I know we have talked about this group before on GrowYourFunds, but I think this one deserves some revisiting. The agricultural group has had an absolutely amazing run that must be in perspective. Numerous times now the group has had short-term major dips where many analysts declare this the end of the bull market for the ags, but it has yet to come to fruition. Before we look at why the ag stocks have had such a run and what may be to come in the near future, take a look at some of the stocks in the group and how amazing their performance has been.
- Mosaic (NYSE:MOS) Up 267% from a year ago
- Potash (NYSE:POT) Up 191% from a year ago
- CF Industries (NYSE:CF) Up 212% from a year ago
- Monsanto Company (NYSE:MON) Up 114% from a year ago
Put these gains into perspective by thinking about how these stocks traded in the years before this amazing run. Mosaic shares were flat in a period from the end of 2000 to the middle of 2005. Monsanto shares traded in a tight range between 12 and 15 for several years back in the early 2000's. Before this amazing run, which started in the middle of 2006 these stocks were often thought of as slow growth stocks with little upside potential.
What has caused such an amazing run? It's the fundamentals stupid! There is no doubt that there has been justification for a major move in these names because of the soaring agricultural prices and pricing power. These companies can basically set the price for their products. Many people believe that farmers will be making huge money because of the high crop prices, but in most cases it is actually the companies making the fertilizers and seeds that are jacking up the prices and bringing in huge profits because of terrific profit margins. Mosaic has seen their profit margins go from the high single digits to around 20% in the last couple of years.
In fact just this evening Mosaic was out with comments regarding their 2008 and 2009 earnings. They were quoted as saying "we anticipate reporting robust Q4 results in FY08 as strong demand and the tight supply situation continues for crop nutrients." These crop nutrients are not optional for most farmers, they are a necessity. Low supply and high demand will always drive up prices, it's economics 101!
While these stocks have had a huge run and they seem due for a pullback, given the current situation I think it is a bad move to bet against these companies. They have been dealt a great hand in the current environment and they should continue profiting in a big way.
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