Profit From Agriculture

By Investopedia Staff | August 30, 2011 AAA

Believe it or not, this market rally has not been equally generous to all industries. For some, like the real estate and auto industries, even Mr. Market's unwavering optimism isn't enough to turn the dial.
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Yet one other industry, agriculture, has not experienced the full effects of the market surge. And the long-term fundamentals of the ag industry look stronger than ever.

China, Of Course
With 22% of the world's population, China only commands 8% of the world's arable land and 7% of its water. That mismatch is a big, big deal. For one, China's growth can only succeed if the country can continue to secure food for its people.

The second major theme supporting a bullish view on agriculture is the desire of developing countries' citizens for a higher quality of life. And nothing signifies an arrival to a better way of life than eating better foods, namely meat and a wider variety of agricultural products. (For more, check out Top 6 Factors That Drive Investment In China.)

Bountiful Future
Such a scenario bodes well for the well-run agricultural plays. What matters, of course, is that these companies create value by earning returns above their cost of capital. Such is an indication that value is being created.

In Canada, fertilizer giant Agrium (NYSE: AGU) is a name worth knowing. This $14 billion giant currently trades at an earnings multiple of 12.5, below the S&P 500 as a whole and less than far inferior businesses.

American names like Bunge (NYSE: BG), Archer Daniels (NYSE: ADM) and CF Industries (NYSE: CF) are also worth a look. Bunge currently trades for 20% of sales, although its balance sheet is loaded with debt. Shares in fertilizer giant CF have been on a tear recently, and it's easy to see why. It's a $13.5 billion company with a solid balance sheet, 38% operating margins and a return on equity of over 23%. Still, shares trade at 10 times forward earnings.

People Must Eat Recessions
Despite the state of the economy, it's hard to paint a grim picture of the agricultural industry over the long term. People have to eat no matter what. And while investing in the agricultural space can encompass a wide spectrum, focusing on companies that have a direct hand in promoting food security looks like a worthwhile consideration. (For further reading, check out Investing In China.)

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