Boom Or Bust For Agribusiness Stocks?

| October 12, 2010 | 0 Comments

Have you noticed the second half of 2010 is shaping up to be a banner year for commodities… Yep, hard assets are rocketing higher.  And the US Dollar is plummeting.

As a result, Ag stocks are growing faster than weeds!

The Market Vectors Agribusiness ETF (MOO) is a good proxy for Ag stocks.  It holds stocks like Deere & Co. (DE), Mosaic (MOS), Potash of Saskatchewan (POT), and Monsanto (MON).  And MOO’s up 37% since July!

Clearly Ag stocks have had a great run.

There’s a clear inverse relationship between MOO and the US Dollar.  As the US Dollar falls, MOO rises.  So we have to be careful.  If the US Dollar reverses, we should see MOO fall in value.

But that’s just part of the story…

Ag stocks are also benefiting from a recent USDA report.  In the report, the USDA cut estimates for the U.S. corn harvest.  They’re now estimating the crop will be 3.4% smaller than last year.

The prospect of tighter supplies is helping fuel a surge in grain prices and Ag business stocks.

And that’s not all…

There are also M&A deals and hostile takeover bids for major Ag companies like Potash of Saskatchewan (POT).  POT makes fertilizers widely used to boost crop yields.

Right now, BHP Billiton (BHP) is attempting a hostile takeover of POT for $130 per share.  It values the company at $38.6 billion.  But Potash’s CEO recently claimed the company should be valued at nearly $170 per share.

And now state-backed Chinese companies are rumored to be putting together a bid to compete with BHP’s takeover bid…

And to top it off, Reuters reported that Rio Tinto Group (RTP) was interested in the fertilizer industry.  So more M&A deals could be heading down the pipe…

The result?

Ag business stocks have a tailwind of positive news pushing them to new heights.

But it looks even better long term.  Major macro changes are pushing Ag business stocks to new heights.

Remember, a growing world population and a limited amount of land suited to growing crops makes higher food prices a near certainty.  And the rapidly growing middle class in developing countries like China and India are only creating more demand for food.

Here’s the bottom line… In the long run, Ag business stocks are a great investment.

However, a word of caution… Ag stocks have run so far, so fast, a pullback is very likely.  Traders can jump in here to catch another leg higher.  But more cautious investors should wait for a pullback before getting in.

An even safer way to play the coming boom in Agriculture is to own farmland.  In the last decade, total returns on crop producing land are averaging 14.6% per year.

And if all the crazy quantitative easing and deficit spending does turn into runaway inflation, owning hard assets like real estate is a great way to hedge your investments.  And unlike gold, farmland has real value because it actually produces something!

It’s time for action, so get onboard for the coming boom in Agriculture…

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Category: Stocks

About the Author ()

Corey Williams is the editor of Sector ETF Trader, an investment advisory service focused on profiting from ETFs and the economic cycle. Under Corey’s leadership, the Sector ETF Trader has become one of the most popular and successful ETF advisories around. In addition to his groundbreaking service, Corey is the lead contributor to ETF Trading Research, where he shares his insights about ETFs and financial markets on a daily basis. He’s also a regular contributor to the Dynamic Wealth Report and the editor of one the hottest option trading services around – Elite Option Trader.

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