Daily Gains Letter

Why Farmers Are Key to the Commodity Price Cycle

By for Daily Gains Letter |


Farmers really are the best customers.

Monsanto Company (NYSE/MON) has become more than a 10-bagger since listing on the stock market. Its performance over the last year has been good, and the company just beat the Street with its quarterly earnings results.

I suspect that many farmers have a kind of love/hate relationship with Monsanto. The company’s “Roundup Ready” products work, but it’s the way the company has litigated some farmers that has probably turned off a number of customers.

The company’s earnings results were good. Revenues in its latest quarter grew 15% to $5.5 billion. Global corn sales were particularly strong. Earnings came in at $1.5 billion, up 22% from comparable earnings of $1.2 billion.

Monsanto’s 10-year stock market performance has been outstanding, and I think investors can attribute a lot of weight to this—especially those who might be considering investments related to agriculture. Monsanto’s stock chart is featured below:

Chart courtesy of www.StockCharts.com

Wall Street has been consistently increasing Monsanto’s fiscal 2013 and fiscal 2014 earnings estimates.

Imagine this business if you have the loyalty of a farmer. The vast majority of farmers are in business for the very long term. They’re not going away tomorrow.

Barriers to entry are high because of seed development and the years it takes to develop proprietary technologies.

Monsanto is in a very good position right now, as the commodity price cycle favors agriculture. The prospect for continued strength in both revenues and earnings growth this year is very good, as the U.S. corn crop should reach an all-time record high.

Monsanto’s stock market performance has been pretty darn solid, especially considering the massive stock market retrenchment that took place during the financial crisis and subsequent recession. Monsanto has a lot of free cash flow—too much in fact—and the company could really do with a dividend boost. This would probably result in a big stock market jump.

Monsanto boosted its fiscal earnings outlook, and the company’s herbicide business is growing by leaps and bounds.

What this company’s operations are saying is very significant. They’re saying that agriculture and cash cropping got a big boost last year, and they should be solid going forward.

I am increasingly worried about the stock market, not because of earnings results, but because it has climbed so fast in such a short period of time. I’m also worrying more and more about sovereign debt and the never-ending cycle of borrowing to keep things going.

This is why I’m very fond of agriculture as a part of a balanced stock market portfolio. This sector has stability in terms of earnings growth; but it also has stability if currencies and financial markets fall apart.

And it’s a way to invest in something domestic that’s real, that isn’t going away. Demand for food, ethanol, and vegetable oil is not going to fall. Monsanto’s business prospects remain excellent.

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