Rising Commodity Prices Boost Stocks Of Suppliers To Agricultural
Industry
The Dynamic Wealth Report
February 27, 2008
Serious Money In Farming?
John was in a small Midwestern town for business a few years ago. Just
before crossing the street he noticed a small crowd forming at the
entrance of a local bank. Curious, he walked over to see what the
commotion was about. He found a group of local businessmen surrounding a
tall man in dirty coveralls. The man, a farmer, had just delivered his
crop. The farmer started exchanging his stack of one dollar bills each
for seventy-five cents.
My friend quickly pulled seventy-five cents from his pocket and received
his dollar bill. Twenty minutes later the crowd dispersed as the farmer
had run out of money. Approaching the farmer, John asked why he would
trade one dollar bills for seventy-five cents? The farmer looked him
square in the eye and said, “It’s easier than farming and much more
profitable.”
Fortunately for farmers, those days appear to be over.
Farmers don’t struggle to get a fair price for their crop anymore.
The prices of commodities have gone through the roof, and farmers are
starting to make serious money. I noticed this trend a few months back.
You may remember my article,
Food and The Stock Market, where I
predicted commodity prices would continue to climb.
Boy, were we ever right. Commodity prices are heading higher and higher,
and they aren’t going to stop any time soon. Take a look at this list.
• Wheat prices have tripled in 14 months and are at new highs.
• Corn prices have more than doubled in 15 months and are at new highs.
• Oat prices have more than doubled in just over 2 years and are at new
highs.
• Soybean prices have more than doubled in 15 months and are at new
highs.
I could keep going, but they only give me so much space for my article.
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Notice the trend? These commodity prices have all moved to new highs.
What most people don’t realize is they won’t be falling anytime soon.
We’ve adapted to $3.00 gasoline (caused by $100 oil), and we will soon
find our food costs rising. We’ll be forced to adapt to that as well.
Why are prices rising? Two major factors; increasing demand from other
countries and high oil prices.
In emerging economies like China and India, you’re seeing a growing
middle-class who craves the success of most western nations –
automobiles, air conditioning, and an improved diet. Simple demands with
dramatic impacts.
When a middle class population develops, they find themselves for the
first time with disposable income. The basics are now readily available
and demand shifts to better products. In the case of food, it leads to a
demand for increased protein and processed foodstuffs. This leads to the
increasing demand for commodities we’re seeing today.
Adding to this demand is the impact of oil. Strange I know, but oil is
causing high commodity prices. The direct impact is through rising costs
of production. Think about the fuel needed to plant and harvest crops
along with the oil based chemicals and fertilizers used to improve
yields. High oil prices are creating demand for alternative fuels like
ethanol and biodiesel.
Billions spent on ethanol.
Billions of dollars are being spent to build out the ethanol production
infrastructure. I know this first hand as I helped raise money for some
of these production facilities. The process of producing ethanol uses
huge amounts of commodities, like corn – which is causing higher prices. The Wall Street Journal noted that in 2008 an estimated 30% of the US
grain harvest would be devoted to ethanol production. This alone would
push up prices.
I don’t think things are going to change anytime soon. International demand
for improved diets is not going to change – I’m not about to
tell 2 billion Chinese what they can . . . or can’t eat. Adding to the
problem is the use of alternative fuels produced from commodities. From
an investment perspective and outside of buying futures, where does this
leave us?
Back to the farmer.
With commodity prices at previously un-dreamed of levels, farmers around
the world are starting to produce more crops. It’s simple supply and
demand. Demand is up, prices are up, and so supply will increase to meet
demand. These farmers are focusing on getting more crops out of the land
that they farm. (As an aside, I have read about farm prices rising
rapidly in Middle America, so expansion from buying the neighbor’s farm
is going to be muted.)
A few companies focus on supplying goods and services to the
agricultural industry. Many of these companies have reached new highs
already, but their businesses are strong and I only see more demand for
their products in the future.
Deere (DE) – Provider of farm equipment.
Monsanto (MON) – Provider of seeds and herbicides.
Mosaic (MOS) – Provider of fertilizers.
Potash (POT) – Supplier of fertilizers.
Look at these companies as long term investments. They benefit from
multi-year growth in the agricultural industry fueled by high commodity
prices. If you consider adding these stocks to your portfolio
try to accumulate shares on any weakness in their share prices.
• Heating Oil ($2.76 per gallon)
Heating oil has reached new highs not seen in years. Prices for home
heating oil traditionally peak in the winter months. This year they are
also being pushed higher due to crude oil prices.
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