How to Play Rising Soft Commodity Prices

Includes: AGCO, AGU, BG, CF, DE, MON, MOS
by: John Henderson

By Tom Henderson

I had my usual bagel and coffee this morning, but could not help think that the cost of my daily breakfast could soon go up. The coffee shop that I buy my breakfast from buys its bagels and pastries from a bakeshop. I imagine that when the baker passes the higher wheat prices onto the coffee shop owner, it will then get passed along to me.

As a consumer and market participant, how can I participate if wheat prices move higher? Wheat prices have moved up over 90% over the past couple of months. These prices may be fleeting (especially if you read about the various amounts of wheat in storage and a slow economy), but what if prices hold? And if wheat prices continue to move higher, then the move could extend into the rest of the agriculture commodity sector and there might be ways to profit.

Aside from the direct play with the commodities markets and the agriculture ETFs, there are other ways to play this. I will start with two:

  1. The Farm Equipment Makers:

If the wheat commodity rally continues or it spreads into the other “soft” commodities, then the farm equipment makers could see further improvement in orders. In the group are Deere (NYSE:DE), and AGCO (NYSE:AG). AGCO is the purest play for a farm equipment maker.

EPS average estimates for 2010 are about $1.98 (according to Yahoo Finance). With the stock at 36, AGCO has a forward PE of around 18. Deere has a substantial part of their business in agriculture too. Its estimates for 2010 are for EPS of $4.15. With the stock at 67.50, its forward PE is around 16.

  1. The Agriculture Chemical Companies That Help Farmers Produce Crops:

Companies like Agrium (NYSE:AGU), Bunge (NYSE:BG), CF Industries (NYSE:CF), Monsanto (NYSE:MON) and Mosaic (NYSE:MOS) could benefit from higher soft commodities.

Agrium sells nutrients to help grow crops. EPS estimates are for $4.58 for 2010. With the stock at 66.32, the forward PE is 14.5.

Bunge has a fertilizer business which could be very beneficial in an agriculture boom. BG earnings estimates are for $4.08 in 2010. With the stock at $55, the forward PE is then 13.50.

CF Industries could be an interesting way to play an increase in grain prices because it provides fertilizer to grain producers in the Midwest. CF’s ESP estimates are for $7.52 for 2010. With the shares at $85.31, the forward PE is a little above 11.

Monsanto, as most are familiar with, provides seeds for farmers. It is one of the goliaths in the industry. EPS estimates for 2010 (fiscal year ending August) are for $2.49. With the shares at 60, the PE is around 24.

Lastly, Mosaic sells crop nutrients. EPS estimates for 2010 are for $0.94 for (fiscal year ending November 2010). With the stock at $51.29, the PE is over 50.

Those are a few ways to play a potential move higher in agriculture prices. The market participant should look at this list as a start for further research. I only skimmed the surface here with this thesis and other plays may emerge in the future. The firm has recommended foreign stocks in the agriculture space but none of these stocks above so far. We will be watching wheat, the “soft” commodities, and these shares closely in the weeks ahead.

Disclosure: No positions

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