Is it Time to Sell Agriculture Stocks?

Food commodities and related stocks, like Potash (POT) and Caterpillar (CAT) have been having a great year. Until now the big names have been recommended on the basis that a growing middle class in developing nations will increase the demand for meat.

The amount of feed, often comprised of corn and wheat, necessary to breed the animals to their ideal size puts a strain on the supply and puts pressure on farmers for greater yields. In order to produce these yields, farmers will shell out on the latest in equipment or the enriched soil most likely produced from makers like Caterpillar and John Deere (DE) increasing the demand for growth.

Investors who caught wind of this trend early have already profited handsomely in many cases and some analysts are suggesting that they may want to cash in to avoid downside risks in 2012.

Global economic growth is slowing and the nations driving up the demand for food are not ascending as quickly as they did at their heights. For this reason, farmers might not be as committed to purchasing the latest innovations in equipment or investing in the priciest soil.

So is it time to sell off Agriculture stocks?

That depends. Investors who are in agriculture stocks for the short-term may want to head for the doors. With facts on global growth indicating flat domestic rates and slowing overseas, incentives for farmers to buy the latest equipment are declining. A perceived drop in pressure for yields is likely to lower expectations for these companies and cause stocks to fall from their heights in the short-term. Long term though, Agriculture stocks still offer a significant upside.

2012 may hold declining EPS estimates but the fact remains that population growth will continue to put pressure on farmers to produce more food. The inevitability of the rising population and the truth that the economy in China is still growing, albeit at a slightly slower rate will both bolster the price of food in the long-term.

Here are a couple that should be promising next year and into the future.

Agrium (AGU): AGU is an international agricultural company with three areas of focus: retail, wholesale and advanced technologies. Sales of the company have continued to grow, with a 40 percent increase for the second quarter of 2011 helping to bolster shares and reach sales of $6.2 billion.  Agrium’s CEO, Mike Wilson believes the best is yet to come for the company. Wilson cites farmers in the Eastern U.S.  Corn Belt and Western Canada as the impetus for continued earnings improvements. Their inability to plant complete acreage and apply maximum nutrients in the spring is likely to continue to limit global crop supply and keep things tight.

The majority of Agrium’s analysts are not just recommending holding onto the stock but believe it is still at buy levels, suggesting an approximate upside of over 50 percent. The stock is currently trading at 7.8 times estimated annual earnings.

The Mosaic Company (MOS): Mosaic is in the business of concentrated phosphate potash based crop nutrient. The company’s enriched soil helps to increase yields and the demand for the product will actually likely grow with the increased acreage from last season. Farmers have more land to cover meaning they need to increase their orders and so far the trajectory for the company has been good.  For the initial fiscal 2012 quarter Mosaic reported net sales of $3.1 billion a 41 percent climb from the year prior. Net earnings added $526 million against $298 million a year ago. Gross margin also grew as the company become more adept at lowering operating rates and is able to charge more for their product from farmers bringing in more money.

In the future, the company anticipates total sales of as much as 3.5 million tons for the third fiscal quarter of 2012. For 2012, improved potash operating rates and higher selling prices are expected to continue to drive profits. The stock has been given a projected upside of 46 percent according to the Street and is trading at only 9.6 times its estimated earnings for the current year.