Agriculture Is Fertile Play for Investors

Corn may grow as high as an elephant's eye, but food investments are surging still higher. Voracious demand from developing nations for better diets, coupled with unhelpful acts of God such as the Midwest floods, have pushed up the Dow Jones-AIG Agriculture Sub-Index 42% from a year ago.

Is it too late to cash in on this trend? One way is to buy individual commodity futures in wheat, soybeans, whatever. This is a risky business, though. These creatures are extremely volatile and, a three-month futures contract can go wrong faster than a salmonella outbreak.

A somewhat safer alternative: exchange-traded funds that own farm commodities, managed by pros. PowerShares DB Agriculture ETF has soared 52% over the past 12 months. Or there's stock in companies that supply farmers with necessary stuff, such as fertilizer outfit Potash Corp. of Saskatchewan Inc., up 191%, and seed and herbicide purveyor Monsanto Co., up 108%.

Most farm-oriented securities aren't cheap. Potash trades at a pricey 52 times trailing earnings and Monsanto at 45 times.

So a wiser strategy might be to buy agriculture-related stocks that haven't benefited from the investing euphoria. David Reidel, head of Reidel Research, makes a case that farm-machinery makers and land consolidators in emerging markets are more affordable ways to cash in on the trend.

U.S. machinery makers like Caterpillar Inc. and Deere & Co., along with India's Mahindra & Mahindra Ltd., haven't been part of the rally because of concerns that high steel and energy costs will crimp their margins. The U.S. companies have increased revenue at modest, single-digit rates and the Indian one at a more respectable pace, around 20%. "But as commodity prices stay high, farmers will see the need to buy a new tractor," said Mr. Reidel.

The resulting sales explosion should wake up investors to these stocks, he said. Meanwhile, the trio change hands at about 15 times earnings, a thrifty level.

The farm consolidators are a more speculative play, because bad harvests, seller reluctance and other problems could hinder them. Sweden's Black Earth Farming Ltd. specializes in buying farmland in Russia's southwestern region. This area has some of the richest topsoil on Earth. Similarly, BrasilAgro SA is amassing large plantations in Brazil.

While neither company is profitable, they have good balance sheets and management, Mr. Reidel said. If he is right, they have time on their side.