BAY STREET-Pressure on Canada’s ag sector may be short-lived

* Grain, oilseed futures down sharply in 2010

* Some ag equities weaken, but downside seen limited

* Developing world demand supports long-term fundamentals

By Rod Nickel

WINNIPEG, Manitoba, Jan 31 (BestGrowthStock) – A plunge in grain
prices to start 2010 has pressured shares of some Canadian
agricultural companies, but the pullback may be short-lived
given the industry’s strong long-term fundamentals.

Analysts said the multi-year trend of improving diets in
populous, developing countries like China and India remains
intact, suggesting investors may find opportunities after
recent price drops in the sector.

“It becomes a great buying opportunity. This doesn’t change
our view on anything … in the interim, there’s going to be
ups and downs,” said Robert Winslow, an analyst for Wellington
West Capital Markets.

The Toronto-based analyst thinks grain prices could still
drift lower this year, taking agricultural equities with them.
But underlying bullish fundamentals should result in higher
grain prices — and better performance by those stocks — a
year from now, he said.

U.S. ag futures plunged in January, with Chicago corn (Cc1: )
down 14 percent and wheat (Wc1: ) and soybeans (Sc1: ) falling 12
percent as of Friday, mostly on projections for big supplies.

That pressure has spilled onto markets for Canada’s two
biggest crops, spring wheat and canola, with ICE Canada canola
futures (RSc1: ) down about 8 percent.

The performance of Canadian ag companies that do everything
from handling grain to selling machinery is linked closely to
the prices farmers collect for their crops.

Saskatchewan-based Viterra Inc (VT.TO: ), which became a
global grain handling giant with last year’s acquisition of
Australia’s ABB Grain, reported a small fourth-quarter loss on
Jan. 21, with its stock off nearly 12 percent from its recent
high, partly because commodity prices have weakened.

BMO Capital Markets analyst Kenneth Zaslow said in a note
to clients that the year ahead looks to be challenging as
Viterra deals with lower grain prices, absorbs ABB and handles
a smaller Canadian crop.

While demand in developing countries keeps the longer-term
outlook bright, some farmers may not be able to ride out a
lengthy grain price slide, said Brian Wittal, an agriculture
analyst with Pro Com Marketing.

A Reuters poll showed analysts expect big global grain
production and a rebound in South American soybean output will
keep pressure on Chicago corn, soybean and wheat futures
through the end of 2010. [ID:nN27185921]

Still, many agriculture-related equities are trading on the
multi-year outlook, supported by the belief that as booming
populations in the developing world prosper, they will eat more
meat from grain-fed livestock.

“(A lower grain price) doesn’t mean the year is a complete
writeoff by any means, but it definitely puts a negative slant
on things,” said Jason Zandberg, an analyst with PI Financial
Corp, who thinks grain prices will be flat if not higher by
autumn.

One of the companies Zandberg covers, auger and grain bin
manufacturer Ag Growth International Inc (AFN.TO: ), should see
most of its growth internationally, he said. Its shares and
those of farm machinery dealer Cervus Equipment Corp (CVL.V: )
gained value in January, while the stock of machinery seller
Rocky Mountain Dealerships Inc (RME.TO: ) slipped.

Cervus and Rocky Mountain did well in 2009 as farmers tried
to minimize their taxes by offsetting big crops with machinery
purchases. But both Zandberg and Wittal noted sustained
weakness in grain prices would hurt the sector.

“Anyone that’s trying to sell iron to farmers is certainly
going to find it a lot tougher, just because, if guys were
planning on having a little disposable income based on crop
values, that’s disappearing pretty fast,” Wittal said.

POTENTIAL WINNERS

Hemisphere GPS (HEM.TO: ), a Calgary, Alberta-based maker of
satellite technology used by farmers to precisely manage their
land, is Winslow’s top agriculture pick for 2010 for its
long-term prospects. But Hemisphere’s global positioning
systems are a “luxury good” that wouldn’t be among farmers’
first purchases even after a good year, he notes, so it’s not
so much a short-term consideration.

Investors looking for a near-term winner from weaker grain
prices may want to consider pork processor Maple Leaf Foods.
(MFI.TO: ), although its shares slipped in January.

Cheaper grain can weigh down hog prices (LHc1: ) since
farmers may sell for less if their costs are lower, said
analyst Robert Gibson of Octagon Capital Corp. If Maple Leaf
can buy hogs more cheaply, its profit margins will grow,
assuming retail pork prices don’t fall as quickly, he said.

The overall outlook for Maple Leaf looks “fantastic,”
mainly because its last two years were so poor following a
costly meat recall in 2008, Gibson said.

Stocks

(Editing by Jeffrey Hodgson and Rob Wilson)

BAY STREET-Pressure on Canada’s ag sector may be short-lived