Agriculture Making a Comeback in the U.S. Economy

by Jason Jenkins, Investment U Research
Monday, December 5, 2011

This summer I wrote about how Jim Rogers loves buying undervalued assets. What he saw in gold and silver over a decade ago, he currently sees in the agricultural sector. Agriculture prices are – on a historical basis – extremely depressed and this is where he saw his next opportunity.

Well, it seems that foresight is coming to fruition. The U.S. Department of Agriculture (USDA) said this week that the net value added of agriculture to the U.S. economy – when you add in inflation – will be the highest this year since at least the early 1970s. And the boom is likely to continue.

The official numbers show that in 2011, U.S. farmers will take home for the first time more than $100 billion in a single year. Agriculture Secretary Tom Vilsack stated, “Agriculture continues to be a bright spot” in the U.S. economy. Indeed, farming, together with natural resources production, particularly oil, is one of the few bright spots.

As the Financial Times reported this week, there has been a surge in farm income as a result of a rarely seen uptick in agricultural commodities. The past three decades have experienced infrequent increases in food prices. And these spikes were not across the board. More commonly, there was an isolated spike in a specific commodity. What we see now is an increase in price across the agricultural commodity board at the same time.

And what’s caused this boom?

Well here are three major catalysts:

There has been a strong demand for agricultural commodities in emerging markets – most notably China and India.

There has been really strong demand for the U.S. bio-fuel industry.

There have been supply and trade disruptions for other key commodity producers, such as Russia and Australia.

Fertilizer Stocks

Fertilizer stocks have been getting rocked over the past month due to fears that falling crop prices will reduce farmers’ ability to invest in potash and other nutrients.

There has been a sharp increase in costs, with fertilizers up 28 percent year-on-year and fuel up 27 percent year-on-year. Overall, production expenses will rise 12 percent to a record $320 billion. Some say this year’s jump is reminiscent of the worrying increase in expenses witnessed we saw three and four years ago.

And here are the reasons for a rosy outlook:

A rising global population that just reached seven billion people.

Higher protein consumption in the world’s developing economies translates into a bigger demand for feed.

High potential for industry consolidation.

These three points are crucial because it creates a longer-term bid – and a strong institutional investor base – for these stocks.

The Strongest Play

Companies from the seed and pesticides producers to agricultural commodities traders have reaped the benefits of this boom. However, take a look at Deere & Co. (NYSE: DE).

Last week Deere & Co. – the leading manufacturer of tractors and combine harvesters – reported off-the-chart earnings that beat market expectations and came in 46 percent above last year’s numbers. Deere & Co. also raised its outlook for next year as it expects strong commodity prices and another good year for the farming industry.

Good investing,

Jason Jenkins

Article by Investment U