Back in the early 1900's, 40% of the American workforce made their living from farming. Today, less than 2% of the U.S. Populace works on a farm. What this means to me is that a major polarity shift in business could soon move that number higher as Americans look to protect themselves against long term inflation.
Could we be in the early stages of a multi-year boom for farming in this county? My research tells me that we are only in the early innings of the great boom for the American (and overseas) farmer because of what the price of oil and gold are telling me about inflation pressures and the Dollar. Farming is one of the best hedges against runaway inflation and it seems to me that even though farm prices are up around 12% per year over the longer term, the capacity for farmland to protect investor capital has never been greater. Keep in mind, in the short run we are bearish on the equity markets and think that the stock market could fall back to around $1200 or so before moving back up.
These 5 Agriculture-based investments look poised to move higher over many years with the rising price of agricultural commodities and with the price of farmland and overall inflation. If you don't want to wear suspenders and drive a Caterpillar, you can always just buy shares of CAT and John Deere. You may not be as richly rewarded, but you will also have a lot more time on your hands, which won't be covered in dirt and blisters...
John Deere (DE) -- Most investors think that investing in the infrastructure and machinery businesses is cyclical and has more to do with "the improving economy" than with food prices and supply and demand for farmed goods. We feel that John Deere revenues have more to do with rising food costs and the rush to move supply into the foodstuffs market. In the end, that new tractor may well be worth the cost for existing farms, while many entrepreneurs will move into farming in future years which should help to buffer sales and earnings from any outward macro shocks that may come from possible war with Iran, sovereign debt, banking panics, etc... DE shares are dirt cheap at 10X forward earnings and 12X trailing earnings. The company drops an enviable 8.5% to the bottom line while delivering an impressive return on equity of 42%. In other words, we feel Deere shares could benefit from a bull market in their business verticals as well as the potential for shares to be positively revalued by Mr. Market. Great investments usually require the combination of rising earnings with reasonable valuations. Right now Deere appears to meet both of those requirements.
Caterpillar (CAT) -- We have been relatively bullish on shares of Caterpillar for a while now, but we think given that the stock has exhibited 34% revenue growth over the past year that a 15X earnings multiple and 10X forward multiple is reasonable for shares of Caterpillar. Though we would wait for a pullback to around the $100 level or lower, the shares represent a decent value at current levels and the stock should reward shareholders over the very long term. CAT delivered an impressive 59% growth rate on the bottom line in the past quarter as well. Though we prefer a Cummins or a Deere, CAT has the best growth rate out of the entire sector. If this is a cyclical and not sustainable jump in earnings, investors need to be ready to hit the exits, however, as many growth stocks are really cyclical in nature and earnings growth in the short term is often not sustained over the long term.
Cummins (CMI) -- Cummins is another farmland "pick and axe" type of derivative play which should work for patient investors. If Cummins can get into the natural gas powered big rig market, the stock may have a whole new bull market behind the name. We think that CMI could become a big player in the natural gas engine market and that the stock is a better investment than a Westport Innovations, who is Cummins partner on the new natural gas engines because of valuations. At 12.7X earnings with a 10X forward multiple, Cummins looks reasonably priced. With an 18% growth rate, Cummins has a lot of top line momentum behind it and we think the momentum will last as diesel engines become more cost effective with rising gas prices.
Potash (POT) -- Most investors don't really think of Potash when they think of farm investing, but what most investors do not realize is that Potash is the fertilizer of choice for much of the heartland in America. Potash is also a resource in decline worldwide and the Potash scarcity is a real issue for long term sustainable agriculture. If the world ran out of fertilizer, the price of food will surely skyrocket which makes investments in POT stock a good hedge against resource scarcity and higher food prices worldwide. I could certainly see this stock being bought up by the sovereign wealth funds of resource poor nations as well as nations who wish to hedge against food scarcity and resource driven inflation. POT looks reasonable at 13X trailing and 11X forward earnings. For longer term investors, this looks to be a good hedge against the rising cost of food.
Mosaic (MOS) -- The other big name in bat guano is Mosaic. Don't look at this excrement stock and cringe, however, because investments in Potash look to be incredibly timely given the lack of new finds of major Potash deposits. Mosaic looks pretty cheap at 10X trailing earnings, but the drop off in quarterly earnings is a red flag for me. I would wait for a pullback into the $50 area before buying here, but I think over the long haul this is a good stock to own.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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