U.S. farm shares mixed after June crop report

CHICAGO (Reuters) - Shares of U.S. farm suppliers and processors were mixed on Wednesday after the government released its latest forecast for key U.S. grain crop prices and yields as well as expected export and stockpile levels.

In many ways, the report from the U.S. Department of Agriculture was bullish for farmers -- and potentially bad news for processors and consumers.

The agency raised its estimate for farm-gate corn, soybean and wheat prices, citing a number of factors including the continued increase in ethanol production and a rainy spring in the U.S. Midwest, which was expected to lower corn yields.

But Wall Street analysts expressed some doubt that the price gains would reverse a general slide in farm income, which is under pressure after reaching record high last year.

Andrew Casey, an analyst at Wachovia Capital Markets, estimated the USDA report implied row crop cash flow, which is expected to fall 2 percent in the current marketing year due to lower harvests, would drop another 1 percent next year.

Since ag equipment sales and farm income are highly correlated, that is not good news for sales of the tractors, harvesters and sprayers made by Deere & Co (DE.N), the world's largest maker of farm equipment, and rivals CHN Global NV (CNH.N) and Agco Corp (AGCO.N).

"Generally, equipment demand follows cash flow trends," Casey said in a note, "suggesting equipment demand will likely continue to erode well into 2010."

Deere was down 92 cents, or about 2 percent, at $45.02 at midday, while CNH and Agco were each down about 1.3 percent.

The projected rise in grain prices, potentially bad news for livestock producers and others further along the food chain, didn't seem to rattle shares of big processors and exporters like Archer Daniel Midland Co (ADM.N), General Mills Inc (GIS.N) and Bunge Ltd (BG.N), which all rose after the report even though their input costs now stand to increase in the coming year.

Ann Duignan, an analyst at JP Morgan, speculated that investors were betting that cattle, hog, poultry and dairy farmers in the "protein sector" will react to the higher feed prices by cutting back on the size of their herds and flocks.

"Grain rises, protein sector gets destroyed -- then no demand for grain," Duignan said.

But fertilizer producers, basic inputs for grain farmers, rallied with Mosaic (MOS.N) up 51 cents at $54.24, about 1 percent, and Potash Corp (POT.TO) (POT.N) up 15 cents at $115.70.

Meat producers, including Smithfield Foods Inc (SFD.N) and Tyson Foods Inc (TSI.N), fell as investors bet that they these processors would be hit the worst as feed and live animal prices work higher. Their margins look to be squeezed because consumers hit by recession will resist higher retail meat prices.

In its report, the USDA predicted livestock feeders would have less than a two-week supply of soybeans, barely enough to keep running, when the fall harvest begins.

It also said the corn market faces a similar squeeze in 2010 from a ripple effect of a rainy Midwest spring that delayed plantings and will reduce this year's corn harvest.

Corn and soybeans are widely used in livestock rations and in an array of foods, besides serving as raw materials for biofuels. They are also among the largest U.S. farm exports.

Smithfield was down 48 cents at $11.68 and Tyson down 53 cents or 4.16 percent, both about 4 percent.

(Additional reporting by Chuck Abbott; Editing by Steve Orlofsky)