Are You Missing the Agriculture Boom?

Amid all the talk over housing prices falling, banks taking huge write-offs, and credit markets acting goofy, it was pretty easy to miss the boom that's been going on in the agricultural sector. That's right, we're taking it back to the farm.

To be sure, farming isn't what it used to be, and technological advances have affected the industry in a profound way. Providing specialty chemicals to farmers is big business, and that hasn't been missed by big chemical players like DuPont (NYSE: DD  ) . However, even more traditional mineral fertilizers made from phosphates and potash have been bringing home the bacon recently.

With that in mind, I tuned into the tags for fertilizer and agricultural chemicals on The Motley Fool's CAPS service to see which ag-related stocks CAPS players thought were the best bets.

Company

Market Cap

1-Year Performance

CAPS Rating (out of 5)

The Mosaic Company (NYSE: MOS  )

$40.4 billion

328%

****

Terra Industries (NYSE: TRA  )

$3.9 billion

212%

****

ShengdaTech (Nasdaq: SDTH  )

$609 million

139%

*****

Agrium (NYSE: AGU  )

$8.1 billion

80%

****

Syngenta (NYSE: SYT  )

$24 billion

33%

*****

Data from CAPS and Yahoo! Finance as of Jan. 24.

CAPS players obviously think that all of these companies will be winners, but to get some more color, I decided to drill down on Mosaic to see what investors have been saying.

Mosaic's 2007: a work of art
So how does a company that produces and markets "concentrated phosphate and potash crop nutrients for the global agriculture industry" end up skyrocketing the way Mosaic has over the past year? Well, you can start with the company delivering killer financial results. Add to that the fact that the entire industry has been scoring big when just about everybody else is shooting air-balls, and you can almost guarantee a big influx of investor cash.

The three most important nutrients when it comes to farming are potassium, phosphorus, and nitrogen, and Mosaic is the largest global producer of phosphate fertilizer and the third-largest producer of potash -- a potassium-based mineral that's mined for use in fertilizer. As food prices have soared recently and farmers have scrambled to cash in, the mineral-based fertilizers that Mosaic sells have been a cash cow. Between Mosaic's fiscal 2004 and 2007, revenue has increased more than 140% while EBIT margins (earnings before interest and taxes) have jumped from 3.2% to more than 10% -- and both top- and bottom-line numbers have further accelerated since the company wrapped up fiscal 2007 back in May.

Though the push toward more ethanol production has played a significant part in the boom, it's not the only driver. CAPS All-Star and Mosaic bull AeroFool noted another major piece of the puzzle last July:

Food price inflation will emerge around the world based on China and India adding protein to their diet. The giant new middle classes will create sustained demand. Supply will simply not keep up with demand over the long term. Agricultural stocks stand to benefit.

While some, like AeroFool, deem the recent run as the result of a global megatrend in the ag business, others are convinced that it's just another cycle that will come back to Earth at some point. Either way, it may not be a bad idea to at least put a few high-quality agriculture stocks like Mosaic on your radar.

Have some thoughts of your own on the agriculture industry? Head over to CAPS and join the 82,000 investors that are already rating thousands of stocks.

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  • Report this Comment On September 18, 2008, at 8:43 PM, gamma65 wrote:

    The equity and bond markets have benefited from a long period of low inflation, but ongoing and massive central bank liquidity injections point to a far less benign environment of elevated inflation ahead. Research by Agcapita Farmland Investment Partnership (Calgary, Canada based agriculture private equity firm) shows investors must be prepared to rotate into asset classes with different characteristics.

    During the last commodity bull market & high inflation period in the 1970’s, equities materially underperformed farmland. Western Canadian farmland went from around $100/acre to $550/acre (550% total return and 176% in inflation adjusted terms), cash held in a money market account barely kept ahead of inflation (6% inflation adjusted return) and the S&P 500 index returned less than 2% per year (a loss of almost 50% in inflation in adjusted terms)

    I believe the world is still in the early stages of this current commodity bull market. When agriculture commodities prices are compared against their previous inflation adjusted highs they are significantly discounted implying scope for further increases:

     Corn is US$ 5/bushel currently compared to US$16/bushel in 1974,

     Wheat is US$ 7/bushel currently compared to US$27/bushel in 1974

     Canadian farmland is C$ 660/acre currently compared to C$1,100/acre in 1981

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