How to Invest in Food Stocks

Beyond the ethanol and agriculture (or "ag") buzz, there are several things to be learned about investing in food and food-related companies. You need to understand the food development process -- from the farm to our mouths -- and how to identify each step along that food itinerary to recognize the investment opportunities (and risks). I refer to this path from farm-to-portfolio as the food investment chain. In this installment of the Finance Professor, I will look at this chain and help sort out the wheat from the chafe for your portfolios.

Down on the Farm With Machinery Manufacturers

We have to start with Mother Earth. Farmers need to get their farmland prepared to plant crops. Later on, once the crops are mature, the farmers will need to harvest those crops. In order to do this, they need to have farm machinery.

Efficient and productive agricultural equipment is vital to increasing farmers' yield. They require tractors, combines, harvesters, tillers, seeder and sprayers to achieve their objectives. With its deep agricultural and industrial heritages, the United States is home to the largest manufacturers of such equipment, however some international competition has garnered significant market share.

Here is a list of the largest agricultural machinery manufacturers:

Agricultural Equipment
Company	Ticker Symbol	Closing Share Price on 2/15/2008	2007 EPS (Earnings Per Share)	2008 Estimated EPS
Caterpillar	(CAT Quote)	69.95	5.37	5.89
Deere	(DE Quote)	85.00	4.00	5.11
CNH Global	(CNH Quote)	48.37	2.60	3.49
AGCO	(AG Quote)	64.49	2.52	3.25
Source: Yahoo! Finance

Be aware that in addition to manufacturing agricultural equipment, many of these listed companies manufacture heavy construction and mining equipment. Thus, if you want to invest in a more farming-focused company, then you should perform more in-depth research The best places to start are the companys' Web sites, annual reports and quarterly earnings reports.

Deere is an example of a company that derives a greater percentage of its revenues and earnings from farming equipment than its manufacturing peers.

I recently analyzed Deere's 2008 first quarter earnings for RealMoney Silver. My conclusion: the stock should still enjoy long term growth from its agricultural business (this becomes more apparent when we see the growing demand from the next set of sectors in the food investment chain). However, Deere's commercial business, which focuses on non-farm manufacturing, was showing some weakness due to the slowing economy (especially in the United States). My takeaway: I like Deere, albeit at lower price levels and would wait for a pullback to the low $80s before taking a position.

Looking for Seeds to Sow With Chemical Makers

Farmers need seeds. But not only do farmers need seeds to plant their crops, they need better, bioengineered seeds. These bioengineered seeds are more resistant to harsh temperatures and disease. As a result, the quality of farmers' crops is improved and the yield to farmers is greater. That's where biotechnology comes in.

However, we need to go beyond high-quality seeds. Farmers also require better agricultural chemicals, which we all know as stinky and smelly fertilizer. Additionally, herbicides and other chemicals help farmers with insect, pest and weed control. Finally, for those who raise cattle, livestock and poultry on their farms, chemicals help reduce animal infection and increase milk production.

The big daddy of seed and agricultural chemicals is Monsanto (MON Quote), one of last year's hottest stocks. (Please note: to lock in gains in this overheated market, I recently sold my positions in Monsanto.).

Here is a list of a few other chemical companies:

Seeds and Chemicals
Company	Ticker Symbol	Price 2/15/2008	2007 EPS	2008 Est. EPS
Monsanto	MON	115.35	1.98	2.84
Potash	(POT Quote)	148.04	3.36	6.67
Mosaic	(MOS Quote)	103.37	0.80	3.72
EI DuPont de Nemours	(DD Quote)	45.49	3.28	3.45
CF Industries	(CF Quote)	118.17	6.57	9.59
Agrium	(AGU Quote)	65.31	3.25	5.33
Source: Yahoo! Finance

If you believe analysts' estimates, then CF and Potash offer some compelling growth relative to their peers. With a lower forward P/E than Potash, Monsanto or Mosaic, CF appears to be a better value play. Recently, I began a small position in CF after taking gains in Monsanto, because I still want to maintain longer term exposure to this part of the food investment chain.

Another player in this sector: Syngenta (SYT Quote), which I did not list earlier because the company is located in Switzerland and I was not able to get readily reliable data to present. However, I think that Syngenta is worthy of further analysis, thanks in part, to its $25 billion market capitalization and its international exposure.