3 Ag Stocks to Buy Now
David is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
While the agricultural industry has historically suffered from low margins and intense competition, the future looks bright with supplies recovering from a trough. Below, I review several producers that I am bullish about ahead of a full recovery.
At around 11x past earnings, Mosaic is slightly cheaper than Potash, which operates in roughly the same market. While the South Forte Meade case has lowered the market's confidence in Mosaic delivering quick results, management is still suggesting a bright future through billion dollar share repurchases. Going forward, the company's main catalyst will be potash, which has been overly beaten down by surplus levels. Alongside, of course, Potash, the company runs a virtual monopoly in this agricultural resource. In the meanwhile, volatility in sulfur and ammonia inputs will be relatively tame as phosphate rock assets remain under low costs. Furthermore, high crop prices will keep fertilizer sales elevated.
According to Morningstar, "Mosaic's potash business is more attractive than its phosphate business," since potash ultimately has "higher barriers to entry" and "benefits from less government control." Mosaic has decided to cut production of potash to produce equilibrium pricing where supply appropriately meets demand; but, it still anticipates an above-average North American application season with record shipments this year. As the analyst correctly notes, planted acreage will be robust this year and create demand for Mosaic's products.
Ultimately, I encourage buying shares alongside a position in Potash. The agricultural producer had a poor end to last year as dealers cut back inventories to hedge against a weak economic outlook. As a result, it has had to cut volumes by quite a bit. These cuts have made prices "sticky" at high levels, so Potash will be well positioned to generate abnormally large profits during a full recovery in the farm market.
Monsanto (NYSE: MON)
Monsanto is a possible investment alternative to Mosaic and Potash. This ag producer has a strong future in South America where demand for planted corn acreage is anticipated to be strong. According to Morgan Stanley, Monsanto is penetrating higher margin markets. Seed shortages in Brazil and Argentina will meanwhile keep prices attractive for extraordinary economic returns.
The perception of corn shortages over the last two weak harvests and a desire to acquire exact trait packages may, claims Morgan Stanley, result in domestic farmers buying more seeds this year. It should be further noted that farmers have delayed pre-payment of fertilizers and minimized operational costs given the weak macro outlook, so the wave of inevitable growth has yet to be appreciated by the market.
And then there are the positive secular trends in the food market. As the economy moves towards full employment, demand beyond basic food staples will increase and drive volumes in fertilizers. I encourage buying a stake in the world's most specialized seed developer to profit from this momentum.
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