Back in March, I wrote in this column about growing investor interest in the agricultural sector. Like precious metals, most individual investors have no affinity or exposure to this huge industry, but I’m certain that this is one sector with excellent potential for above-average returns over the next 10 years.
A few others feel the same way. In what can only be described as a bold and opportunistic move, mining giant BHP Billiton Limited (NYSE/BHP) just announced an unsolicited takeover bid for the world’s largest fertilizer business by capacity, Potash Corporation of Saskatchewan Inc. (NYSE/POT).
The $39.0-billion hostile takeover bid is for $130.00 per Potash share and virtually all participants (except BHP) view the offer as too low. Potash operates a great business and there’s a lot of pent-up global demand for potash, phosphate and nitrogen. This is why Street analysts view the $130.00-per-share offer as too low and traders have already bid up Potash shares to just under $150.00 a share in anticipation of a bigger offer.
People usually don’t think about agriculture as a business or an investing opportunity. This is especially the case with fertilizer. While the fertilizer part of the industry is highly cyclical, it’s a product that farmers can’t do without.
I believe that we’re at the beginning of a new up cycle in the agricultural sector and there’s good money to be made from this trend. The commodity price cycle is not over and, in my view, is about to migrate into basic agriculture commodities. Already, the prices of sugar and coffee are strong. If we get a period of sustained price inflation from the huge increases in government money supplies, guess which products are going to increase dramatically in price? Food products.
I wouldn’t have an equity portfolio going forward that didn’t have some exposure to agriculture. All you have to do is look at Deere & Company’s (NYSE/DE) latest financial results. The big-green-tractor-maker is seeing strong revenue growth from its global operations. While the company said that Europe is weak right now, sales are strong in Asia, Canada and the U.S. market, where farm incomes are going up big time. There are even new Chinese agriculture stocks in the marketplace. One hot trader is China Agritech, Inc. (NASDAQ/CAGC), which sells fertilizer.
Currently, there are new funds being set up that are pooling investor money to actually buy real farm land in Canada and the U.S. In my mind, this is the biggest vote of confidence; yet, it’s a sector that’s been in the doldrums for a long time. Every industry has its heyday and, over the next 10 years, I believe that the agriculture industry is going to make big money for investors.