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Rising food prices pinch consumers, but could enrich investors

Michael Santoli
·Michael Santoli

Drought and severe cold mean hardship for farmers and headaches for strapped consumers facing higher grocery prices.

But on Wall Street, the severe California water shortage and extreme winter weather conditions across the country are among reasons to warm to agriculture-related investments, which appear well-positioned to continue recovering after having spoiled in the commodity bust of recent years.

Large harvests and cash exiting from the once-popular “commodity trade” among fund managers led to a serious slump in crop prices last year. But so far in 2014, the PowerShares DB Agriculture exchange-traded fund (DBA) has climbed 15% in price. This fund invests directly in a broad spectrum of crop and livestock commodity futures.

This likely means an end of the brief reprieve from food inflation U.S. households were granted in 2013. The USDA forecasts retail food prices as a whole are likely to climb 2.5% to 3.5% in 2014, driven largely by drought-impacted supply strains on fruits, vegetables, dairy products and eggs.

The United Nations’ food organization likewise reported global food prices jumped in March to their highest level in a year, with political turmoil in Ukraine – a major grain producer – adding to weather-related difficulties.

Some individual food goods are seeing outsized price shocks. Market prices for the world’s most popular variety of coffee beans are up more than 60% this year to a two-year high, due in part to drought and then disruptively heavy rains in Brazil. (Consumers going to their local coffee houses for a cup have not been affected by this surge and are generally less likely to feel the hit from upward movement of raw commodity prices.) In a quirkier development, lime prices have more than doubled in recent months due to bad weather, disease and disruptions by organized crime.

Nasty winter weather fouled transport networks and has stranded plenty of wheat in storage facilities, and years of summer drought have left the nation’s cattle herd at multi-decade lows. As Yahoo Breakout points out in the attached video, corn prices in particular are on the climb, helped along this week by a USDA report estimating American farmers will allot 4% less acreage to corn this year.

Add all these supply issues to a still-hungry and growing world, and the case for hunting for some agricultural plays appears even brighter – especially given that shares of so many big ag-related companies still trade well below their peak levels of a few years ago, even as the broad stock market clicks to new all-time highs.

The most popular proxy for the barnyard economy, the MarketVectors Agribusiness ETF (MOO), is almost exactly flat over the past two years, left behind by the 35% advance in the Standard & Poor’s 500 index. The ETF is heavily weighted in seed, fertilizer, crop-processing and farm-equipment leaders such as Monsanto Co. (MON), Potash Corp. of Saskatchewan (POT), Archer-Daniels-Midland Co. (ADM) and Deere & Co. (DE).

In the past month, “the Moo,” as the fund is cheekily known, has shown some life, outpacing the broad market and gaining the attention of investors looking for overlooked opportunities in a picked-over market.


Josh Brown, financial advisor at Ritholtz Wealth Management and writer of the Reformed Broker blog, has flagged the sector as a potential outperformer this year, and a growing group of chart-studying technical traders have warmed to the Moo as it flirts with breaking out from its longstanding range between about $50 and $55.

Deere shares in particular have shown new life in recent weeks, climbing nearly 6% in the past month to approach $92, after going sideways for a year. The stock is intriguing for its combination of a modest valuation – about 11-times forecast 2014 profits of $8.43 a share – and for being largely disliked by the Street. Only four analysts among the 23 who follow Deere rate the stock a Buy, versus eight with Sell-equivalent ratings. That’s encouraging to Deere bulls, from a contrarian perspective.

Jim Larkins, manager of the Wasatch Small Cap Value fund, (WMCVX) focuses in large part on “fallen angel” stocks – one-time high-riding favorites that have fallen temporarily out of favor. He’s eyeing a handful of agricultural plays as possible rebound candidates. He reports that he hasn’t yet pulled the trigger, in fear that the broad ag cycle might not have durably bottomed, “but we can’t be too far away.”

Among the names on his watch list are Titan International Inc. (TWI), a maker of tires and wheels for tractors and other off-road vehicles; Intrepid Potash Inc. (IPI), a rare U.S.-based potash producer for fertilizers that might become an acquisition target someday; and American Vanguard Corp. (AVD), which distributes older, “orphaned” herbicide and pesticide products many farmers are rediscovering. All three stocks are well below their highs of a couple of years ago, but have stabilized at cheaper prices.

It’s hard to find a less dazzling economic sector than this one. But that’s exactly why these earthier names might prove to be ripe opportunities in a market captivated by buzzy Internet and consumer “story stocks.”