Agricultural stocks feeling the heat

MELBOURNE - Shares of GrainCorp, AWB and other agricultural stocks in Australia, the world's second-largest shipper of wheat and beef, may decline should drought-easing rain not fall across the eastern states in the next month.

Above-average rainfall isn't likely between now and August, the Commonwealth Bureau of Meteorology said last month. Sixty-three per cent of New South Wales, Australia's second-largest wheat-growing state, slipped into drought in May.

Shares of Sydney-based GrainCorp, eastern Australia's biggest grain handler, have declined 11 per cent this year amid concern spreading drought will cut earnings. The drought and rainfall outlook may prompt Australia's Government commodity forecaster to trim its wheat output forecast this month.

A prolonged drought is "going to be reflected in the pricing of these stocks," Craig James, chief equities economist with the Commonwealth Bank of Australia, said from Sydney.

"Investors aren't going to wait for the companies to declare their hand. They're going to be looking fairly carefully" at the weather patterns, he said.

An El Nino-induced drought in 2002, the nation's worst in 100 years, slashed Australia's wheat crop by more than half, reducing earnings for companies including Melbourne-based AWB, Australia's monopoly wheat exporter, and GrainCorp.

The ideal time for crop-planting has passed and prospects for average grain yields will worsen each week that sowing is delayed, said Malcolm Bartholomaeus, an analyst with Callum Downs Commodity News in Clare, South Australia.

Shares of AWB fell 11c to A$4.37. The stock has slumped 29 per cent this year amid an inquiry into allegations of kickbacks to the former regime of Saddam Hussein.

- BLOOMBERG