Buy a Farm, Not a House (DE, CNH, POT, MOS, SYT, MON, IPI, AGU, MOO, BHP)

Rising commodity prices, especially for agricultural products, are pushing up land prices and stock prices for some of the biggest players in the agricultural sector. Prices for cotton, corn, and wheat have risen dramatically, driven in part by the quantitative easing program that has pushed down the value of the US dollar, making US agricultural goods and exports more competitive in world markets. Since the US Federal Reserve Bank started buying US Treasuries in March of 2009, the Thomson Reuters/Jeffries CRB Index has risen 49% according to Bloomberg.

Farm equipment makers like Deere & Co. (NYSE: DE) and CNH Global NV (NYSE: CNH) have seen share prices rise substantially this year. Fertilizer and seed producers, for the most part, have also done well. Potash Corp. of Saskatchewan, Inc. (NYSE: POT), The Mosaic Co. (NYSE: MOS), Syngenta AG (NYSE: SYT), Intrepid Potash Inc. (NYSE: IPI), Agrium Inc. (NYSE: AGU), and Monsanto Corp. (NYSE: MON) have watched share prices rise between 25% and 80% since July 1st. The Market Vectors Agribusiness ETF (NYSE: MOO) is up about 40% in the same time frame.

Deere is scheduled to release earnings on November 24th, and analysts are estimating EPS of $0.93 on revenue of $6.2 billion. In the same period a year ago, Deere posted EPS of $0.23, way above then-estimates of $0.03. The company has hammered estimates every quarter since.

In its most recent earning report on October 21st, CNH posted EPS of $0.43, about 27% above estimates. Like Deere, since a year ago, CNH has pounded estimates. For the quarter ending in December, CNH is expected to post EPS of $0.42 on revenue of $3.69 billion, reflecting sales growth of about 15%.

Potash Corp.’s share price has been distorted by the $38.6 billion buyout offer from BHP Billiton plc (NYSE:BHP). The $130/share offer boosted the company’s share price from around $112 to more than $150. Now that BHP says it’s withdrawing the offer, the share price will decline again, even with the company’s plan to buy back $4.2 billion in stock. But demand for potash fertilizer will keep Potash Corp. earnings and revenues rolling in, with estimates for the current quarter at EPS of $1.60 on revenue of $1.57 billion. The EPS estimate is double the year ago’s actual EPS.

Mosaic, which is majority owned by privately held Cargill, Syngenta, Intrepid, and Agrium should continue to post solid numbers as demand for fertilizer follows demand for the agricultural commodities. Cotton, corn, wheat, and soybean prices will encourage farmers to plant more and to get the expected yields, farmers will buy more fertilizer as well.

Monsanto has been struggling with sales of its latest modified corn seed, and a drop in sales of its Roundup Ready seeds. Analysts expect that to turn around somewhat in 2011, with EPS estimates rising from $2.79 in the year ending August 2011 to $3.31 in the 2012 fiscal year. Those estimates have been declining over the last 90 days, and Monsanto still looks to have an uphill climb.

Paul Ausick

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