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What is Feeding Agriculture Stocks?
The U.S. agriculture industry is a highly integrated and interdependent network of companies from various sectors. These corporations support growth throughout the broader industry by playing integral roles across the spectrum of the food production process, from planting to the retail level. Although farmland is considered a renewable resource, widespread industrialization makes tillable land limited. Considering the accelerating rate of global population growth, coupled with the expansion of the world economy, particularly relative to the emergence of developing nations, the investment prospects in the agriculture industry are positive to say the least. Indeed, as demand increases, food prices have risen and market indicators point toward a protracted recovery for agriculture stocks.
Some of the companies with promising potential can be found at the beginning of this food chain, including fertilizer and agricultural productivity giants like CF Industries (CF) and Agrium (AGU). Both of these businesses have considerable market share in the nitrogen, phosphate, and potash fertilizer arena. Canadian-based Agrium is, in fact, one of the largest agricultural retail outfits operating in the United States, with a wide portfolio of crop nutrients and seeds, as well. Both of these businesses also have a competitive advantage in relation to their respective exposure to the natural gas industry. Agrium benefits from its Canadian nitrogen development, where natural gas pricing is more favorable than in other regions. CF has the edge of having facilities in areas that are abundant in natural gas reserves.
Another sector that serves the agriculture industry, often overlooked, is the heavy equipment manufacturers, including major farming suppliers AGCO (AGCO) and CNH Global (CNH). The outlook for these companies is bright, as the North American farm industry regains financial flexibility and emerging economies benefit from an expanding middle class. Commodity inflation, particularly for crops, ought to fuel broader rebounds in planting and farm activity. Moreover, the wide international exposure of these outfits offers a competitive advantage over U.S. behemoths like Deere (DE). In addition, AGCO and CNH are less pricey equities of companies with greater potential for market penetration.
At the retail level it is more difficult to identify food processing companies that offer particularly compelling investment merits. In fact, the higher commodity prices that have been stirring agriculture companies have been hurting the margins of food processing businesses, particularly against the backdrop of challenging economic conditions, which have consumers tightening their purse strings. However, one company that stands out is Corn Products International (CPO). A strategic acquisition model, coupled with effective cost management, suggests that the company is capitalizing on consolidation trends in the industry, while emphasizing rates of return.
All told, the aforementioned companies are examples of businesses that are benefiting from the myriad factors that are likely to contribute to a prolonged period of growth in the agriculture industry. Indeed, these outfits have noteworthy investment prospects both in the near term and over the long haul.
At the time that this article was written, the author did not have any positions in any of the companies mentioned.