Will the Agriculture Sector Bust?

If the definition of a bubble is a speculative, rapid run-up in price, the agriculture sector definitely has half of the definition covered. Just check out these returns:

Source: Capital IQ, a division of Standard & Poor's.

Speculative?
Whether we're in an agricultural bubble partially depends on whether we're in an energy bubble. All you have to do to get an answer is to follow the money trail. Oil goes up, which pushes development in ethanol, which pushes up corn prices, which persuades farmers to plant more, which allows agricultural facilitation suppliers to sell more of their products at higher prices.

If the price of oil comes down or the chain gets broken because investors finally realize that ethanol may not be all it's cracked up to be, expect ethanol producers such as Archer Daniels Midland (NYSE:ADM) to face even more serious headwinds than they're dealing with now.

Ag's backup plan
The seed makers have a growth plan that doesn't hinge on energy prices. Revenue growth won't be tied to the amount of land that's planted, because the seed makers will be able to increase revenue by raising prices as a result of developing seeds with increasingly high crop yields. The more of the end product that farmers can get from a seed, the higher price the seed companies can charge for the input supplies.

The development of these super seeds will come from rivals joining forces to stack multiple traits on top of one another. For instance, Monsanto and Dow Chemical have partnered to create SmartStax. Due out in 2010, this corn seed will combine both companies' weed-control and insect-protection traits into a hybrid that can produce up to 10% more corn per acre.

Where does that leave fertilizer makers and farm-equipment suppliers such as Deere (NYSE:DE) that don't have such benefits? Well, they could benefit indirectly from the seed makers' research-and-development investments. In addition to making seeds that increase yield, the seed makers are also pushing the envelope in developing seeds that can produce decent results in suboptimal conditions -- think areas prone to drought conditions or disease. Once those seeds hit the market, land in borderline areas could begin to be planted, and more planting area would benefit the entire farm-supply industry.

What's a Fool to do?
For Fools who have enjoyed the nice jump in stock price, it's tempting to say that the top of the commodity market is near and take some money off the table, if not sell out completely. But calling the top of a bull market isn't easy, and doing so could cause you to miss further escalating returns.

Here's a radical idea for long-term-thinking Fools: Do nothing. Yes, the agricultural sector may drop from its highs, but removing the growth of the commodities bull market isn't going to kill all of the growth in the industry. We all have to eat, after all, and the world's population isn't getting any smaller. It is, however, getting wealthier, and its willingness to spend more for food is rising as a result.

For Fools like me who got interested in agriculture only after the run-up in price, the choice is a little harder. If you think the commodities bull market has no end, then jump on board.

As for me, even though I love high-growth opportunities, I'm sitting this one out and will buy in after the market inevitably overreacts to grain prices stagnating or even dropping.

In either case, be prepared for a bumpy journey. The agricultural industry may be in for a roller-coaster ride, but the projection should generally be upward.