With global debt fears, market instability, and a whole host of conditions striking fear into the hearts of investors, there has to be somewhere to put your money, right? Struggling governments might reduce spending on infrastructure, corporations struggling might hold back on capital spending, and the average person will hold off on any luxury purchases. One thing people still need to buy is food. With some current food shortages, and predictions that say it will only get worse given a world population growth rate at 78 million per year, agriculture companies are in a prime position to both increase production and increase prices. Below I detail a few of the better known companies and note which are potential buys, and which ones should be avoided.
Monsanto Company (NYSE:MON): Shares were trading around $77.63 at the time of this writing; just a dollar shy of their 52-week high and well above their 52-week low of $58.89. Monsanto recently surprised experts by reporting an EPS of $0.23 when everyone was expecting something in the $0.16 area. This also caused a recent increase in the stock price. I think Monsanto is a little expensive at this point and should just be a hold. If it dips back to below $75 add slowly, and if it gets back to the $70 range it’s a steal. Monsanto also offers a small dividend around 1.55%, which will probably stay flat while it is working on growth and expansion into the lower Americas. According to Monsanto’s most recent conference call, it has some significant growth and trade expansion in international markets. The promising growth in international markets should ease fears of anyone that is long Monsanto because of the large potential for increased sales to these markets. Even if things in the U.S. flat line or decrease slightly, Monsanto should be able to more than make up for it through growth in Latin and South America. Other areas should see growth too as the Earth’s population continues to grow and the demand for food become greater.
Mosaic Company (NYSE:MOS): Shares were trading around $52.67 at the time of this writing; well below their 52-week high of $89.24 and slightly above their 52-week low of $44.86. Mosaic to me is a much larger gamble. Its CEO noted during their most recent conference call that Mosaic is expecting a 3rd quarter rate decline because of macroeconomic uncertainty. One would think though, that with a pending global food shortage, farmers should be buying as much fertilizer as possible to boost their crop production to meet global demand. Mosaic offers a small 0.40% dividend, and with shares so far below their 52-week high, it has been buying some back. It is an interesting play; I think the Q3 decline is already priced into the stock. The current price is actually well below many analysts’ low targets for the stock. And those same analysts have targets near the $100 mark. I am still concerned because of the vagueness of the term used by the CEO of “macroeconomic uncertainty.” Everyone needs to eat regardless of job situation. To me that means a farmer that wants to make a bigger profit will buy just enough fertilizer to make sure he has a profitable yield and won’t buy extra to try for more. If you own it already, hold on and see what happens, if you want to roll the dice buy in now, I’m going to wait another quarter and see what happens.
Agrium Inc (NYSE:AGU): Shares were trading around $70 at the time of this writing; well below their 52-week high of $99.14 but just above their 52-week low of $60.15. Agrium offers a small dividend around 0.64%. Agrium is heavily tied to the U.S. farming economy. 88% of its revenues are from U.S. markets. This could spell doom for Agrium if the U.S. doesn’t start to recover in a timely fashion. This also presents Agrium with huge growth opportunities. Analysts are expecting a slight decrease in EPS on a slight increase in revenues for 2012. It is currently working on a plant to expand production by 50%, which should be completed sometime in 2014. I think that Agrium needs to look at growing its international customer base to secure a revenue stream that is less tied to the U.S. In addition, many analysts have them ranked number three behind Mosaic and Potash, both of which have much bigger international revenue streams. If you’re looking to buy in this industry, do it with MOS or POT. If you’re already in AGU, get out.
Potash Corporation (NYSE:POT): Shares were trading around $41.68 at the time of this writing; well below their 52-week high of around $64 and just above their 52-week low of $38.42. Potash also offers a small 0.67% dividend. Potash is another of the fertilizer companies that is looking at an expansion. Potash is working on its mines; despite a recent closure of several facilities for a few weeks. Potash and all the players are estimating a record year for potash demand. Recently Potash has been dropped from many fund portfolios, some analysts have issued warnings about earnings declining, basically lots of not so positive looking things for Potash. Despite that Potash sells mined raw materials to other companies like MOS. Potash is $2 above analysts low target and it has a potential upside of $34/share. I think the companies in this group are right, with the large food shortages, farmers need to produce more crops. The only way to do that is to buy fertilizer. Especially as farms grow and move into areas were soils need extra nutrients. Potash will win twice because it will sell raw materials to other companies as well as produce their own products to put to market. Potash is a top play if you’re looking to buy a stock in this industry.
Deere & Company (NYSE:DE): Shares were trading around $82.24 at the time of this writing; under their 52-week high of $99.80 but above their 52-week low of $59.92. Deere offers a 1.99% dividend. Deere is a different play in the agriculture industry because they are equipment. Deere wouldn’t necessarily see such a large order increase when the other companies in this article would. Deere would see an order increase in expanding markets as new farms open to meet increases demand for crops. Deere is also a concern because it mainly deals in farming heavy machinery; it doesn’t have any exposure into anything else such as cranes for building or trucks for mining. Deere does have security because international markets make up nearly half of its revenues, so it is not solely dependent on U.S. customers. Another concern is the global debt crisis; Deere’s machines aren’t usually something that can be purchased with cash. If lenders are being tight and stricter about who they lend money too, farm owners could be denied loans, or decide to repair existing equipment in lieu of new purchases.
Overall the agriculture market is a stable market because every human and animal on Earth will always need to eat. Especially as we need to grow more crops in areas that aren’t exceptionally suitable for crops and have to add fertilizer to make the soil suitable. I think Mosaic and Potash are the best two companies if you’re looking for an agriculture stock.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.