Prepare for a Bountiful Harvest

By JAY PALMER | MORE ARTICLES BY AUTHOR

Seed companies, crop producers and farm-equipment makers are poised to prosper, as food demand increases with population growth.

 

Following two years of healthy gains, farm-related stocks have yielded a bumper crop of losses. The S&P Global Agribusiness Index, which tracks shares of 24 of the world's largest agribusiness companies, has fallen more than 16% this year, while familiar names such as Archer Daniels Midland and Deere are trading at or near 52-week lows.

Investors down on the farm might want to reconsider. Agribusiness companies have been posting strong revenue and profit gains, and the long-term outlook is even brighter for industries involved in feeding a hungry and growing world. Besides, after a particularly punishing third quarter, the stocks are dirt cheap, and some, like Monsanto (ticker: MON) and Deere (DE), offer tempting dividend yields.

The bullish case for agriculture investments is based largely on demographics. According to the United Nations, the world's population is projected to rise to 9.1 billion by 2050, from 6.8 million in 2009. In addition to their expanding ranks, the planet's residents are becoming wealthier and more urban, two trends that are fueling growing demand for meat and feed crops, such as corn and soybeans.

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Curtis Parker for Barron's

The world will have 9.1 billion people by 2050, up from 6.8 billion in 2009. That's a lot more mouths to feed.

The U.N.'s Food and Agriculture Organization estimates that agricultural production will need to increase by at least 70% worldwide between now and 2050 to meet the needs of more protein-hungry populations, particularly in the developing world. That means almost a billion more tons of annual cereal production and 200 million more tons of meat. In the emerging markets alone, the FAO sees annual investments of $83 billion in agricultural production and "downstream" services such as processing and storage, not to mention billions of dollars for seeds, fertilizer, farm equipment and irrigation to coax more production from the land. By 2050, the organization forecasts, the world will have only 5% more arable land than it did at the start of this decade.

Such numbers suggest immense long-term opportunities for a wide array of companies in the U.S. and abroad. "Getting better seeds, fertilizers, water pumps and farming equipment to where it's needed is what the private sector is well suited to accomplish," says Roy Steiner, deputy director of agricultural development at the Bill and Melinda Gates Foundation, a $36 billion humanitarian institution. "Smart companies can make a difference, and make a profit."

So, too, can smart investors, whether in agribusiness stocks and exchange-traded funds or commodities and farmland. For individual investors seeking broad exposure to the market, giant commodities processors such as Bunge (BG) and Archer Daniels (ADM) might be a good place to start. A major oilseed processor and commodities trader, Bunge hit a 52-week low of 54.03 last week, and is down 22% from an April high of 76.13. (Like most farm-related shares, the stock peaked at a much higher level in 2008, at 133.) Shares are trading for a discounted 8.3 times next year's expected earnings of $6.93 a share; 0.15 times estimated 2011 sales of $54.8 billion; and 0.7 times book value. Bunge is likely to benefit from rising demand, especially for sugar. Standard & Poor's has a 12-month price target of 81.

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ADM might be an even better bet. Its shares, at 25.91, have fallen 30% from their 52-week high and are trading at levels last seen in 2006. Earnings are somewhat volatile and are expected to fall to $3.10 a share in the fiscal year ending next June 30 from $3.47 in fiscal '11. Analysts are estimating earnings of $3.39 for fiscal 2013. The shares trade for 8.4 times next year's estimated net, and about 20% of current-year sales. Some analysts see the stock returning to 35 in a year, propelled in part by rising prices for corn sweetener. ADM yields 2.5%, and Bunge, 1.7%.

Investors have been kinder to São Paulo-based BRF Brasil Foods (BRFS), Brazil's No. 1 producer and exporter of poultry, pork and beef. Its American depositary receipts are up 8.6% this year, to 18, and trade at 14.8 times next year's estimated earnings of $1.24 a share. Says Juliana Rozenbaum, an analyst at the Brazilian bank Itaú, "the long-term story supports a prolonged growth cycle." In the near term, the company could benefit from tight beef supplies.

FARM-EQUIPMENT STOCKS such as Agco (AGCO), Deere and CNH Global (CNH) offer another way to play a long-term bull market in agriculture, as well as some positive near-term trends. The companies are benefiting from overseas growth and rising farm income in the U.S., which is expected to jump 31% this year, to $103.6 billion, according to the U.S. Department of Agriculture. That's the highest level, adjusted for inflation, since 1974.

Deere, the world's largest producer of farm machinery, beat fiscal third-quarter earnings estimates and raised its full-year profit forecast for the 12 months ending Oct. 31. "All the macroeconomic trends favor us, and we are having our best year in the history of the company," Deere CEO Sam Allen recently told Barron's. "Between now and 2050, the world must double food output. The right equipment in the right place can boost yields."

Analysts expect Deere to earn $6.44 a share in fiscal '11 and $7.21 in fiscal '12, and some see the stock hitting 90 in a year, up from last week's 66.57. The shares, which peaked in April at 99.80, sell for nine times next year's forecast, and yield 2.5%. Shares of CNH and Titan International (TWI), which makes tires and wheels for farm vehicles, also have been decimated. CNH trades for 7.2 times and Titan for 7.6 times next year's estimated earnings, ratios well below those merited by the companies' expected profit growth.

Without advances in seed science, global food supplies couldn't keep pace with population growth. It's a safe bet, then, that companies such as Monsanto, Syngenta (SYT) and DuPont (DD) will play a large role in shaping agriculture's future. DuPont's Pioneer Hi-Bred division leads the world in hybrid seeds, which are cross-pollinated to include desirable traits. But hybrids' potential is dwarfed by that of genetically modified seeds, manipulated at the molecular level to be hardier and more productive.

Monsanto's Seeds and Genomics unit accounts for 73% of company revenue. "It is critically important that we improve both yield and productivity," says David Fischhoff, vice president of technology at Monsanto. The company is committed to doubling its yield in corn, soybeans and cotton by 2030 from 2000.

Gone are the days when Monsanto changed hands at 140 a share; the stock now trades for 71.29, up 2.4% for the year. Although it isn't a steal at 20.8 times estimated earnings for the August 2012 fiscal year, investors are getting double-digit profit growth and a management team focused on returning cash to shareholders through stock buybacks and rising dividends. Monsanto expects to raise seed prices in the current fiscal year, and is benefiting from growing demand in emerging markets.

The Bottom Line

Farmland is still expensive, but shares of agricultural-commodities companies, seed suppliers, and fertilizer and farm-equipment makers are a lot cheaper than they were just months ago.

As for fertilizer, Wall Street fell in love with the stuff a few years back, but the romance ended badly. As a result, this could be a good time to snap up shares of Potash of Saskatchewan (POT), Mosaic (MOS), Agrium (AGU) or CF Industries (CF), all of which are much cheaper than they used to be. Potash, at 46.49, trades for 10 times next year's estimated earnings of $4.47 a share, even though earnings are expected to rise at a rate twice as much as the multiple indicates. Mosaic, a phosphate and potash producer, has an even lower multiple of 9.4 times fiscal 2012 earnings. The company missed Wall Street's fiscal first-quarter estimate, despite a 77% increase in earnings and a 41% jump in revenue for the three months ended Aug. 31.

Fertilizer stocks are big holdings in two farm-related exchange-traded funds― Market Vectors Agribusiness (MOO), launched in 2007, and the much smaller PowerShares Global Agriculture (PAGG), launched in 2008. Both offer a relatively inexpensive way to play the theme without betting the farm, so to speak, on specific industries. Investors also can choose from a variety of ETFs that track agricultural-commodity futures, including PowerShares DB Agriculture (DBA), the most liquid offering, with assets of $2.5 billion.

FARMLAND IS THE MOST DIRECT WAY to invest in feeding the world, but it is also the least liquid. And, after surging in value in recent years, it is among the most expensive. Analysts at Rabobank calculate that the value of productive farmland has increased at a rate between 20% and 70% in the past five years, depending on location, with gains driven by higher commodity prices, low interest rates and a scarcity of available land―some of which has been acquired by financial buyers such as pension funds. The bank sees no near-term correction but thinks prices could fall some in three to seven years, as production costs and interest rates rise.

Legendary investor Jim Rogers views farmland as a long-term investment but notes that it's cheaper outside the U.S. "Myanmar is opening up as we speak, and there will be enormous opportunities there," he says. Angola and Cameroon also offer "magnificent opportunities in farmland."

Fortunately, you don't have to go to Cameroon to find compelling agribusiness investments these days. There are plenty ripe for the picking on Wall Street. 

Up on the Farm

Agribusiness stocks and exchange-traded funds have been hammered this year, leaving many at tempting levels. Some, such as ADM and Deere, also pay nice dividends.

	Recent	YTD	Market	EPS	EPS	P/E
	Price	Change	Val (mil)	2011E	2012E	2012E
BRF Brasil Foods /BRFS	$18.34	8.6%	$16	$1.14	$1.24	14.8
Potash of Saskatchewan /POT	46.49	-9.9	40	3.73	4.47	10.4
Deere /DE	66.57	-19.8	28	6.44	7.21	9.2
Archer Daniels Midland /ADM	25.91	-13.9	18	3.95	3.10	8.4
Source: Thomson Reuters

	Recent		Assets	YTD	3-Yr.
ETF/Ticker	Price	Category	(mil)	Return	Return
Market Vectors Agribusiness /MOO	$44.94	Equities	$4,811	-16.06%	19.96%
PowerShares Global Agriculture /PAGG	26.53	Equities	110	-17.09	13.69
PowerShares DB Agriculture /DBA	30.10	Commodities	2,505	-6.96	5.55
Sources: Morningstar; company reports

RICHARD THOMPSON, a Barron's research assistant, provided additional reporting.