The following seven agricultural equities have been steeply sold off this year based on a vortex of volatility brought on by a slew of incessant negative macroeconomic headlines from the eurozone, Middle East, China, Japan and a lack of confidence from Main Street USA based on the ever-present deleterious unemployment picture. Ironically, none of the building blocks of the “Wall of Worry” have altered the underlying dynamics which will rouse an unbelievable run in these names.
The world’s population recently surpassed seven billion people for the first time this October according to a recent report in the USA Today. Please review the following short excerpt:
This historic milestone is rekindling age-old debates over birth control, protecting natural resources and reducing consumption. It also has many wondering whether the Earth can support so many people. About half were added just in the past 40 years, and 3 billion more are expected by 2100.
Global population has swelled in record time since 1987, when it hit 5 billion. "Currently, world population is growing at the most rapid pace in history," says Carl Haub, a demographer at the Population Reference Bureau. "In 1900, we were at 1.6 billion. In 99 years, we flipped the numbers to 6.1 billion."
With depressed yields of major agricultural crops leading to tight inventory levels, seemingly snowballing inflation, and the exponential growth in population and the burgeoning emerging middle classes of India and China desiring an improvement to their current diets, the soft commodities bull case remains intact. Additionally, according to the chartist, the current correction was healthy technically. Taking these factors into account, I posit these agricultural equities will soon soar from their current shares prices based on macroeconomic, sector and company specific catalysts. These stocks have great stories and positive facilitators for future growth. However, many are trading significantly off their 52-week highs.
Current Market Backdrop
We saw an inkling of positivity in the headlines out of Europe last week regarding the eurozone sovereign debt crisis as well as the U.S. unemployment situation which triggered a rally of epic proportions. This week is a critical week for the eurozone and global markets.
If things go well, this could be your last chance to pick up these stocks at this level. If you have powder dry, this is an excellent opportunity to pick up some shares. The FOMC minutes for the two-day November meeting suggest that under current economic circumstances the Federal Reserve will have to engage in a third round of quantitative easing. The solution to the eurozone’s sovereign debt issues will inevitably lead to euro printing presses cranking up, allowing them to paper their way out of their solvency problems, which will only spur soft commodity prices even higher.
Last week was incredibly strong for the equity markets, with the S&P 500 jumping nearly 8%. The week began with a robust relief rally, spurred by news that European powers that be were deliberating the prospect for a new eurozone fiscal pact that could make budget discipline legally binding and enforceable by European establishments.
Stocks soared Wednesday after major central banks proclaimed coordinated liquidity arrangements. The S&P 500 flew 4.4% once the Fed and five other central banks decided to lower the pricing on existing provisional U.S. dollar liquidity swap arrangements by 50 basis points to ease tensions in financial marketplaces and alleviate the effects of such strains on credit supplies. While these actions do not address the fundamental solvency difficulties in Europe, they help to add liquidity. Prior to this synchronized stroke, equity futures rose after China lessened policy by reducing its Reserve Requirement Ratio by 50 bps to 21.00%. Even these developments bode well for agricultural commodity stocks.
7 Ways To Profit
My picks to play the impending inescapable soaring demand for soft commodities is as follows: Market Vectors Agribusiness ETF (NYSEARCA:MOO), Potash Corp. of Saskatchewan, Inc. (NYSE:POT), The Mosaic Company (NYSE:MOS), Monsanto Co. (NYSE:MON), Archer Daniels Midland Company (NYSE:ADM), Bunge Limited (NYSE:BG) and Caterpillar Inc. (NYSE:CAT). Please review the following chart detailing these companies’ current performance statistics followed by a brief review and highlights for each name.
Click to enlarge charts
Market Vectors Agribusiness ETF - The investment seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the DAXglobal Agribusiness Index. The fund normally invests at least 80% of total assets in equity securities of U.S. and foreign companies primarily engaged in the business of agriculture, which derive at least 50% of their total revenues from agribusiness. Such companies may include small- and medium-capitalization companies. It is non-diversified. Please review the chart below for ETF holdings details. The Market Vectors Agribusiness ETF is an easy way to gain exposure to the coming agricultural boon.
The Mosaic Company - The Mosaic Company engages in the production and marketing of concentrated phosphate- and potash-based crop nutrients for the agriculture industry worldwide.
Mosaic’s current share price is close to the lower-most boundary of the company’s five year valuation array in regards to almost all fundamental ratios to including price to earnings, book and cash flow. Please review the following chart detailing Mosaic’s current fundamental statistics.
Bunge Limited - Bunge Limited engages in the agriculture and food businesses worldwide. Its Agribusiness segment principally involves in the purchase, storage, transport, processing and sale of agricultural commodities and commodity products, including oilseeds and grains, primarily soybeans, rapeseed or canola, sunflower seed, wheat and corn.
Bunge has the lowest enterprise value to sales ratio among the companies in the agricultural products industry. EV/Sales gives investors an idea of how much it costs to buy the company's sales and the lower the ratio, the more undervalued the company is believed to be. Bunge’s EV/Sales ratio is 0.24. Bunge is also selling at book value. Please review the following chart detailing Bunge’s current fundamental statistics.
Archer-Daniels-Midland Company - Archer-Daniels-Midland Company procures, transports, stores, processes and merchandises agricultural commodities and products in the United States and internationally.
Archer-Daniels-Midland has one of the lowest enterprise value to sales ratio among the companies in the agricultural products industry with an EV/Sales ratio of 0.32 and is also selling at near book value. Please review the following chart detailing Archer-Daniels-Midland’s current fundamental statistics.
Potash Corp. of Saskatchewan, Inc. - Potash Corporation of Saskatchewan Inc. produces and sells fertilizers and related industrial and feed products primarily in the United States and Canada.
With the growing need to improve crop yield worldwide, the value fertilizer companies bring to the table will become increasingly evident across the globe. Potash is a steal selling at near book value. Please review the following chart detailing Potash’s current fundamental statistics.
Monsanto Company - Monsanto Company, together with its subsidiaries, provides agricultural products for farmers in the United States and internationally. It operates in two segments, Seeds and Genomics, and Agricultural Productivity.
Monsanto is more expensive than the other picks on the list, trading at just over two times book. But they bring a strong backlog of products and recently increased the dividend for 2012. Please review the following chart detailing Monsanto’s current fundamental statistics.
Caterpillar Inc. - Caterpillar Inc. manufactures and sells construction and mining equipment, diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives worldwide.
Cat is my pick for the obvious increasing demand of farm and mining equipment that will be needed for the increase in crop yields and to expedite mining operations. Cat is currently vastly undervalued, trading at near book value. Please review the following chart detailing Cat’s current fundamental statistics.
Additionally, the stocks are trading well below consensus analysts’ estimates and have improving financial results. Several have recent upgrades and positive analyst comments. Please use this information as a starting point for your own due diligence.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in MON, MOS, MOO, POT, ADM, BG, CAT over the next 72 hours.