Farming Profits

By Sham Gad | October 11, 2011 AAA

Despite all the uncertainty in today's world, there's a fact everyone can bank on: no matter the environment, people will consume food and populations will increase. Taken together, the conclusion is that food demand will inevitably rise. The way for investors to play that, then, is to look to the farm.

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Tools of Production
The biggest long-term winners from the world's growing need for food are the sources of production: farms and the related infrastructure and supplies that help farms produce more food. For ultra conservative investors, large cap names like farm equipment maker Deere (NYSE:DE) and grain storage and marketing company Archer Daniels Midland (NYSE:ADM), are good bets. Thanks to the September market sell-off, shares aren't expensive, although the market rally in October has elevated prices. ADM trades at $27 and yields 2.3%. The company is expected to make $3.10 this fiscal year and $3.39 the following year, valuing the shares at around eight times earnings. Deere similarly trades for about 11.5 times earnings and yields 2.3%. The company has an amazing franchise-type business that makes money once at the time of sale, and then on a recurring basis, from servicing its equipment. (For related reading, see Harvesting Crop Production Reports.)

Seeking the Source
The source of all food begins with seed and develops on the farm. Monsanto (NYSE:MON) is the world's largest producer of agricultural seeds, which enable farmers to grow crops that can persist in less than ideal farming conditions. Business is strong for Monsanto and shares have recovered nicely, trading close to $73 or about 25 times earnings.

The outlook is solid for Monsanto, but a better value play may be fertilizer giant Mosaic (NYSE:MOS), which now trades at $55 or nine times earnings. The long-term outlook for fertilizer is supported by strong grain prices, thanks to the growing consumption of meat in China and other emerging nations, as it takes about six pounds of grains to produce one pound of meat. Mosaic's pristine balance sheet should not go unnoticed either: over $3 billion in net cash against a market cap of a little over $24 billion.

The Bottom Line
Agriculture has received a lot of attention over the past couple of years, as farmland prices have appreciated thanks to record farmer profits. Agricultural related stocks, after enjoying a nice surge in 2009 and 2010, sold off significantly in September. While prices are not at levels seen in 2008 and 2009, valuations seem very reasonable, given the strong fundamental outlook, for many years to come. (Learn the technique that Buffett, Lynch and other pros used to make their fortunes. For more, see The Value Investor's Handbook.)

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