Higher food prices aren't disappearing any time soon – meaning it's time to revisit one of the best "Buys" in the agricultural industry – Monsanto Co. (NYSE: MON).
I first called Monsanto Co. a "Buy" in October 2010, when I told you the company had started a rebound that would pay off for investors. The stock was trading at $56 a share and down 34% for the year – compared to an 11% gain in the Standard & Poor's 500 Index.
Since my recommendation, Monsanto has reversed its downward trend and is up more than 23% — much more than the S&P 500's 3.4% rise. The stock hit a 52-week high of $77.09 on July 25 before recent volatility dented its comeback. Monsanto stock closed Friday at $69.77.
If you missed getting a position on Monsanto the first time around, it's not too late. This innovative global Ag leader is still taking off.
You see, St. Louis, MO-based Monsanto is the largest producer of seeds to commercial farms. With food prices expected to increase 4% next year, and global reserves dwindling, demand for Monsanto's products will rise.
This means Monsanto should see record-high seed prices and margins.
Not only that, Monsanto has a competitive edge: It's a leader in creating genetically modified seeds that help crops reach levels of productivity unimaginable a few decades ago.
So it's time – again – to buy Monsanto Co. (**) – especially if you didn't get a chance to pick it up last year. If you already have shares, I suggest you continue holding them and possibly look to add to your position.
Why Monsanto Co. Has Plenty of Room to Grow
The effects of global weather conditions over the past year have drained the world's food reserves.
Fires in Russia last fall depleted wheat crops to levels so low the country had to quietly import seed grains. China's drought and Australia's endless rains also reduced reserves.
In fact, China's shrinking food supply led it to purchase more corn from U.S. markets in July than the U.S. government expected it to buy in all of 2011.
The United States also had its share of weather damage. The effects of the last La Niña (unusually cold ocean temperatures) lingered on this summer's corn crop. Nearly endless heat and drought made the southern region suffer, while cold, wet conditions prevailed in the north late into planting season. This compromised the yield and quality of this year's corn crop and led the United States Department of Agriculture (USDA) to reduce its fall crop forecast to 12.9 billion bushels from 13.5 billion.
Worse, the National Oceanic and Atmospheric Administration weather projections for the Pacific region show signs of a second La Niña developing. This is after the third strongest La Niña ever was recorded last winter.
These weather conditions and food supply constraints mean U.S. farmers could see historic corn market prices during next spring's planting season.
Since corn prices are a huge driver of food prices, which are expected to climb 4% in 2011, analysts predict retail food prices will rise another 4% next year.
This will drive up prices on Monsanto's products. The company already announced last week it would increase prices next year for its DeKalb brand of corn seeds by 5% to 10%, helping it reach its goal of boosting earnings by 13% to 17% per year.
Monsanto also will benefit from its one-of-a-kind line of genetically modified seeds. The company has created seeds with built-in defenses against pests, helping farmers yield a higher crop percentage. The company is expected to release new defenses next year.
Increased seed sales helped push third-quarter profits up 77% from the year before. Third-quarter revenue rose 21% to $3.59 billion. Monsanto's seed and genomics business constitute about 73% of its revenue; the rest comes from its agricultural productivity division.
In addition to the company's profit potential, investors will like that Monsanto just increased its dividend from 28 cents to 30 cents, for a 1.7% yield.
The company has a $37 billion market cap, with an enterprise value (EV) of $38 billion once you take into consideration net debt and cash levels.
The stock is a "Buy" to anyone who missed the chance to pick up shares in the past, or who is looking for a stock with some upside leverage to rising corn prices.
Monsanto is a "Hold" if you are nearing long-term capital gains on your position from last year, but now's a good time to pick up extra shares.
Corn and other food commodities prices are in a long-term bull market due to global weather patterns and shrinking food reserves. The reality is that this year's corn crop will be poor, leading to extremely tight supplies for growing global food demand.
When China arrives again to buy U.S. crops, taking down large volumes, food prices will rise – and rise rapidly.
Let's look to put some of that leverage to work for us, while still getting a decent dividend.
(**) Special Note of Disclosure: Jack Barnes has no interest in Monsanto Co. (NYSE: MON).
Barnes launched his own shop, RIA, in 2003, just as the second Gulf War was breaking out. In early 2006, after logging a one-year return of nearly 83%, Forbes named Barnes the top stock picker in its "Armchair Investors Who Beat the Pros" competition. His two audited hedge funds generated double-digit returns in 2008.
Barnes retired to the beach in the summer of 2009, and continues to write from there. He's now the author of the popular blog, "Confessions of a Macro Contrarian," and his "Buy, Sell or Hold" column appears in Money Morning twice a week. In his previous BSH column, Barnes analyzed Chesapeake Energy Corp. (NYSE: CHK).
News and Related Story Links:
- Yahoo Finance:
- National Weather Service:
Climate Prediction Center
Monsanto to Raise 2012 Corn Seed Prices 5% to 10% on Average
- Money Morning News Archive:
Previous "Buy, Sell or Hold" Features.
Confessions of a Macro Contrarian.