Thursday July 26, 2012
by Elliott Gue, editor Personal Finance
Drought now plagues roughly 56 percent of the contiguous US, the most extensive water shortage in the 12-year history of the USDA’s Drought Monitor. In the near term, weather conditions will drive the bull market for agricultural commodities.
However, the long-term outlook appears sanguine, thanks to surging meat consumption in emerging markets, epitomized by China. Here’s how to harvest profits from the coming boom in agriculture stocks.
Monsanto (MON) is the world leader in the production and development of GM seeds, designed to exhibit certain beneficial traits such as resistance to insects, herbicides and drought.
Corn is the single most important crop for Monsanto, accounting for 60 percent of its profits in the seeds and genomics business.
The US is the world’s largest producer and exporter of corn and is considered an established market for GM seeds, but there are still opportunities for growth as Monsanto releases new products.
Modern GM seeds often feature multiple beneficial traits known as stacked traits. In 2010, Monsanto introduced SmartStax, a GM corn seed that contains 8 beneficial traits, more than double the number included in any type of seed introduced prior to 2010.
In the product’s first year of availability, only 3 million of the 96 million acres planted with corn in the US used SmartStax. This year, SmartStax and two other leading Monsanto GM corn seeds are planted on more than 25 million acres.
For the third quarter of its 2012 fiscal year, Monsanto pre-released positive earnings and revenue guidance mid-quarter and then beat those raised expectations when it reported results in late June. Monsanto is a buy under $90.
Canada’s Potash Corp of Saskatchewan (POT) is the world’s largest fertilizer company. As the name implies, the firm dominates the production of potash, a fertilizer mined from ore deposits located deep underground.
Fertilizing corn acreage accounts for nearly 30 percent of global potash demand, and Potash Corp of Saskatchewan alone accounts for about one-fifth of global production capacity.
The stock pulled back last year and in early 2012 because of weak demand for potash. However, the outlook has improved markedly into the second half of this year.
Farm incomes are still solid because of rising corn and soybean prices, and producers seek to boost crop yields by any means possible, including intensive fertilization.
Over the long term, potash demand will benefit from the need to increase the annual harvest of fertilizer-intensive crops such as corn.
Further, emerging economies such as Brazil, India and China are expected to step up their fertilizer use per acre. Potash Corporation of Saskatchewan rates a buy under $65.
CF Industries (CF), the largest North American producer of nitrogen-based fertilizer, is a more direct play on surging corn prices.
Natural gas prices account for up to 90 percent of the cost of producing nitrogen-based fertilizers. US natural gas prices are by far the lowest in the world and should remain depressed over the next few years. This cost advantage gives CF Industries a considerable leg up on overseas competitors.
Corn is the most nitrogen-intensive major field crop; increased US corn acreage relative to soybeans and wheat will boost demand for the nutrient. We’re adding CF Industries to the Growth Portfolio as a buy under $220.
Deere & Co. (DE) is the world’s largest producer of farm machinery and equipment such as tractors, combines and harvesters.
The most important drivers of demand for large farm equipment are farmer’s income and access to credit. The USDA projects that US farmers’ cash receipts in 2012 will top an all-time high of $364 billion, driven by strong demand and pricing for key crops such as corn and soybeans.
At the same time, years of solid crop demand and pricing have reduced the average farmer’s debt-to-asset ratio to about 10 percent from roughly 15 percent in 1999. That makes Deere’s equipment more affordable and allows the company to offer attractive financing options through its credit arm.
Although the Illinois-based company still generates the majority of its sales from the US and Canada, the firm aims to generate more than 50 percent of sales from outside the region by 2018.
This goal is eminently doable, as farmers in emerging nations increasingly covet the company’s modern equipment and obtain the wherewithal to pay for it. Deere & Co. rates a buy under $100.
Learn more about this financial newsletter at Elliott Gue's Personal Finance.