Don't Miss This Opportunity to Invest in Agriculture

The recent pop in the silver bubble has sent ripples through the commodities markets. Everything from gold to grain is selling off, and as the physical assets go, so too do the related businesses. But the individual investors who respond this way, especially by selling agricultural businesses, are making a mistake.

Radiating outward
Here's just a sampling of some of the companies that have been selling off since silver popped at the start of this month.

Some of these companies are directly linked to the commodities markets, like PotashCorp and Mosaic. They both sell phosphates and potash, which are commodities, though not as easily traded as, say, cotton. Deere and AGCO, on the other hand, sell tractors and should have nothing to do with the silver market, but end up connected through the web of fund linkages.

A modern-day industrial revolution
It's no secret that I'm bullish on agriculture. As the world population continues to grow and large economies like China and India grow at more than 9% annually, the need for more food and better farming technology will become more and more important. A short-term sell-off in the silver markets does not change this.

Better farm equipment will be critical. Mechanized agriculture is still relatively rare in parts of China and India, accounting for part of the reason their crop yields are lower than in the developed world. According to the Food and Agriculture Organization, there were 8.5 tractors per 1,000 hectares of arable land being used in China in 2003 and 15.8 in India, compared to 25.8 in the United States.

Deere sees the opportunity here and recently announced a plan to spend $100 million to build a new plant in northern India and expand an existing one. AGCO also recently appointed a vice president and managing director of China and India, capitalizing on the fact that while most regions reported lower sales for the company, Asia has shown 41% growth in the last two years.

But tractors aren't everything
Irrigation also plays an important role. Recently, farmland has been subjected to flooding, which is hard to cope with, but during dry years irrigation can greatly increase crop yields and keep plants healthy. Lindsay is the second biggest manufacturer of mechanized irrigation equipment, next to Valmont, but Lindsay's irrigation segment is 72% of total revenue, versus 22% for Valmont, which also manufactures street light and utility transmission poles.

However, investing in equipment manufacturers may not be the best bet. For one thing, most farm equipment has a useful life of at least several years, sometimes much longer. Once countries like China and India have enough equipment, sales are bound to slow down as farmers merely seek out replacements or the occasional upgrade.

Furthermore, farm equipment can only do so much. The United States has had essentially the same tractors-to-land ratio for most of the last 48 years, but meanwhile, crop yields have increased 185%. Some of this is because of better farming techniques, but the use of specialized chemicals plays a big part. Fertilizer use increased 252% from 1961 to 2002, and the use of insect-resistant and herbicide-tolerant genetically modified seeds, like Monsanto's Roundup Ready products, have become prevalent.

The demand for fertilizer is so great right now that import shipments are actually causing congestion in Brazil's ports, slowing its ability to export sugar. UBS recently raised its forecast for potash by 20%, citing heavy demand in Latin America and signs that India will be willing to pay more after trying to negotiate lower prices. This is good news for PotashCorp, Vale, and Mosaic. Even though potash doesn't need to be reapplied every year, these companies also essentially share the market for nitrogen and phosphate, which do need to be reapplied.

Seize the opportunity
There's a lot of growth potential for companies that will facilitate higher crop yields and keep the world fed. The recent sell-off in some of these companies is unwarranted and will make a great buying opportunity.