Rising Commodity Prices Boost Stocks Of Suppliers To Agricultural Industry
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.
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.
Category: Commodities
