(05/22/14) Food Favorites: Triple Play in Agriculture

World food prices are climbing sharply in 2014; there are several reasons for the climb in food-related commodities, mostly related to global supply problems, suggests Philip Springer in Personal Finance.

These include cold weather in the US; drought or very dry weather in California, the southern Great Plains, Brazil, and elsewhere; a hog virus in the US; and concerns about disruptions of wheat and corn exports from the Ukraine and Russia due to political unrest.

Weather forecasters expect El Niño to return this year. Temperatures in the Pacific Ocean are rising, which can lead to extreme weather around the world, wreaking havoc with growing conditions and boosting prices of many commodities.

Meanwhile, demand for US beef and pork has climbed sharply in recent years, particularly from China. Those higher prices also boost demand and prices for less-expensive chicken and eggs, for example.

Deere (DE)

Among our favorite individual agriculture-related stocks, Deere’s tractors and other machinery control more than half of the North American agricultural equipment market.

But Deere is focusing on emerging markets, particularly China, India, and Brazil. Those countries need agricultural machinery to help boost agricultural yields to fill the populace’s growing demands for grain-intensive meat in their diets. Deere is increasingly building factories in strategic locations in those booming markets.

Deere shares are trading about where they were in 2007, and they carry a rock-bottom price-to-earnings (P/E) ratio of 11. In addition, Deere has been steadily buying back its shares over the years.

In December 2013, it announced a new repurchase program for $8 billion, which is 23% of the company’s stock-market capitalization. We view Deere as a low-risk way to invest in rising food prices.

Monsanto (MON)

Monsanto is a pioneer in applying bioengineering to agriculture and is the leading producer of genetically modified (GMO) seeds. Some 90% of all corn and soy grown in the US is genetically modified.

In Monsanto’s latest quarter, revenue grew 7% and earnings per share (EPS) climbed 15%. Corn seed and traits accounted for 58% of the company’s total sales.

Soybeans are expected to grow in importance: The company’s biggest-ever new soybean product, Inacta Roundup Ready (RR) 2 PRO, carries a significant yield-harvest advantage over the competition. Inacta has been approved by China, which also has approved the company’s DroughtGrad corn trait.

Monsanto projects double-digit revenue increases over the next decade from emerging markets, particularly Brazil and China. We expect the company to generate average annual profit gains of 15% over, at least, the next three years.

Bunge (BG)

Founded in 1818, Bunge is a sprawling global agribusiness ; its primary business (three-quarters of revenue) involves buying, selling, and transporting oilseeds and grains to customers around the world.

Bunge operates in 40 countries and generates $60 billion-plus of annual revenue. About a quarter of revenue comes from the US, but the greatest growth has been in South America and Asia.

As for 2014, the company says its agribusiness operation could generate record profits, partly because of a forecasted strong soybean crop in South America. Wall Street currently is looking for EPS of $7, up sharply from $4.78 in 2013.

Meanwhile, Bunge is financially strong and has raised its dividend for ten years in a row, tripling the payout over that time. The stock’s current yield is 1.5%.