Despite the strength of the agricultural sector in the second half of 2010, we could be in for a multi-year strong cycle for all things agricultural. Agricultural commodity prices were up nicely in 2010 but are still a far cry from the peak levels of 2008. I wouldn't expect those levels to be reached in 2011, but if underlying prices remain robust during the year, valuations of certain companies still look attractive over the long run.

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Fertile Plays
Thanks to strong corn prices in 2010, fertilizer stocks responded favorably. In fact, over the past years share prices of fertilizer stocks have correlated with the movement in corn prices more so than the actual price of fertilizer. Yet while the price of corn ended up over 25% in 2010, shares in Mosaic (NYSE:MOS) were up approximately 19% in 2010. That alone is not the case for Mosaic. As one of the largest producers of phosphate fertilizer, Mosaics earnings should appreciate nicely in 2011 due to increasing phosphate prices. China's demand for phosphate is enormous and the country may likely curtail its exports of phosphates to satisfy domestic demand. Trading at under 16 times forward earnings, Mosaic shares have room to run in 2011. (For more, see 5 Things To Know About Potash.)

Agrium (NYSE:AGU), which is a primary producer of another essential fertilizer component, nitrogen, is in the same position as Mosaic for 2011. Nitrogen fertilizer's main raw ingredient is natural gas and natural gas prices remain depressed thanks to growing domestic supplies in the US. Lower input costs will translate into higher net profits. Agrium also has a strong retail operation that generates high margins. Trading at 12.5 times forward earnings, Agrium shares also look ripe to grow in 2011.

Buying a Basket
While I prefer picking the individual names in the agricultural sector, owning the Market Vectors Agribusiness ETF (NYSE:MOO) will give you a broader exposure to the agricultural sector. The ETF's top holdings include Potash (NYSE:POT), the largest fertilizer company in the world and one that was brought to the spotlight when BHP (NYSE:BHP) attempted to acquire the company for $130 a share, a price that Potash shares have exceeded since the attempted offer. (For more, see 2010: A Look Back At Agriculture Stocks.)

However, the ETF also includes Deere (NYSE:DE) as its single largest holding. Deere is a fantastic company, but its best gains may have come in 2010 as the stock was up nearly 60% for the year. While Deere's operations should remain healthy in 2011, shares may lag in 2011 and thereby depressing the performance of MOO relative to the more attractively valued individual components. However, my overall favorable expectation for a strong year for agricultural stocks will likely make this ETF a decent pick in 2011.

Bottom Line
Whether you pick a diversified basket of agricultural holdings or choose individual plays, the industry - especially inputs such as fertilizer - should deliver an above average performance in 2011. (For more, see 5 Agriculture Stocks To Grow With.)

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Tickers in this Article: AGU, CF, MOO, DE, POT, BHP

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