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Sunday, January 30, 2011

9 Ways to Play the Agricultural Boom AGU / BG / BHP / CNH / DE / MON / MOS / POT / SANW / SQM

We all remember last year’s BHP Billiton (BHP) and Potash Corp (POT) drama. BHP’s takeover offer was $130/share. Potash rejected it on the grounds that they are worth more. After that, Potash’s stock price jumped to $150. Finally, the Canadian government blocked the bid after Potash pleaded.
The point of this little flashback was that usually when a company rejects a takeover bid, the stock falls. Potash’s stock only modestly fell and then rose back to $150/share. The reason was that POT was worth more than its $130 target and its $2 billion buyback plan. Since this takeover, POT and its competitors soared, sending Potash Corp up 69%, Mosaic (MOS) up 72% and Agrium (AGU) up 66% (since 7/1/10), while the S&P 500 is only up 18% in that same time.

These companies have a resource that is in high demand right now: fertilizer. Agricultural commodities are booming right now, farmers need fertilizer to grow the crops. Potash Corp alone holds 20% of the world’s potash supply, giving it “large, low-cost, long-life, expandable, export-oriented, tier 1 assets” as BHP said.

However, there is another side to agriculture boom that you can profit from: equipment, seeds and pesticides.

Farming equipment maker, Deere (DE) outpaces the rest of its industry with a recently increased dividend, low P/E of 20, ROE of 33%, P/S 1.4, PEG 1.68. The company is a very good buy compared to its competitors. Deere is my choice for a farm equipment maker.

Seeds and pesticides: Monsanto (MON), Bunge Limited (BG), S&W Seed Co. (SANW). Monsanto is a larger cap play, Bunge and SANW are smaller cap play. Bunge and S&W are the growth stories in this industry and I would recommend them strongly.

Here is the recap:

Fertilizer: Potash Corp (POT), Mosaic (MOS), Agrium (AGU), SOCIEDAD QUIMICA MINERA DE C (SQM)

Equipment: Deere (DE), if you want something a little more speculative go with CNH Global (CNH)
Seeds and Pesticides: Monsanto (MON), Bunge Lim (BG), S&W Seed Co (SANW)

There are plenty more gains in the agriculture industry, and I have shown you some thriving areas and some decent plays to thrive on. It is important to do your own research to make sure the risk fits your own requirements. Some of the plays above are more speculative than others. Agriculture can be volatile at times, so it is important that you keep an eye out on earnings reports, agricultural prices, crop reports, etc.

Disclosure: I am long DE.

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