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for ag suppliers the good times are rolling

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    For agricultural suppliers, good times already rolling

    By PHILIP BRASHER • Register Washington Bureau • February 21, 2008

    Richard Benda wraps a pallet of seed corn Wednesday at a Pioneer Hi-Bred warehouse in Toledo. The strong farm economy has meant profitability for agribusinesses such as Pioneer. Its worldwide seed sales rose 40 percent in the final quarter of 2007.

    Washington, D.C. - Farmers aren't the only ones making money off the run-up in commodity prices. Companies that sell things to farmers, everything from fertilizer to seed to tractors, are reporting healthy profits, too.

    Terra Industries, a major fertilizer supplier based in Sioux City, recently reported that its fourth-quarter 2007 profit jumped by six times over the year before.

    Deere & Co. - which makes tractors, harvesters and other farm equipment in Ankeny, Waterloo, Ottumwa and Dubuque - reported record quarterly earnings. Agricultural equipment sales were up 33 percent.

    The company could benefit further from the $168 billion economic stimulus package. A provision will allow farmers to write off the value of their equipment sooner and let them keep a greater portion of last year's record income to spend on new machinery.

    Last week, Monsanto Co. raised its 2008 earnings estimate by 8 percent because of strong seed and herbicide sales.

    The list of agribusiness winners goes on to include names such as Dow and DuPont, parent of Johnston-based Pioneer Hi-Bred.

    "Following a very strong 2007, 2008 is shaping up to be a spectacular year" for agricultural suppliers, Goldman Sachs analysts wrote last week in a report headlined: "Let the good times roll!"

    A worker moves seed Wednesday at a Pioneer warehouse in Toledo. The seed will be shipped to sales representatives and then distributed to farmers. The farm economy boom is so strong that only a depression could derail it, says one fertilizer company CEO.

    The analysts say the industry's "tremendous fundamentals" are unusual in the current economic slowdown.

    Prices for corn, soybeans and other commodities have doubled over the past two years, and that means farmers can afford to pay more for seed and chemicals and buy new equipment. Crop insurers also make more money because premiums paid by farmers rise along with the price of the crop being covered.

    The economic impact on Iowa of the agribusiness boom will vary, said David Swenson, an Iowa State University economist.

    To the extent that companies are simply charging farmers higher prices, the extra income will flow to investors and won't stay in the state. But local economies do benefit when farmers buy more chemicals and other inputs than they used to, he said. Every $10 million in new input sales supports 325 jobs, producing $7.4 million in income, he said.

    Economists are forecasting commodity prices to remain well above traditional levels well into the next decade.

    The U.S. Department of Agriculture estimates that net cash farm income nationwide will hit a record $96.6 billion this year - up 10 percent from last year and 40 percent from 2006 - even with the higher prices of fertilizer, seed and other inputs being charged by companies like Terra and Monsanto.

    Terra's ammonia fertilizer sold for an average of $333 a ton in 2007, up from $315 the year before.

    Citigroup estimates Terra's 2008 earnings will reach $3.71 per share, up from $2.45 for 2007, and hit $4.11 in 2009.

    "This is a market that's just reacted to the fundamental supply and demand changes, and that's basically driven by the grain demand that's driven the fertilizer prices up," said Joe Ewing, vice president of investor relations and human resources for Terra.

    A few farmers have even tried to lock in their fertilizer prices for 2009, said Ewing, even though this year's crop isn't in the ground yet. DuPont's agriculture and nutrition business, which includes Pioneer Hi-Bred, is predicting double-digit earnings growth through 2012 because of the strong farm economy and DuPont's new seed and pesticide products.

    Pioneer's worldwide seed sales were up 40 percent in the last quarter of 2007. Pioneer hopes to begin selling biotech corn seed in Brazil next year.

    "It's a great time for agriculture," Erik Fyrwald, group vice president of DuPont agriculture and nutrition, said at a Feb. 12 conference sponsored by Goldman Sachs.

    At Pioneer rival Monsanto, 2007 was "absolutely spectacular," said Brett Begemann, executive vice president of the St. Louis-based company.

    As corn becomes more valuable, farmers have shown they will pay more for the biotech varieties produced by Pioneer, Monsanto and other companies that are protected against yield-robbing insects and immune to herbicides.

    This year, 90 percent of the corn seed Pioneer will sell will be genetically engineered to make the plants either resistant to insects or immune to herbicides or both. That's up from 75 percent last year.

    Prices for types of Monsanto seed that have two biotech traits rose 25 percent last year. Triple-trait seed prices rose 15 percent to 20 percent. Monsanto officials say they try to price their seed according to what they determine to be its value to farmers. That takes into account the savings in insecticide, increased crop yields and higher commodity prices. "Typically, Monsanto looks to capture a third of that value," said spokeswoman Danielle Jany.

    Bill Doyle, chief executive of fertilizer giant Potash Corp., said agriculture is facing a long-term boom that could be derailed only by a depression. The boom is being driven not by biofuel production so much as by growth in China, India and other countries, he said.

    "It's a demographic switch that we've never seen before. We've always had lots of people, but we didn't have people with money in their pockets," he said.

    Even with the higher prices for fertilizer, seed and other inputs, farmers are still making more money.

    A farmer planting corn or soybeans this year would earn up to $500 or more per acre after the cost of seed, chemicals, insurance and fuel is deducted. That's up to five times what the crops returned in 2005, according to a Goldman Sachs analysis.

    Farmers are willing to pay more for inputs when their crop is more valuable, said Ron Litterer of Greene, president of the National Corn Growers Association.

    "You're going to try to optimize yield because you have a crop that's worth more," he said. "Because the crop is so valuable, you add on some fungicide costs that you maybe wouldn't have done in the past. All of these things are market-driven."
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