swapping dollars."

If cheaper oil reduces demand for ethanol, and a drop in demand for corn brings the price down, Witt said farming will quickly become unprofitable.

Such concerns were reflected in a negative report on Monsanto Co. last week from UBS analysts Chris Shaw and Joe Dewhurst.

While the analysts praised the company's long term prospects, they advised investors to sell the stock because more farmers like Witt might switch from growing corn to soy beans partly due to rising fertilizer costs.

Because selling corn seeds is more profitable for Monsanto, the switch could cut into the firm's bottom line, according the note.

Witt said he's not switching to soy beans, but he's not expecting a bang-up year either.

"The gross dollars are large — we're handling a lot of money. But when it's all said and done, we're not going to keep any of it at the end of the year," he said.