Stocks That Will Benefit from the Drought

By Kevin Gill - August 10, 2012 | Tickers: BG, INGR, DD, MON, SYT | 0 Comments

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The current drought in the continental US has many in the investing community talking about the potential impacts of one of the worst farming disasters in decades. While the obvious play is in food based commodities, it is a subject of debate whether or not the most profits to be made in food futures (both crops and livestock) are already past the investor who has yet to make a move.

While the commodities themselves are moving, the drought will impact some companies in a positive way. Monsanto (NYSE: MON) is a producer of agricultural products, most notably seeds. Their genetically modified products have accomplished things like producing plants resistant to certain pests and even certain weed killers allowing farmers to destroy weeds without harming the crop plant. Expect drought resistant seeds to give MON a boost in the next year.

Commodities are used by all humans and companies. It would be tough to find even a service based company that is entirely unaffected by the world of commodities, at least indirectly. Certainly the dramatic rise in some commodities will have a negative impact on certain entities. Fast food companies may have to raise prices. Grocers could see thinner margins due to consumer belt-tightening. But some companies are in a position to benefit from commodity price increases.

Bunge Limited (NYSE: BG) is a nearly 200 year old company that deals with many facets of agriculture. The main thing to understand about BG is that 80% of its raw commodity exposure is outside of the United States. More importantly, these raw commodities are in areas where growing conditions are better than in the US so prices haven’t moved much. This will be a tremendous advantage over US-leveraged commodities dealers and leave room for much profit.

Not all companies in the food game will be hurt by rising commodity prices. On the contrary, some companies are in a very fortunate position. Ingredion (NYSE: INGR) is a corn sweetener maker that one would expect to suffer like others in the corn game. But INGR locked in its 2012 corn at 2011 prices. INGR can either boost demand with lower prices or take a nice profit by taking advantage of spiraling prices.

Syngenta (NYSE: SYT) is in a position similar to that of Monsanto. They are a producer of agricultural products including fertilizers and seeds. According to Standard and Poor’s the fertilizers and agricultural chemicals sector of stocks is among the top-performing categories this year with an 18.4% gain thus far. Compared to the S&P’s 10.5% gain, the ag chemical companies look good. SYT is near its 52-week high with a P/E of 20, but higher valuation along with nice dividends look likely.

Don’t lose sight of the fact that a year with lower food production will necessitate attempts at bumper-crop production next year to catch things back up. That means increased attempts at high production, achieved through seeds and ag chemicals. Farmers taking a hit this year will conserve money, so stay away from producers of big ticket farm items like John Deere and look instead at DuPont (NYSE: DD). DD makes just about everything, but they have some nice exposure in the ag chemical game and will benefit in a fashion similar to Monsanto and Syngenta.

Commodities aren’t the only thing increasing in value because of the drought, they are the most obvious thing benefiting from the drought. But smart money knows there are always stocks to be found that will benefit from any given situation. Since these aren’t as obvious as the commodities rising, there is still time to get into these stocks and reap rewards.

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