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Ag Sector Pressured By Lower Crop Prices

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 multiyear 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 down 14 per cent and wheat and soybeans falling 12 per cent as of Jan. 29, 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 down about eight per cent.

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., 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 per cent 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 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.

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