Investing in agriculture doesn’t only allow investors to get in on increasing global food demand, it also helps recession-proof your portfolio. The sector has benefits both domestically and internationally, because even during recessions, people have to eat.
As that demand persists and grows along with the flourishing global middle class, grain inventories are used up, to the point where they are at nearly their lowest level in over 40 years.
Furthermore, the increasing demand for biofuels is requiring 240 million acres for its production. In the United States alone, from 2004-07, biofuel use increased by 50 million tons, and the rest of the world increased use by 51 million tons in the same period. But which firms will help you profit the most from the sector?
As the Unites States’ largest fertilizer producer, Mosaic Co (NYSE:MOS) looks to continue steady growth, as it plans to take over the privately owned firm, Cargill. In fact, the company was split from Cargill in 2011. Mosaic Co (NYSE:MOS) is carrying about $7.3 billion in cash on hand, which is plenty for the takeover.
However, investors may have to wait longer before shares start to rise. The company is facing pressure from a delayed phosphate expansion plan. But as a long-term investor, I see huge potential in Mosaic Co (NYSE:MOS) due to the deal and because the firm has proven its dominance in the past.
With a materials market share of about 20% and as the planet’s largest producer of Potash Corp./Saskatchewan (USA) (NYSE:POT) by capacity, this is a firm to reckon with. Potash Corp./Saskatchewan (USA) (NYSE:POT) can also produce its products much cheaper than any other companies. It has six main mines in Canada that are extremely efficient.
I see this company driving forward with profits in the years ahead. The firm garners over 70% of its revenue from international sales. That makes it the leader in the global market and helps it cater to the growing middle class in developing nations. In fact, Potash Corp./Saskatchewan (USA) (NYSE:POT) is expected to increase sales substantially in China, India and Brazil for that very reason. The company anticipates sales to those nations will increase by at least 10% in each of the next several years. Furthermore, the production capacity at the firm is expected to increase from around 12 million metric tons of the finished Potash Corp./Saskatchewan (USA) (NYSE:POT) fertilizer, to 17 million metric tons within two years. That represents a 40% increase and a major opportunity for investors.
Investing in the company that manufactures the tools farmers need to harvest crops as global food demand increases, often makes for a sound investment. AGCO Corporation (NYSE:AGCO) appears to be undervalued, as it has a forward PE ratio of about 8.9. However, firms such as AGCO Corporation (NYSE:AGCO) are facing a tough time with increased environmental regulations, which means that company has to recreate many of its engines to meet the new standards. That can cost a lot of money and decrease the profit margin substantially. However, that short-term setback will likely be overcome by AGCO Corporation (NYSE:AGCO), as operations become more efficient in the future.
Common denominator
All three companies are weighted heavily on the world economy due to the fact that much of the demand for food comes from abroad. That is an uncomfortable fact for investors, because while economic indicators in the United States have been especially solid over the past several months, the same can’t be said for nations throughout the world. However, trying to predict the short-term prospects of the global economy is a guessing game; knowing that the demand for food will increase in the long-run is not. Investing in both fertilizer and agriculture equipment are surefire ways to get in on that rising food demand, though investors may experience short-term losses before the world economy recovers and food demand surges.
Phillip Woolgar has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Phillip is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article 3 Agriculture Firms to Have on Your Radar originally appeared on Fool.com is written by Phillip Woolgar.
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