Agriculture-based investments, or “ag stocks,” have been getting the short end of the stick since the beginning of 2015. Declining prices of fertilizers and farming nutrients have left raw material producers no room to make a profit. Record lows in terms of food price deflation further exacerbated matters as farmers searched for ways to skimp on costs. With consumers not picking up the slack, the entire supply chain for ag stocks looks grim.
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It’s not as if there were no warning signs. One of the primary reasons why ag stocks had a rough 2015 was China. With the world’s second-biggest economy and number one fertilizer importer slowing to a 6.9% growth rate, suppliers were left hanging.
In turn, demand for domestically produced crops tumbled. International indices — especially the Shanghai Stock Exchange Composite Index — were volatile at the beginning of this year, signaling that relief would be slow to come for ag stocks.
However, it’s an equally dangerous proposition to be permanently bearish on the agricultural industry. At the most basic level, we all need to eat. Another inescapable reality — there’s way more of us than there’s ever been in history. By the year 2040, the global population will balloon to 9 billion — a 29% increase over the current tally. Somebody has to feed them, and that’s why an investment in an ag stock doesn’t seem like a far-fetched idea.
Another point of optimism for ag stocks is speculation that the worst is over for the fertilizer markets. The spot price for key agricultural materials such as potassium chloride (muriate of potash) and diammonium phosphate has absorbed brutal hits. Potash specifically has seen a 44% drop over the last five years, while DAP has shed a similar amount over six years. However, the universal importance of these fertilizer components means that the bearishness can’t last indefinitely.
There’s no doubt that it has been a tough challenge for any ag stock to navigate. But with every crisis comes an opportunity. As we look to close off a very eventful 2016, here are three ag stocks that could surprise in the new year.
3 Ag Stocks to Buy: Scotts Miracle-Gro Co (SMG)
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Just like its name suggests, Scotts Miracle-Gro Co (NYSE:SMG) engineered its own miraculous growth in the markets. Around mid-February of this year, SMG looked like any other ag stock — that is to say, not very well.
Shares of the gardening and fertilizer manufacturer looked to be under pressure from broader economic concerns. But a pair of earnings beats in the second and third quarters of fiscal year 2016 affirmed investors’ confidence, sending SMG soaring.
You can’t argue with performance, and that’s the position Scotts Miracle-Gro is fortunately in. Year-to-date, SMG is up over 36%, making it one of the top investments among ag stocks. Shares have also spent a majority of its time this year above the 50- and 200-day moving averages. That tells you that this is no fly-by-night ag stock, or that shares are bouncing from a one-off news item.
Despite the big jump, investors can reasonably expect a brighter future for SMG in 2017. First, the company is steadily improving upon already solid fundamentals. Second, Scotts is taking a page out of the ag stock playbook and joining forces on key markets. It’s also very acquisitive, buying up both international and domestic companies in a bid to expand its sales reach. Finally, the specter of a recovery in fertilizer prices would be icing on the cake.
Ag stocks might not be the first sector on everyone’s mind, but SMG is one name that you do not want to ignore!
3 Ag Stocks to Buy: Potash Corporation of Saskatchewan (USA) (POT)
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The recovery in fertilizer prices can’t come soon enough for heavily-embattled Potash Corporation of Saskatchewan (USA) (NYSE:POT). POT is one ag stock that lives and dies by commodity valuations.
Company shares unsurprisingly hold a high 80% correlation with the potash market dating back to 1990. Even more remarkable, POT has a 90% correlation with DAP pricing. Wherever the smelly stuff goes, POT will follow.
Fortunately, things appear to be looking up for ag stocks. Between April through September of this year, monthly losses in the DAP spot price averaged 1%. In the six-month period prior to April, losses averaged 4%. Subsequently, POT stock is also down roughly 4% YTD. That doesn’t sound like much, and I’m not trying to make it a bigger deal than it is. However, it’s a dramatic improvement from the 49% decapitation that POT endured in 2015.
Admittedly, ag stocks still stand on shaky ground. The problems affecting the industry are not going to disappear overnight. But in addition to the slowing decline of fertilizers, I think the proposed merger between POT and Agrium Inc. (USA) (NYSE:AGU) makes a lot of sense for both parties. It’s an opportunity to join forces and make the most out of a challenging circumstance. It frankly is also a matter of necessity, a lesson the airline industry has taken to heart.
POT definitely leans on the speculative side, but with share prices hitting multi-year lows, it’s a bet worth looking into.
3 Ag Stocks to Buy: Sociedad Quimica y Minera de Chile (ADR) (SQM)
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I’m a big fan of Chile as an investment opportunity. Among Latin American countries, it has one of the most stable financial infrastructures and is very much open to foreign trade.
Best of all, the country is blessed with an abundance of natural resources. Chile is a nation that I believe is on the rise, and ag stock investors in particular should take note — Sociedad Quimica y Minera de Chile (ADR) (NYSE:SQM) is kicking butt and taking names.
SQM stormed the markets this year by gaining over 56% YTD. While that figure is impressive in and of itself, what separates Sociedad from other screamers is that the growth has been consistently robust. For example, in the trailing three months, SQM is up nearly 19%. In my opinion, it’s a safer road to buy a high-momentum stock that’s trending in a clearly defined bullish channel as opposed to riding a reactionary story.
The best part is that I don’t think Sociedad is done here. Yes, the company has a lithium mining business that has supported them through the downturn in ag stocks. However, SQM is highly levered towards fertilizer prices. Since October 1993, Sociedad shares have a 72% and 76% correlation with DAP and potash prices, respectively. That implies that as fertilizers begin their recovery, we could see huge markups in stock valuations.
Because SQM was trading at $52 in early 2013, the possibilities of a lucrative 2017 will have investors putting Sociedad on their wish list.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
