It’s been a bountiful year on the farm. The 2014 corn harvest is expected to be the largest in U.S. History, and the supply glut has driven down corn prices by more than 20% so far this year. Since corn is the largest agricultural crop produced in the U.S., Big Ag stocks have been feeling the impact: The S&P Commodity Producers Agribusiness Index has risen by less than 1% so far this year, badly lagging the 8% gain for the broader S&P 500. But many market pros are now saying that the corn slump presents a tasty buying opportunity for investors.
One strategy is to bet directly on a corn rebound. As of early September corn prices were averaging about $3.40 a bushel—a sharp drop from $8 a bushel just two years ago. Commodities analysts at Rabobank International predict that corn prices will stabilize in the fourth quarter of 2014 before climbing back up to $3.90 a bushel in the spring of 2015. Over the longer term, global population growth and improving diets in emerging markets are expected to bolster the demand for corn. Investors looking to make a bet on increasing corn prices might consider the Teucrium Corn Fund, an exchange-traded fund that tracks corn futures. But such specialized exposure doesn’t come cheap: The fund levies a 2.75% expense ratio.
Another way to play the drop in corn prices is to purchase stocks of agricultural companies. For instance, shares of ag giant Monsanto (MON) have fallen by 2% so far in 2014. But farmers have traditionally been willing to pay a premium for the company’s genetically engineered seeds, which are designed to have characteristics (such as resistance to herbicides and insects) that can’t be obtained through conventional methods. That’s not likely to change. “Don’t fear the ‘corn apocalypse,’” says Credit Suisse analyst Christopher Parkinson, who figures that Monsanto will be able to hike prices for its seeds by an average of 2% to 3% over the coming year. Monsanto’s management is forecasting low-double-digit to mid-teens earnings growth for 2015. Parkinson, who has a buy rating on Monsanto, thinks the shares could rise by as much as 20% over the next 12 months.
The corn glut has also weighed on the stock of DuPont (DD). The company derives more than 40% of its operating earnings from its agriculture unit, and corn makes up about half its seed business. Citigroup analyst P.J. Juvekar views the current corn price pressure as temporary. Meanwhile, DuPont is on track to spin off its slower-growing performance-chemicals business in 2015, a move that Juvekar says will make the company “more focused on its core competencies.” Indeed, since 2008, DuPont has steadily increased its share of the U.S. Corn market, to about 37.5%. Juvekar, who has a buy rating on the stock, sees a 15% upside over the next year, on top of a 2.8% dividend yield.
An easy vehicle for gaining exposure to the broader agriculture industry is the Market Vectors Agribusiness ETF, which invests in companies that derive at least half their sales from ag-related businesses. Top holdings of the fund, which charges a 0.55% expense ratio, include Monsanto, food processor Archer Daniels Midland, and equipment maker Deere. There are worse ways to buy the farm.
A former compensation consultant, Janice Revell has been writing about personal finance since 2000.
This story is from the October 6, 2014 issue of Coins2Day.