Agricultural bull market passes 'sell-by' date

Stock market investors seeking to capitalise on the boom in food and agricultural commodities may have left it a little late to sow their investments for a short-term harvest, sector analysts warn.

The surge in food prices over the past year has fuelled a spike in the shares of agriculture-related companies from tractor makers to fertiliser producers. But analysts now caution that stock valuations for some companies have reached over-ripe levels at a time when food prices are showing tentative signs of stabilising.

"All it would take is one big crop to prove to the world we have enough food - and these stocks would suffer," warns David Bleustein, an analyst at UBS.

Richard Ferguson, an analyst at Nomura in London, adds that, in the short term, there is "froth" in some agriculture companies' valuations.

Some of the share price rises across the sector have been striking. John Deere, the world's biggest tractor manufacturer, has seen its shares jump 40 per cent in a year as US tractor sales hit a nine-year high. Agco, the farm equipment maker, has risen more modestly but is still up nearly 40 per cent.

Gains have been even sharper in other areas, particularly in fertiliser stocks. Prices for potash and phosphate fertilisers have surged 96 per cent in the past year, US government data showed this week. This has helped drive shares in German fertiliser group K+S up 277 per cent from last year.

Monsanto (NYSE:MON) , the world's largest biotech seed producer, also has seen its value nearly double in 12 months, as has Syngenta (NYSE:SYT) , the Anglo-Swiss seeds and crop protection group.

Genus, the British animal genetics company which sells semen and breeding animals, has jumped 39.4 per cent over the past year as farmers sought help to improve their herds.

With such dramatic gains across the sector, these companies are no longer the bargains they once were. Monsanto trades at about 37 times its earnings over the next 12 months based on consensus forecasts. Syngenta and K+S all trade above 20 times while Agco is valued at 17 times expected 12-month earnings.

Some analysts believe much of the short-term good news has already been priced in to such stocks and some companies have already seen some gains trimmed. Deere shares have fallen 11.7 per cent since peaking at $94.69 in January to $83.61 on Friday. Deere trades now at nearly 18 times expected earnings while Genus trades on a multiple of 27 times.

Credit Suisse warned this week that valuation of K+S was "stretched", saying the time to harvest profits on potash stocks had now come.

But it added as long as the "agricultural/fertiliser bull market shows no signs of weakness", the shares will trade well above fair value.

This week the Financial Times revealed that the United Nations' Food and Agriculture Organisation food price index, considered the best measure of global food inflation, saw its first decline in 15 months in April, as wheat, dairy, sugar and soyabean prices fell.

Jose María Sumpsi, the FAO's assistant director-general, said that with the exception of corn and rice, food inflation appeared to be "reaching its peak", although he did not expect prices to start falling.

Analysts say another problem is that most companies making agricultural machinery have some degree of exposure to the troubled building sector. Rising production costs, as the price of steel surges, is also denting prospects, they add.

Mr Ferguson says the medium-term outlook is still positive. He believes countries such as Ukraine or China, where there are less than five tractors for every 1,000 hectares, need to industrialise their agriculture to western standards of about 30-50 tractors per 1,000 hectares.

Some investors are now looking for more innovative ways to gain exposure to the potential long-term boom in agriculture, seeking out opportunities that are still cheap.

Investing in the banks that finance the expansion of farming in developing countries such as Brazil or Ukraine is one strategy some advocate. Another is to buy into "agribusiness" structured products or specialised indices.

Some entrepreneurs, not content with tapping into the farming boom indirectly, are buying up unused or underused land and farming it themselves.