While many of us here in the United States are focusing on
economic recovery, much of the rest of the world is concerned
about more basic needs - like food. In fact, the world is reeling
from a food price shock, aka, food inflation, which was
exasperated after the U.S. Department Agriculture (USDA)
surprised traders by cutting their forecasts for key crops, which
sent corn and soybean prices to their highest level in 30
Specifically, the USDA said corn inventories are expected to
decline 5.5% this year to the lowest level in 15 years. Corn is
used to make ethanol, which is causing gasoline prices to rise
and is an important ingredient in animal feed, so meat prices are
rising. The United Nations Food and Agriculture Organization
recently warned the world could see another food crisis as grain
prices rise further.
Although rice prices, which spurred the last food crisis in
2008, are stable, high grain prices, especially corn, soybeans
and wheat, have already caused riots in Algeria and Mozambique.
In emerging economies, food is a larger portion of spending than
it is in developed countries, and that is why people in emerging
countries feel the pinch the most when prices rise. India
reported on Friday that their wholesale prices rose to an annual
rate of 8.43% in December, up from 7.48% in November.
On Thursday, the Labor Department reported that wholesale
prices soared 1.1% in December as the Producer Price Index (PPI)
rose 1.1%, which was significantly higher than economists'
expectations. Baked into the increase was a 0.8% increase in
wholesale food prices with vegetable prices rising a whopping
22.8% as freezing conditions sent prices soaring. Excluding food
and energy, the core PPI rose only 0.2% in December, but in the
past 12 months, the PPI has risen 4%, with the core PPI rising
1.3%, so clearly higher food and energy costs are emerging as a
threat that might curtail worldwide economic growth.
As you can see, there is clearly a supply and demand issue at
work here. Emerging markets have made great strides in recent
years, and it has been shown that as people move up into the
middle class their protein intake increases. With higher demand
and lower production due to environmental issues prices are going
So, as an investor, how should you play this trend? I say the
answer is not to become a commodities trader speculating on the
price of pork bellies, corn or orange juice. The way to safely
make your money is to play the equipment, fertilizer or seeds
that grow the food by buying agriculture stocks. Prices there are
rising as well, and are far less volatile. Here are a few ag
stocks that I like right now and one that I don't.
Deere & Company
) is the world's largest farm equipment manufacturer and a
leading producer of construction, forestry and commercial and
residential lawn care equipment. Unlike in Eastern Europe, where
wheat production has slowed, U.S. crops have surged in the past
several months. Currently, the country is producing a record
number of crop exports. The higher demand for crops is leading to
a greater need for farm equipment.
Although agriculture only accounts for about 1% of the U.S.
economy, the actual impact of surging prices could be 10 times
greater once spending on equipment, seeds, grain handling and
food processing is calculated. This is why Deere & Co. stands
to capitalize on high agricultural commodity prices. I see this
as a great way to play the overall trend in higher food prices
that is developing, along with the decline in the U.S.
) is a major producer and marketer of fertilizers in North
America. The company operates plants in Argentina, Canada and the
United States that produce mostly nitrogen, as well as potash and
phosphate products. These plants have the capacity to produce
more than 8 million tons of the nutrients per year. In addition
to supplying wholesalers, Agrium operates more than 826 retail
outlets in the United States and South America. The company has
had trouble in recent quarters living up to analyst expectations,
so if the company meets or beats in its next report, this could
be a runaway winner.
) is a regional agricultural firm that manufactures and markets
nitrogenous and phosphate fertilizers. The company operates a
network of manufacturing and distribution facilities, primarily
in the Midwest. It's a no-brainer when it comes to understanding
why fertilizer companies are doing so well right now. CF is a
go-to company when farmers need to boost crop yields to meet the
global demand for food.
CF has had some of the same issues as AGU when it comes to
earnings, but the company has seen improving fundamentals over
the past six months, and looks like shares will continue their
march higher in the coming months.
) produces crop protection products (insecticides, herbicides,
fungicides), field crop seeds (soybeans), vegetable seeds (corn,
beans, tomatoes) and flowers. Syngenta's seeds are particularly
valuable because they have been genetically engineered to resist
While all of this sounds good, I would not recommend buying
the stock right now. The stock has been on a decent run since
July, but with deteriorating earnings growth, buying pressure and
other problems with fundamentals, this company is a hold at