Currently, strong grain prices and ever increasing food demand from emerging economies has made agriculture a potentially lucrative industry to invest in. In this article, I will show how five agriculture stocks are capitalizing off these market currents. Additionally, I will discuss how the following five companies present solid investment opportunities for 2012.
"The underlying fundamentals for the agriculture sector remain strong as crop inventory levels for most crops remain well below normal levels and in some cases are critically low," Agrium Inc. (AGU) Chief Executive Mike Wilson said in a release.
Calgary, Alberta,-based Agrium is the largest North American retailer of agriculture inputs such as seeds, nutrients and crop protection chemicals. It had a reported a 43% rise in quarterly net profit, catapulting shares up 3.3%. The company also managed to quadruple its semi-annual dividend payout recently and boasts the highest revenue in the industry at $3.2 billion. I believe this company is well positioned for growth this year as sales will increase due to an increased demand for agriculture inputs.
Coming in at a close second with $3 billion in revenue is Mosaic Company (MOS), the world's largest phosphate producer. The Minnesota-based producer and marketer of concentrated phosphate and potash crop nutrients has a very attractive 14% debt-equity ratio and trades at a comparatively reasonable $54 per share. Although analysts are saying that Potash Corp of Saskatchewan (POT) will outperform Mosiac. Potash does have a far more attractive return on equity at 39% compared to Mosaic's 22%. Trading at $47 per share with a dividend yield of 1.22%, Potash appears to me to be the better deal at the moment compared to Mosiac's $54 per share and paltry .37% dividend yield.
News that Mosiac is reportedly cutting potash production by 20% through May should have little impact on investor sentiment, though, as it is a fairly industry-wide cost-cutting measure, and one that will tighten up profit margins moving forward. In my opinion, Mosaic is in a great position heading toward 2013 as demand for concentrated phosphate and agriculture inputs increases.
The company that needs to manage its image most is $38 billion global agriculture leader Monsanto (MON), as it's had some degree of pushback from the organic food movement. This company has a generally positive reputation in investment circles and in St. Louis, where it is a top employer and benefactor to local universities. Nonetheless, it has had to spend aggressively to combat the negativity from non-agricultural circles, including a $100 million ad campaign in magazines like Atlantic Monthly, The New Yorker and New Republic to soften its image as the creator of seeds that could produce genetically modified "frankenfood."
While Monsanto has a strong quarterly growth rate at 34%, I think it's worth factoring in any valuation of the company that it has spent $6.37 million in lobbying costs and another $170,000 in political contributions during the 2011-2012 election cycle. That's a whole lot of seeds to sell to pay for policy bargaining chips. Despite its image, I believe Monsanto will continue to produce strong results going forward, due to its position as a leader in the agriculture industry where I expect demand for agriculture input products to increase.
On the opposite end of the media buzz spectrum, the leading manufacturer of nitrogen fertilizer products, Terra Nitrogen Company (TNH), might have what it takes to qualify for Warren Buffett's inner circle of stock picks. There's certainly no greater endorsement than that of the Oracle of Omaha. Even if Buffett doesn't actually purchase any shares, it is worth noting how closely Terra Nitrogen's fundamentals align with his other investments. With an amazing 198% return on equity and 0% debt-equity ratio, this company definitely warrants a closer examination by investors. I expect this company to exceed investor expectations throughout 2012 as supply of agriculture input products pushes ahead to keep up with demand.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.