Investing in Agricultural Stocks

In 2007 and the first half of 2008, agricultural stocks were some of the best performing stocks. Since the summer of 2008, these stocks have declined more than 50% in most cases. Some of the reasons for the spike and then decline in these stocks are due to the ethanol mandate imposed by President Bush. At the time, oil was over $140 per barrel and everyone was looking for alternative energy sources. So with oil now down to around $40 per barrel, are agricultural stocks a good investment for the future? I believe they are, not because of the ethanol mandate which President Obama is against, but because of the worldwide food shortage. The agricultural stocks you should focus on are the ones that help increase food production. These include Potash Corp. (NYSE: POT), Monsanto (NYSE: MON) and Terra Nitrogen (NYSE: TNH).

Potash Corp. engages in the production and sale fertilizers and related industrial feed products in North America. Potash manufactures and sells solid and liquid phosphate fertilizers, animal feed supplements, and industrial acid, which is used in food products and industrial processes. Their main customers include retailers, distributors, and other fertilizer producers. This stock reached its 52-week high of $241 per share in June of 2008 and has since dropped all the way to only $65 per share. Fundamentally, this stock is expensive on an earnings growth basis as it is estimated to only have earnings growth on 3.5% over the next five years, compared to its 83% earnings growth over the previous five years. Despite this, I expect their earnings expectations to be revised up on account of the global food shortage issue. I do not expect this stock to turn around before the economy improves, but if you can afford to wait; this could be a very profitable stock over the long run.

Monsanto is a company that focuses on improving the agricultural industry by developing seed products that assist farmers in controlling insects and weeds, as well as developing see using biotechnology traits that help farmers produce more food. Monsanto generally sells its products through retailers, distributors, and directly to farmers. Monsanto reached its 52-week high of $145 in the summer of 2008 as well, and like Potash, it has declined all the way to $70 per share. Unlike Potash, this company still has a very solid long term growth rate of 15% which makes this stock cheap on an earnings growth basis.

Lastly, Terra Nitrogen is the one agricultural stock that has held up decently over the last 6 months despite the decline in the overall market. This is mainly due to Terra Nitrogen’s 9.8% dividend yield which gives the stock downward protection. Since this company operates as a Master Limited Partnership, it is required to distribute its cash flow to it shareholders to avoid paying tax penalties. This is very beneficial to share holders because as long as the company has a positive cash flow, it is guaranteed to pay a high dividend yield. Like its peers, this company engages in the production and distribution of nitrogen based fertilizer products and agricultural products to industrial markets. This is the safest of the agricultural stocks because of the dividend, so if you are a more conservative investor this is the stock for you.

Generally speaking, these stocks will not turn around until the rest of the market does. With that said, this sectors long term growth prospects continue to be positive because of the global food shortage. Farmers will be called upon to grow more grain and corn products, and these fertilizer and seed companies will directly benefit from this, and if President Obama decides to invest money in ethanol as an alternative form of energy, expect these stocks to fly, but I wouldn’t count on the latter.