Looking back at agricultural stocks in 2011, about the best thing that can be said is that 2011 may have set the stage for a 2012 surge in agricultural related stocks. After starting off the year in strong fashion, agriculture stocks sold off during the later part of the year, yet the sell-off occurred despite continued strong fundamentals for the industry.
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The year started off strong for agricultural commodities like corn and wheat. Strong corn and wheat prices boosted share prices of fertilizer producers, like Potash (NYSE:POT) and Mosaic (NYSE:MOS), as strong grain prices give farmers more money to spend on fertilizer. Yet as the European crisis came to a head in the second half of 2011, the market sold off. The drop in commodity prices sent agricultural stocks down with it. Never mind that the fundamental picture remained strong, the second half of 2011 took away all the gains from the agricultural stocks, and then some. Shares in Potash Corp are down 20% year to date, while Mosaic shares have declined over 30% during the same time period. (For related reading on the European crisis, see 5 Other Countries Affected By A Troubled Europe.)
Fertilizer shares weren't the only agricultural stocks hurt in 2011. Agricultural construction equipment maker Deere (NYSE:DE) is also down over 5% this year but that's after a strong share price surge in 2009 and 2010. Yet Deere has continued to deliver solid sales and profit growth in 2011. Deere's operational strength underlies a strong fundamental outlook for agriculture. Greater and greater rates of urbanization in areas like China and India requires an increasing amount of food production from finite sources of land. That urban shift will continue for years, thus providing a strong tailwind for agricultural products and equipment.
Monsanto (NYSE:MON), the world's largest producer of seeds is also a key player in the field. The need to grow more vigorous disease and drought resistant crops will surely grow, as places like China and Africa seek to expand their agricultural production. Monsanto's leading position in genetically modified seeds will bode well for investors over the years.
The Bottom Line
Mediocre performance from agricultural stocks in 2011 will likely not be repeated in 2012. The 2011 sell-off has created attractive valuations for the world's leading agricultural related stocks. With the industry likely to experience growth in 2012, stock prices are likely to follow.
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At the time of writing, Sham Gad did not own shares in any of the companies mentioned in this article.