But how much will come back to the farmer?

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Down on the farm is where market growth is headed
Rob Carrick


Tuesday, January 08, 2008

Don't let the heated action in oil stocks this year fake you out.

Oil, along with base metals, is yesterday's story in the great multiyear commodity boom we're experiencing. Today, it's all about agricultural commodities like grain, livestock, coffee, sugar and cotton.

Energy and metal stocks have soared over the past four years or so thanks to demand for raw materials in the emerging economies of China, India, Brazil and elsewhere. The price of crude oil last week hit the psychologically important level of $100 (U.S.) a barrel after a year-long runup, and Canada's big energy stocks have responded with impressive gains of around 25 to 35 per cent in the past 12 months.

Agricultural stocks have been even more fertile, though. Take Canada's big two names in the sector, Potash Corp. of Saskatchewan and Agrium, which have at least doubled in the past year or so.

These stocks, and others that are focused directly or indirectly on agriculture, are benefiting from the same factors propelling demand for natural resources. A rising level of affluence in countries like China and India is increasing demand for food products, and that in turn is boosting food prices and demand for anything that helps increase food production, including fertilizer (that's Potash and Agrium), seeds and tractors. Demand for agricultural products has been heightened by a trend in which farmers are growing crops for biofuels like ethanol rather than food.

Increases in demand for food are outpacing supply, which in turn has resulted in high levels of food inflation. A U.S. government inflation report issued last month showed that the rate of increase in food prices had more than doubled over the previous 12 months and reached a 25-year high. Wheat and soybean prices rose close to 80 per cent last year, and corn hit an 11-year high.

If you're heavily invested in commodities of any kind, the question you have to ask yourself is how much more upside there is. Prices for base metals like copper and zinc have been in a down trend for the past several months as expectations of a global economic slowdown grow. Oil prices would also be affected if economic activity slackens, but there's a geopolitical component to energy prices that makes forecasting difficult.

This brings us to agricultural commodities, which are more immune to economic cycles because of basic supply-and-demand factors like global population growth and declines in the amount of cultivated land. It's true that agricultural stocks are like food commodity prices in that they've soared in the past year, but one expert in the field says retail investors should not be scared to jump in.

"This is not a situation that has been overhyped," Don Coxe, global portfolio strategist for Bank of Montreal, said from his Chicago office yesterday. "Quite the contrary, and it's still in the early stages."

Mr. Coxe said the agricultural story at its simplest level can be explained as another 600 million people, minimum, being added over the next 10 years to the list of those who have a diet something like what we in the West enjoy. Companies that help satisfy this demand for food have already benefited, and will continue to do so. "This isn't like saying you should buy this company because they have a really hot product that is going to be a big fad for the next two or three years."

The flip side of soaring demand for agricultural commodities is higher prices for food producers like the chocolate maker Hershey Co. The firm recently reported a 66-per-cent plunge in third-quarter profit that was linked in part to higher prices for milk.

But for every Hershey, there's a Deere & Co., which makes John Deere tractors and other agricultural machinery. "Deere is well positioned to continue benefiting from powerful global economic trends such as growing affluence and increasing demand for food, feed and biofuels," the company said recently in announcing a 57-per-cent rise in share profit for the fourth quarter of fiscal 2007.

Stocks like Deere, Potash Corp., Agrium, Monsanto, Mosaic Co., Terra Nitrogen and CNH Global are one way to play the agricultural commodity boom. Investors who appreciate the diversification benefits of owning a variety of stocks in a sector have at least three exchange-traded funds to choose from, including the new TSX-listed Claymore Global Agriculture ETF. The mutual fund world hasn't yet jumped on the trend, but the Criterion Diversified Commodities Fund is one option. It has about 40 per cent of its assets exposed to agricultural commodities and the rest to energy and metals.

There may yet be some juice in energy and metals, but don't get faked out. Agricultural commodities are where the real growth is.

Big growth in agricultural stocks

Agricultural commodities are hot right now, and so are stocks and exchange-traded funds

Stocks Ticker 12-Month return

AG Growth Income Fund AFN.UN-T 144.8%
Agrium AGU-T 97.7%
CNH Global CNH-N 144.9%
Deere & Co. DE-N 97.3%
Monsanto MON-N 137.0%
Mosaic MOS-N 361.3%
Potash Corp. POT-T 163.2%
Saskatchewan Wheat Pool VT-T 49.4%
Terra Nitrogen TNH-N 399.4%

ETFs Ticker 12-Month return

Claymore Global Agriculture ETF COW-T 8.6%
PowerShares DB Agriculture Fund DBA-A 38.3%
Market Vectors Agribusiness ETF MOO-A 39.6%

© The Globe and Mail
 
That Potash is the craziest thing. I have purchased many a ton for $120/ton. Now it is over $400/ton. I like to grow some alfalfa and this is just amazing. Sorry--don't get me started on fertilizer.
 

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