7 Ways to Play This Hot Sector

The Food and Agricultural Organization of the United Nations (FAO) estimates that about 1.02 billion people are undernourished as of 2009 -- the highest amount since 1970. The global crisis of 2008 certainly didn't help, as remittances, aid, and foreign direct investment all decreased rapidly, leaving many of the world's poor without food or peripheral options.

According to the World Bank, "Over the 1981 to 2007 period, the share of net aid flows to developing countries has become negative for Latin America and for East Asia, and it has declined substantially for South Asia."

Investment in agricultural must increase in the next few decades if we expect this trend to reverse -- it worked in the 1970s and 1980s -- and there are certain ramifications for global businesses considering the magnitude of investment needed.

Mainly, who's going to profit from all this investment?

Here's a place to start
With over a billion people, the second largest GDP in the world but the 128th worst GDP per capita, China seems a likely recipient of not only aid, but major direct investment as the country attempts to increase domestic consumption, reduce poverty, and urbanize the workforce.

In fact, agricultural productivity is going to be an integral part of the success of China's economy for years to come. More than 300 million people are tied to the sector, and about 12% of the country's output is derived from some sort of agricultural process.

The Chinese government has made agriculture a major priority. The government's first official policy document of 2010 has said that its goal was to coordinate development between rural and urban areas. Agricultural development will undoubtedly play a huge role. In 2009 their official document stated that its theme was "achieving steady agricultural development and sustained income increases for farmers." In 2008 it was "fortifying the foundation of agriculture."

So we've established that agricultural innovation and production is a definitive solution to worldwide poverty, and that massive amounts of capital will be spent in China in order to bridge the gap between rural and urban areas of the country. How, as an investor, can you take advantage of the opportunities out there?

I screened for agricultural companies that were either based in China or have substantial growth opportunities in China, that traded for a forward P/E of less than 15, and that was rated by our 165,000 strong CAPS community with four or five stars. Here are six of the results:

Companies	Industry/Sector	Forward P/E	CAPS Rating (out of 5)
Yonge International (Nasdaq: YONG  )	Agricultural Chemicals	4.71	****
China Green Agriculture (NYSE: CGA  )	Agricultural Chemicals	6.27	*****
AgFeed Industries (Nasdaq: FEED  )	Processed & Packaged Goods	7.58	*****
Archer Daniels Midland (NYSE: ADM  )	Farm Products	9.22	****
Syngenta (NYSE: SYT  )	Agricultural Chemicals	12.92	*****
Caterpillar (NYSE: CAT  )	Farm and Construction Machinery	13.60	****

*Yahoo Finance; Motley Fool CAPS.

Rolling the dice in China
Yonge, China Green, and AgFeed Industries are all Chinese-based companies. Yonge specializes particularly in an organic fertilizer called Shengmingsu, a product that enhances the use of other fertilizers and makes crops grow at a faster pace. Yonge has relationships with over 9,000 stores and is set to quadruple its production capacity -- accordingly, analysts see this all-star growing at a 38% clip per year, for the next five years.

China Green also sells fertilizers and has about 130 products that it sells to private wholesalers. Not only has the company been able to rapidly increase sales over the last few years, but it's also been able to boost its operating margins from an already impressive 37% in 2005 to 50% today.

AgFeed isn't in fertilizers -- it sells premix and concentrated hog feed in addition to actually raising and breeding the hogs themselves. In the latest quarter, revenue jumped by 58% as a result of expanding market share in both lines of its business. With a solid balance sheet, a mounting presence in various provinces, and projected 5-year growth above 30%, AgFeed is a solid food play in China.

Some safety in familiar names
Archer, Syngenta, and Caterpillar are all indirect ways to invest in the Chinese market. Archer Daniels recently invested $100 million in the Agricultural Bank of China -- CEO Patricia Woertz said that "China's agricultural market is growing in both supply and demand and represents significant growth opportunities for ADM."

Syngenta has major processing and R&D plants in China, of which includes the important Syngenta Biotech plant that looks at genetically modified traits in corn, soybean, and rice. Most of the increase in recent Asia-Pacific sales has come from places such as China, Vietnam, and Indonesia.

As a maker of farm equipment, Caterpillar has stated that one of its major goals is to expand into China. It has eight manufacturing facilities in China and has signed joint ventures with Chinese firms to remanufacture engine parts for its equipment. In particular, infrastructure spending and increased credit in the Chinese market has helped Caterpillar increase the delivery of its products.

For investors that believe there's money to be made in the future of agriculture, but aren't sold on any one specific company, there are ETF's that offer broad exposure. For instance, check out Market Vectors Agribusiness ETF (NYSE: MOO  ) or the PowerShares DB Agriculture ETF.

The Foolish bottom line
China is the world's largest fertilizer market. The government has repeatedly said that its main priority is to integrate rural and urban areas, and that a major source of this integration will come from the development of agriculture.

Whether you choose to purchase Chinese stocks or invest more broadly, this is one sector that has the potential to outperform for the long-run. I suggest getting in while you can.

Have an opinion on any of the stocks above or think it's too late to get in the market? Sound off in the comment section below!