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 months.
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 to rise.
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 (NYSE: DE) 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. dollar.
Agrium (NYSE: AGU) 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.
CF Industries Holdings (NYSE: CF) 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.
Syngenta AG (NYSE: SYT) 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 infestations.
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 best.