Agricultural Commodities Still in Early Stages

You really have to hand it to Chief Strategists Don Coxe [BMO], Byron Wien (Pequot), and Jeffrey Saut (Raymond James) for accurately calling agricultural commodities higher during the last year.

Back in October, in his investment letter, Jeffrey Saut called for continued strength in the agricultural commodities due to the demand from China.

Unsurprisingly, China is importing nearly 13% of all the soybeans grown in the U.S. to feed its livestock and continues to "throw" cash at its farmers in an effort to produce more meat for Chinese consumption. And that cash flow has caused the U.S. Agriculture Department to estimate that net farm incomes in this country will soar by nearly 50% this year with an attendant increase in demand for farm equipment, irrigation equipment, fertilizer, seeds, etc. Ladies and gentlemen, this theme should have long legs as 3 billion new entrants (read: people) join the world's economy and per capita incomes rise. While some of the "easy money" for investors has already been made from our recommendations, we think there is still room for additional investment returns. Clearly, there are numerous individual agricultural stocks for participants' consideration (see recommendations from our previous missives and/or our research correspondents), but a broader-based approach for most investors is likely the best strategy. To this point, we embrace investment vehicles like MK Vectors Agribusiness ETF (MOO), as well as other open-end and closed-end investment funds.

During the early summer, following his sabbatical trip to India, Don Coxe also made a powerful case for agricultural commodities (Basic Points, June 07) as a result of his call for food inflation due to the 600-million strong middle-class demand from India and China, and emerging markets in general.

…What happened with meat, eggs and milk was what had happened with oil— the assumption that those billions of people in China and India don't really matter much to us, except in terms of giving us cheap goods and services. That they could be raising our cost of living by driving up the cost of what we eat, and how we heat—that's a bizarre idea…

…What BHP's Chip Goodyear calls the supercycle for energy and metals has been joined by a supercycle in grains…

…So we weren't surprised when the same savants (1) failed to predict soaring grain prices, and then, (2) blamed them on ethanol…

…We now know that when a major Midwest crop failure occurs, it will be the global food equivalent of an Al Qaeda bomb strike that shuts down Saudi Arabian oil production for months.

Coming at a time of a worldwide shortage of feed grains and wheat, it will send food inflation to peaks not seen since 1974. The force of those shock waves would trigger food riots across the world and topple some precarious Third World governments. It will send food inflation to peaks not seen since 1974…

From June 15, 2007 Investment Recommendations:

3. The most attractive stock group now is companies which benefi t from food price infl ation—such as meat packers and supermarkets—and those who help farmers to boost outputs, including the feed and seed companies, and the farm machinery manufacturers. The least attractive in the food sector is the ethanol producers. Being permanently short corn is being under permanent stress.

Recently quoted in Rob Carrick's Globe article, down on the farm is where market growth is heading, Don Coxe says,

This is not a situation that has been overhyped. Quite the contrary, and it's still in the early stages.

Mr. Coxe said the agricultural story at its simplest level can be explained as another 600 million people, minimum, being added over the next 10 years to the list of those who have a diet something like what we in the West enjoy. Companies that help satisfy this demand for food have already benefited, and will continue to do so.

This isn't like saying you should buy this company because they have a really hot product that is going to be a big fad for the next two or three years.

Byron Wien called agricultural commodities higher in his 2007 predictions back in 2006.

Rob Carrick writes:

Increases in demand for food are outpacing supply, which in turn has resulted in high levels of food inflation. A U.S. government inflation report issued last month showed that the rate of increase in food prices had more than doubled over the previous 12 months and reached a 25-year high. Wheat and soybean prices rose close to 80 per cent last year, and corn hit an 11-year high.

If you're heavily invested in commodities of any kind, the question you have to ask yourself is how much more upside there is. Prices for base metals like copper and zinc have been in a down trend for the past several months as expectations of a global economic slowdown grow. Oil prices would also be affected if economic activity slackens, but there's a geopolitical component to energy prices that makes forecasting difficult.

This brings us to agricultural commodities, which are more immune to economic cycles because of basic supply-and-demand factors like global population growth and declines in the amount of cultivated land. It's true that agricultural stocks are like food commodity prices in that they've soared in the past year, but one expert in the field says retail investors should not be scared to jump in.

Carrick mentions these picks of the agriculture segment:

Stocks and their 12-month return

• AG Growth Income Fund [AFN.UN-T]; 144.8%
• Agrium (AGU); 97.7%
• CNH Global (CHN); 144.9%
• Deere & Co. (DE); 97.3%
• Monsanto (MON); 137.0%
• Mosaic (MOS); 361.3%
• Potash Corp. (POT); 163.2%
• Saskatchewan Wheat Pool [VT-T]; 49.4%
• Terra Nitrogen (TNH); 399.4%

ETFs and their 12-month return

• Claymore Global Agriculture ETF [COW-T]; 8.6%
• PowerShares DB Agriculture Fund (DBA); 38.3%
• Market Vectors Agribusiness ETF (MOO); 39.6%

By the way, Mr. Coxe recommends being overweight, even going as far as to "hoard" agriculture related stocks.

Disclosure: none

Comments

[sunrises]

Mon is excellent yet pricey to buy. Is it expected to have a pullback back to approx $100?

[sunrises]

Correction...will Mon have a pullback to low 90s? Other stocks have significantly pulled back.

[sunrises]

actually missed the chance to buy at the affordable range. Just would be valuable to have.