Agriculture Stocks Still Make Sense, When Selected Wisely

Friday morning we got some disappointing news about slowing sales at Caterpillar (CAT). There's been a softening of orders in new machinery / equipment tied to global infrastructure and agriculture, which has led the company to slash costs and forecasts.

Earlier this month, we heard a similar story from Deere (DE), which has seen orders for agricultural equipment drop sharply.

You might be tempted to conclude that weak orders for agricultural machinery equates to a weak outlook for "ag" as an industry. It doesn't. You just need to pick your spots.

My checks of farmer demand indicate that, while uncertainty about the global economy remains a concern, farmers still need to grow their crops. To get the most from their crops, demand for nutrients, chemicals and fertilizer remains very high. Suppliers I've checked in with are very happy about orders for the coming season.

My two favorite nutrient/fertilizer plays here are Potash (POT) and Agrium (AGU) -- with trailing enterprise-value-to-EBITDA ratios of under 6 times and 4 times respectively. Both should see their stocks rise over the summer as results come in.

I also mentioned AgFeed (FEED) last week, a favorite Chinese small-cap of mine, selling pork in that market -- it's up about 20% since my mention last Thursday.

Ag makes sense. You just have to realize that not all in the space are created equal at this stage in the cycle.

Comments

[legohead:]

so let me get this straight. we have the potential of a massive epidemic of swine flu and you are suggesting ag-related stocks today? and even to mention a company dealing with pigs?

the industry could release whatever statements they like regarding the safety of pork, but fear is what counts. ag-stocks and FEED will come under trmendous pressure if this crisis continues to mount. i wouldn't be surprised if there's a significant initial plunge today.

Apr 27 07:01 AM

[goldrush:]

Traders want FEED to plunge today for only one reason............Profit!
Eric you are right on point. Food is one of the cornerstones in this market. Buy FEED.

Apr 27 08:24 AM

[G:]

selling pork in that market -- it's up about 20% since my mention last Thursday.

Hope ya locked in your profit Friday!

Apr 27 08:51 AM

[Mad Hedge F...:]

It's a great long term play. Pack your portfolios with agricultural plays like Potash (POT), Mosaic (MOS), and Agrium (AGU) if Dr. Paul Ehrlich is just partially right about the impending collapse in the world’s food supply. You might even throw in long positions in wheat, corn, soybeans, and rice. The never dull, and often controversial Stanford biology professor told me he expects that global warming is leading to significant changes in world weather patterns that will cause droughts in some of the largest food producing areas, causing massive famines. Food prices will skyrocket, and billions could die. At greatest risk are the big rice producing areas in South Asia, which depend on glacial run off from the Himalayas. If the glaciers melt, this will be gone. California faces a similar problem if the Sierra snowpack disappears. Rising sea levels displacing 500 million people in low lying coastal areas is another big problem. One of the 77 year old professor’s early books “The Population Bomb” was required reading for me in college in 1970, and I used to drive up from Los Angeles to hear his lectures (followed by the obligatory side trip to the Haight-Ashbury). Other big risks to the economy are the threat of a third world nuclear war caused by population pressures, and global plagues facilitated by a widespread growth of intercontinental transportation and globalization. And I won’t get into the threat of a giant solar flare frying our electrical grid. “Super consumption” in the US needs to be reined in where the population is growing the fastest. If the world adopts an American standard of living, we need four more Earths to supply the needed natural resources. We need to raise the price of all forms of carbon, preferably through taxes, but cap and trade will work too. Population control is the answer to all of these problems, which is best achieved by giving women an education, jobs, and rights, and has already worked well in Europe and Japan. All sobering food for thought.

Apr 27 04:39 PM

[daveddawg:]

If people don't buy pork, then they will buy chicken or beef. Either way, the farmer still sells his crop.
With the rising populations, we are approaching infinite demand, met by finite supply. Only fertilizers will provide the "juice" to drive up crop yields. If farmers are worried about crop prices, then don't plant! If they plant, the only smart decision is to fertilize. In for a penny, in for a pound.

Apr 27 06:50 PM

[crofin:]

here some ideas:
translate.google.ch/tr...

original article: blog.crottaz-finance.c...

Apr 28 05:12 AM

[trick:]

Agree on the agricultural thematic, however why you would want to be in terrible stocks like CAT and DE I don't know. They're excessively geared and the expected earnings for the current and next year are in a continuous downward slide at the moment. The recent rally is a selling opportunity. One real quality agricultural stock in the US is Monsanto. Just take a look at what the price was at its SP high and what the expected earnings were at that time for 09+10. Now what are the expected EPS for 09+10? I find that they have not deteriorated at all, they have actually improved! Further, MON has great financial strength with very low gearing, which is reflected in its very low Credit Default Swaps level.

Apr 30 05:15 PM

[T. Marc Sch...:]

Ag has tons of potential. Like the article said, Deere has seen sharp drops in equipment sales. Creighton University puts out a great monthly index of Rural Mainstreet. This last month showed that banks are finally giving out more loans in these small, agricultural based, communities. Also, it confirms farm equipment sales haven't risen much since last fall. The good news is that these towns have hope in the near future because their confidence index has finally risen.

Here's a link to a blog that talks about this Rural Mainstreet Index: farmlandforecast.colvi...

May 07 11:00 AM