Sowing the Seeds for Ag Stocks

Editor's note: As part of our partnership with PBS's Nightly Business Report, TheStreet's Debra Borchardt joined NBR to explain how to tap into rising commodity prices by investing at the beginning of the food chain. (Watch video and read transcript)

NEW YORK ( TheStreet -- Whether it's Ben Bernanke's fault or not, broad commodity prices have been on the rise over the past few months, increasing 15-20% from a low point in June.

For example, wheat prices have jumped 61% as Russians have produced 29% less wheat and the Canadians had a disappointing crop. Rice and corn prices are up 50%. Cocoa, coffee and sugar have all hit prices that many haven't seen in years.

Barclays Capital recently told clients it expects agriculture to lead the commodities markets over the next month or so as "fundamentals in grains markets look especially strong, supported by weather concerns in the U.S. over the winter wheat crop, further downgrades to 2010-11 harvest estimates, strong demand from the energy sector and expectations of rising Chinese import requirements."
Word on the Street

These concerns are supported by the government as well. According to the latest USDA estimates, crop markets are tight. More acres and higher yields will be needed in order to balance the market this year. These crop markets could get even tighter if the weather is bad. The U.S. corn market in particular remains very tight -- the lowest level seen since 1995-1996 timeframe.

But it isn't so simple to just add more acres of corn. Every time one crop is increased, another loses out, like soybeans or cotton. But those markets are tight as well. Brazil and Argentina also produce corn and soybeans, but their bad weather is putting this year's respective crops at risk.

To add to the problems of limited acreage and the whims of Mother Nature, there is speculation. Investors know that Russian droughts have impacted the global wheat supply. The talk of higher prices and easy money is drawing traders to speculate in those markets -- further pushing up prices. There will be even more market interest this week as Goldman Sachs hosts an Agricultural BioTech Forum on Feb 9th.

"There are three basic ways to think about food and ag commodities at the stock level and that is seed, nutrients and equipment," says Tim Holland, portfolio manager at Aston/TAMRO Diversified Equity Fund. As rising food prices fill farmers' pockets with extra cash, they inevitably buy things that would boost their productivity further, the foremost of which is soil nutrition.

Here are some agriculture companies that give investors exposure to the beginning of the food chain.

Monsanto ( MON) is a leading global provider of technology-based solutions and agricultural products that improve farm productivity and food quality.

Monsanto's goal is to provide for both small-holder and large-scale farmers to produce more from their land while conserving natural resources like water and energy. In January, Monsanto reported a net profit of $6 million in its latest quarter vs. a loss of $19 million in the same period a year ago. Seed and Genomics reported an increase in sales of 13% year-over-year and gross profit climbed 14%. Roundup and other crop protection products increased sales 1% year-over-year.

In a boost to Monsanto, the USDA is partially deregulating genetically modified sugar beets for commercial planting. The government estimated that if growers have to rely on conventional beets, then production could drop as much as 21%. Half of the nation's sugar comes from sugar beets. Monsanto's beets tolerate the herbicides better and result in fewer weeds, making production easier for the farmers. The Genuity beets can go into the ground for spring planting this year.

Higher crop prices, favorable weather, higher farm income and increases in acreage planted will help the company achieve growth targets. The company has increased it dividend to 28 cents per share for a yield of 1.6%. The debt is rated A+ stable by S&P and Fitch.

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Mosaic ( MOS) is on the fertilizer end of the business. It produces phosphate crop nutrients and feed phosphate for animals. It also produces potash that is used in fertilizers and animal feed as well.

The company is a spinoff from Cargill that sells to both wholesale distributors and retail chains. Mosaic should begin to benefit from higher fertilizer prices in 2011. Demand is so strong that the CEO James Prokopanko said that the biggest challenge will be meeting demand.

The company is frequently mentioned as a takeover target, but the stock is at a 52-week high, having risen more than 50% in the past year. CEO Prokopanko has already said the outlook for 2011 was very strong for Mosaic.

Syngenta ( SYT) sells a variety of crop-enhancing products from seeds to crop-protection herbicides.

Credit Suisse analyst Rhian Tucker believes that, even if the seed business saw no volume growth, the share price would still rise. The analyst writes: "Syngenta offers good exposure to strong long-term growth fundamentals driven by global population growth and rising standards of nutrition."

This follows the "feed the world" theme that is also pushing many of these stocks higher. For its part, Sygenta is up 27% in the past year, hitting a 52-week high of $67.07 earlier this month.

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Agco ( AGCO) makes tractors and farm equipment and other products that appear under the Massey Ferguson name.

The company has forecast an increase in net sales of 10-15% in 2011 with an operating margin expansion of 50-100 basis points. Hay equipment and sprayers are expected to do particularly well, and Agco already has 30% market share in sprayers used for applying fertilizers.

Farmer's cash receipts are expected to be up and crop prices should be strong. Agco also has its sights set on international growth. According to Credit Suisse analyst Jamie Cook, the company is getting into developing markets like China and Russia. Agco has 23% ownership in TAFE, the second largest farm equipment maker in India.

The analyst has a $49 12-month target price, but that's below Monday's regular session closing price of $53.46 after the stock jumped 75% in the past year.

DuPont ( DD) is a diversified chemical company, but it does have a seed component to its business.

High crop prices are driving demand at DuPont. The seed business was up 25% in its most recent quarter, led by 12% volume growth and 10% pricing. Credit Suisse analyst John McNulty writes that seed sales are driven by a strong start to the North American planting season, and notes crop protection sales have seen strong growth as well. DuPont expects sales to continue to go higher in 2011.

The company recently acquired Danisco, a Danish producer of industrial enzymes and specialty food ingredients used in the production of ethanol, food and animal feed. Bill Selesky of Argus Research has a buy rating on the stock with a target price of $58. He believes the company can see year-over-year EPS growth of 13% in 2011.

Deere & Co. ( DE), whose origins date back to John Deere's early 19th century Illinois blacksmith shop, is organized into four main segments: agricultural equipment, construction and forestry, commercial and consumer equipment, and credit.

Credit Suisse analyst Jamie Cook believes 2011 is the first year in a multiyear recovery in C&F (construction and forestry) suggesting upside to Deere's 25-30% sales forecast. He thinks Deere is being conservative and raised his 12-month target price on the stock to $91 from $82 back in November; and the stock has already moved beyond it, closing Monday at $94.14.

Deere's debt is rated A/stable by Standard & Poor's and the company recently raised its dividend to 30 cents from 28 cents for a yield of 1.6%. The company reported a fiscal fourth-quarter profit of $457.2 million back in November, a performance that marked its highest fourth-quarter profit in Deere's history with revenue rising 35% year-over-year.

Even though the company is dealing with higher raw materials costs and the transition to a Tier 4 emission standard, it still stands to benefit from strong global commodity markets.

-- Written by Debra Borchardt in New York.

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