Fully Invested In Agriculture
Tuesday, April 19th, 2011
If You are Fully Invested In Agriculture, You are Doing Well
Where are you reinvesting your profits from agriculture? Buying more farmland or investing in the equity markets? If it was the latter, you might have done very well for yourself if you had relied upon what you know and invested in agricultural companies. While the Standard and Poor’s Index of 500 stocks has gained value in the past several years, a similar index of agricultural stocks did even better. But you probably knew that because you have been buying equipment, crop inputs, and hauling grain to them and see firsthand how they are doing.
Agriculture has done well since commodity prices began to aggressively rise in 2007. There was a dip midstream, but commodity prices are back to record levels, and farmland prices continue to climb. That is a mirror reflection of the performance of 21 publicly traded companies which are deeply tied to the agricultural economy, say economists Clay Kramer and Gary Schnitkey at the University of Illinois. Their recent newsletter details the performance of public companies in five areas, which you know well:
1) Fertilizer: Agrium, CF Industries, Intrepid Potash, Mosaic, Potash Corp of Saskatchewan
2) Equipment: AGCO, Art’s-Way, Caterpillar, CNH, Deere, Kubota, Lindsay,
3) Seed & Genetics: Monsanto, Syngenta
4) Crop Protection: Dow, DuPont, FMC,
5) Processing: The Andersons, ADM, Bunge, Corn Products,
Kramer and Schnitkey determined the market value of each based on the value of outstanding shares and tracked the share value beginning with the first quarter of 2007. They found that their Ag Index tracked the performance of the S&P about 81% of the time, reaching a peak in 2007, declining in 2008 and early 2009, then climbing to the present quarter. Despite the close correlation, there were distinct advantages for the stocks in the Ag Index. In 2007, the Ag Index gained 55% in value, while the S&P gained 2%. In 2008, the Ag Index lost 48% while the S&P lost 36%. In 2009, the Ag Index gained 37% and the S&P gained 22%. In 2010, the Ag Index gained 26% and the S&P gained 12%.
The economists also created a different gauge of performance by determining the increased value of a specific investment, and report that from 2007 to 2010 the market value would have increased by 8.6% per year, while the S&P would have lost 2.7% during the same time. They say, “Judging by these geometric means, market values of companies in the Ag Index have increased more than firms in the S&P 500.”
The economists also compared the performance of each of the groups, and found that you should have invested in fertilizer companies. The market value of each sector varied considerably, with the fertilizer sector doubling its market values. A $100 stock investment in the fertilizer sector would have risen to $500 in 2008, but fell to $150, and ended 2010 at $350. The equipment sector had a 51% increase, followed by seed and genetics at 37%. There was a 2% decrease in value in the crop protection sector, and a 4% decrease in the processing sector. The economists say when the evaluation is extended into 2011, those latter two sectors have seen increases that exceed their opening value in 2007.
Market values of publicly traded agricultural companies have generally increased in value to a greater degree than the S&P500 stock index. While there is a close correlation in value, the index of agricultural companies has performed with overall profitability and higher stock values from the start of 2007 into the early part of 2011. However, there has been wide variability within the various sectors of agriculture, with fertilizer companies more than doubling in value, compared to processors which ended 2010 just below stock values at the outset of 2007.