It took 112 years, but the farmers of this country have finally gotten revenge over the greedy moneymen of Wall Street. In 1896, the greatest orator of his day, William Jennings Bryan, gave what is widely recognized as one of the best political speeches in the history of this nation, lambasting the bankers back east for ignoring the plight of farmers and caring more about the soundness of their money than about the heart and soul of America. Jennings Bryan’s closing words to a cheering throng of delegates at the Democratic convention—“You shall not crucify mankind upon a cross of gold”—put the Great Commoner in the history books, mostly as a coda, an epitaph for what was once an agrarian-dominated society.
Until now. Suddenly, it’s the farmers who are flush, at a time when Wall Street has turned mendicant. Suddenly, those who grow corn and wheat and soy have the upper hand, and it’s all because of a simple irony: This time, the government has decided to crucify mankind upon a cross of ethanol.
Ever since Washington fell in love with this renewable form of energy, Wall Street has been trying to figure out how best to profit from what amounts to a mandate for higher crop prices. It’s so pronounced that, in what has become one of the more horrific bear markets in years, courtesy of the housing and lending debacles, agriculture has become one of the only safe havens for investors. In fact, farmers are benefiting from not just one but two factors: food and fuel.
In normal times, the farmers’ production of wheat, corn, and soy would be bid up simply because of newfound demand from places like China. Throughout history, when a population grows wealthier, you get a pronounced trend away from starch to protein, which calls for dramatically increased corn harvests to feed the cows, pigs, and chickens that produce that protein. But that’s only half the story now. The Bush administration has also mandated a fivefold increase of corn ethanol’s use in this country by 2017, at the same time that the world’s clamoring for our corn. That means as much as 50 percent of our corn will be needed to make ethanol in the next few years, dramatically increasing the price of corn, which has more than doubled from $1.95 a bushel three years ago to $5.47 last week. With farmers switching quickly to corn to benefit from federal subsidies, prices of the remaining major cash crops, soybeans and wheat, have increased from $5.42 and $3.36 a bushel to $14.69 and $11.24 a bushel over that same three-year period. Corn’s plenty has created soy and wheat scarcity, because there are only so many arable acres left in this developed country. The demand is so strong for grain that we have the lowest stocks in decades. The farmers have become the new wildcatters, planting crops everywhere they can, in a rush that feels reminiscent of our nation’s turn-of-the-century oil boom: There Will Be Corn!
In this new world, the parallels to oil and oil drilling are everywhere, and so are the profits. Despite popular myths about spendthrift farmers making do with ancient equipment and old-fashioned methods, nothing could be more wrong. To cash in on the crop boom, the farmers have engaged in spending analogous to any of history’s myriad gold rushes. They have to buy equipment and use new techniques because they can’t buy land. Unless home builders can get a government program to plow down empty houses and turn the vacated land into farms, there is no more land. So here’s how to make money off the flush farmers: Own the stocks of the companies that make the equivalent of their derricks and drill bits, their picks and their pans.
Farmers have become the new wildcatters, planting crops everywhere they can, in a rush that feels reminiscent of our nation’s turn-of-the-century oil boom.
Here you’re in luck. Agribusiness has been so starved for capital, so in the doldrums for decades, that most of the companies that service it have gone under or merged to the point that you’ve got players with little or no competition spewing gigantic, oligopolistic profits. And they’re eager to return their capital to shareholders. In fact, unlike so many other companies that are reeling from the Wall Street–caused credit crisis, the biggest problem facing these ag players is that they have too much cash; they can’t redeploy it fast enough in their own industries, so they are doling out dividends and buying back stock like mad. There are so few of them and they are so treasured for their momentum on Wall Street that their own companies compete every day with the big mutual funds for stock, propelling them to higher levels.
The first, and the most obvious and yet still dramatically undervalued, is Deere & Company, the biggest and best tractor company in the world, with sales and earnings that just blew away even the most optimistic analysts. While Deere’s up 50 percent year over year, it is down 4 percent for 2008, creating a remarkable buying opportunity for this corporation’s stock, the envy of all machinery companies (not just ag machinery makers) worldwide. I think it could go up 50 percent from here and still be too low in valuation. It’s turned into the equivalent of Schlumberger, the greatest oil-service company, with competition that’s almost nil in its field. There were dozens of large tractor companies at one time, but only Deere survived, and it is now prospering.
Farmers need seeds to plant renewable fuels, and they need billions of dollars’ worth of them. Plus they need seeds that produce hardy stalks with corn that has more oil yield than the crops in the old days. Here, Monsanto stands out as an amazing innovator, with patents galore for seeds that can produce much more corn per stalk than could even be imagined ten years ago. Monsanto’s expensive on a per-share basis. And the stock’s not undiscovered; it’s up 100 percent since last summer. But the company just keeps blowing away estimates, and a new corn varietal is about to hit the market that could mean game, set, and match for farmers trying to meet the outrageously aggressive ethanol standards the federal government has passed.
A less risky way to play seeds is to snap up some DuPont, another remarkable seed innovator. You get a snazzy 3.5 percent dividend, better than most bonds after taxes, but you also get stuck with some domestic housing and auto businesses that are handicapping the explosion of agricultural earnings.
Where the biggest money’s being made is perhaps the most dicey business in the world: fertilizers. I say dicey because for so many years the industry’s been plagued by overcapacity. That, however, is history. With farmers desperate to take advantage of these prices, fertilizer’s another key ingredient to bountiful harvests. Two of the best fertilizer companies are PotashCorp of Saskatchewan and Agrium; the first is the lowest-cost producer, the latter is integrated from mine to retail. But my favorite is Mosaic, which has operations globally and can take advantage of the outrageous prices the Chinese are willing to pay for fertilizer.
Here’s how to make money off the flush farmers: Own the stocks of the companies that make the equivalent of their derricks and drill bits, their picks and their pans.
Finally, there’s the company that has spent millions trying to be sure that its interests are “well represented” in Washington: Archer Daniels Midland, the agricultural processor. With the ag renaissance, this company should be making money hand over fist. So far it hasn’t done much because of managerial snafus, but the environment is so favorable, it’s bound to benefit.
If our government were to show any rational thinking, by the way, we would be making gasoline with soy, not corn. Ethanol is an entirely inefficient method of producing energy, by some estimates consuming almost as much as it generates. It’s a fuel no one really wants. It’s difficult to transport because of its corrosive nature. And subsidizing it is causing runaway food costs and a nasty bout of inflation that’s hitting the poor hardest (soybeans are more efficient as a fuel and easier to produce and distribute). If we came to our senses, Bunge, the soybean company, would be the outfit to bet on. But don’t count on the soybean play; corn’s got too many states’ voters pulling for it.
If the agricultural stocks were simply riding the wave of increased grain use because of worldwide food shortages, that alone would make me bullish on the companies I’ve mentioned. We simply don’t have enough food—or ag stocks—to go around. But the etched-in-stone mandates of ethanol use, no matter how absurd they may be, will ensure at least a half-dozen years of extraordinary returns for these stocks. It’s a rush that puts oil and gold to shame.
James J. Cramer is co-founder of TheStreet.com. He often buys and sells securities that are the subject of his columns and articles, both before and after they are published, and the positions he takes may change at any time. E-mail: jjcletters@thestreet.com. To discuss or read previous columns, go to James J. Cramer’s page at nymag.com/cramer. Get all of James J. Cramer’s stock picks via e-mail, before he makes the trades, by subscribing to Action Alert Plus. A two-week trial subscription is available at thestreet.com/aaplus.