Old MacDonald Had a Good Year
By As a gathering gloom from the credit and housing markets enshrouds much of the economy, there's one place that's still sunny: down on the farm. Prices for wheat, soybeans, and other farm products soared in 2007, and so have the shares of companies that produce tractors, seeds, and fertilizer. Persistent droughts and booming demand from China and biofuel makers should keep prices high.
For farmers, the statistics have been uniformly bullish. The price of a bushel of wheat is almost three times what it was a year ago, and soybean futures recently hit a 34-year high. Even corn, which lost ground after farmers planted a record crop to meet demand from ethanol plants, has rebounded 25% since the end of August.
With farmers flush, many fund managers are keeping their bets on the sector. "When grain prices are high, farmers are investing more in better equipment, better seeds, and better fertilizer," says Walter "Bucky" Hellwig, manager of the Regions Morgan Keegan Select Value Fund (RVLAX). Hellwig's top five holdings include seed giant Monsanto (MON) and tractor maker Deere (DE).
Deere's stock gained 88% in 2007, as revenue rose 9%, to $24 billion, and net income jumped 25%. Shares of Monsanto, which produces bioengineered seeds, have nearly doubled on sales gains of 17% and a 44% jump in net income for 2007. The Van Eck Market Vectors Agribusiness ETF (MOO), a fund launched in September to track an index of 40 farm-related stocks, has already gained 25%.
Worried that the big gains have come and gone? Opportunities may be hiding in sectors still catching up with the farm boom, particularly shares of smaller companies supplying fertilizer and insecticides. Laurent Saltiel, co-manager of the Janus Adviser International Equity Fund, says fertilizer makers haven't opened a new potash mine in 20 years. "There's no new capacity, so it's basically a recipe for several years of rising prices," he says. Among the fund's recent top holdings: shares of Potash Corporation of Saskatchewan (POT) and Syngenta (SYT), a Swiss provider of fungicides, herbicides, and insecticides.
Then there's the farm belt wealth effect. Some value-oriented managers are looking for companies outside the ag sector that could benefit from farmers' bulging purses. Cabela's, (CAB) the heartland's superstore for fishing, hunting, and recreational gear, is one selection that Value Funds manager Wallace Weitz picked up this year. Robert Hunter Perkins, manager of the Janus Small Cap Value Fund (JSIVX), bought shares of Cedar Fair (FUN), which runs a chain of amusement parks popular in the Midwest. With grain prices likely to remain high, investors may get another opportunity to share in the bounty.
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