Outlook for Agriculture Stocks Remains Strong

What's remarkable about soaring agriculture prices is that corn, oats, barley and wheat are not finite resources, like oil or copper. Fortunately for the world's ever-growing population, food is a renewable resource. Yet it is not inexhaustible. I read that U.S. stockpiles of many grains are at record lows. A more affluent world population is clamoring for better quality foods, starting with wheat, a natural high protein grain and the essential raw material in bread. The ethanol boom may have peaked, but the biofuel movement has further super-charged demand.

You thought $3-a-gallon gas was bad? On a recent visit to my neighborhood market, I saw loaves of bread fetching upwards of $4, a small box of granola was $5 and a pound of beef filet was $27.99. Get ready for refrigerator shock.

There's not much that consumers can do about it, short of going on a crash diet. But you can ease the pain by sharing in some of the profits that are flowing into the agricultural sector. Readers of this column should be well positioned, since I've been urging a commitment to the agriculture sector for some time, and have recommended Monsanto (MON), Syngenta (SYT), and Deere (DE) (all of which I own). If you haven't sowed any of these seeds, so to speak, I don't think it's too late. Despite stellar earnings last week, Deere shares dropped on the news because its forecast was slightly lower than expected. Buying opportunities crop up periodically, which I've been taking advantage of.

Agricultural commodity prices have been historically volatile, with booms like the current one inevitably followed by overproduction and busts. I grew up in a farming region and still have friends and family there. Farmers have lived through these cycles before. Maybe because they're so dependent on the weather, many tend to be pessimists. They aren't living lavishly on their newfound wealth. They're plowing profits back into machinery, seed and land, and saving for the proverbial rainy day. Still, there's reason to believe the current boom will persist. In its earnings release, Deere noted that "farm conditions throughout the world remain quite positive." High grain prices, low stockpiles, and government encouragement of biofuel development have spurred investment in the tractors, combines and other heavy equipment which Deere makes.

Another agricultural stock I like, but don't own (at least not yet) is Bunge (BG), which was featured in SmartMoney's "Where to Invest in 2008" cover story. Bunge is the world's biggest soybean processor, but it's also ideally positioned to benefit from soaring demand for grain. Bunge makes fertilizer, seeds, grains, animal feed, biofuels and consumer products, which pretty much covers every stage of the plant life cycle.

Neither Deere nor Bunge is entirely immune from the risk of recession, and both are well off their 52-week highs. Both peaked in mid-January. Deere was recently trading at $85 after reaching $94. Bunge was selling for $110 a share, down from $135. But even in tougher economic times, food is one of the last things where people cut back.

On my recent trip to the grocery store, I managed to find some relative bargains, and the same is true of agriculture stocks. With the "green" revolution showing no signs of flagging, they belong in every long-term investor's portfolio.