Agricultural Commodity Pricing

As I have stated for the past six months on theupdown.com, I am bullish the agricultural space. Even as there may be a pullback in upcoming months, I still think that current valuations are fair within the space as we are just starting to see price increases in the sector. Many of the people I deal with on a day to day basis are farmers. Most deal in corn, soybeans and wheat. With respect to their current situation they are very cautious. The reason for this is that they do believe that commodity pricing will remain high, but they also have worries with respect to inflation. They use to speak of the price of diesel fuel, but now all you hear is with respect to seed, fertilizer and herbicides. The most spoken of, is with respect to Monsanto. This is very important as Monsanto has not seen the recent gains of the fertilizer and I believe they are better positioned on a valuation basis. One farmer stated, "the price of seed and roundup have tripled, year over year". This is important as many of them are still paying last year's prices as they put their orders in early. One other important aspect is that they are only able to buy one year in advance. The reason for this is that the company will not back the seeds for a time period longer than that.
Other areas that look good are fertilizer stocks. As I believe nitrogen producers still look good going forward, I believe that Potash, Mosaic and the speculative IPO IPI are all good in this area. Potash just announced that they have increased pricing to China from $500 a ton to $700. I believe that investors were expecting a higher bump, but the CEO said that they need to keep their customers in mind. Potash the commodity looks better than phospherous and nitrogen because of costs. Potash is mined and their costs are much more fixed than phospherous which has the cost of rock and nitrogen which is linked to natural gas, which I am also bullish. CF, TNH, and TRA are all good from the aspect of nitrogen. AGU also put in a beautiful quarter and looks strong headed forward. CMP is also interesting as they have salt but potash exposure. RAVN had a great quarter after their GPS and fluid control systems for agricultural machinery shown promise.
With respect to companies that process these commodities, I like ADM. They have done a very nice job of increasing their pricing with respect to corn so the commodity hasnt killed their margins. They are also engaged in an endevour with LNDC to produce biodegradeable plastics that are temperature sensitive. MON also purchase a long term deal with LNDC for their technology with respect to seeds.
There are also other international plays that are attractive, such as SQM, which a leader in the production of iodine. WILMF.PK Wilmar Industries, Yara International, IOI Corp BHD, and Golden Agri-Resources LTD are also good plays although they do not have US ADRs.
It is easier to get exposure through ETFs nowadays and this looks to make it easier for the inexperienced investor. DBA gives an investor equal exposure to the commodity prices of corn, soybeans, wheat and sugar cane. JJA follows the Dow Jones AIG Commodity Index which is based on seven separate futures contracts. RJA gives broader exposure as it links the investor to twenty commodity futures contracts. UAG is also a good play with exposure to twelve separate futures contracts. MOO seems to be the best etf with respect to stock exposure, and is a good indication of which stocks are best positioned as their top three holdings are POT, MOS and MON. POT is the only one still in a bullish trend, so be careful here.
Going forward I would stay away from the machinery producers as the United States farmers will keep tightening their belts until they know how much more they will have to pay for herbicides, pesticides, seeds and fertilizer. The commodities have pulled back nicely, and those I am bullish. The reason is that in many areas the corn crop was unable to be planted as the longer winter sacrificed too much of the growing season. Also, it was too wet in many areas and the late frost killed much of it. The corn crop should lead pricing further and the best bet from here, for the next three months is DBA as they seems to have the highest exposure to corn.


This was done in May of 2008, it is very important to know that nitrogen, phosphorous, corn, soybeans, etc. have all been beaten badly so far. There is a fear of demand as cash and credit dries up and farmers are afraid to take out loans to buy seeds and fertilizer. Fertilizer was not used excessively as of the last plant. The hold out on using this can only go for so long, and then the land will suffer as crop rotation helps but is not a cure all for depleted soil. A bottom was seen about two weeks ago in the price of nitrogen and if you check the charts of the major agricultural companies, they look as though they have put a bottom in. Another ETF that I like is MOO. Not joking about the ticker symbol.