Agribusiness Is Still Flourishing

Even though commodities' prices have come down from record highs, agribusiness is hardly a fallow sector, Citi Analyst Brian Yu said, deeming fears of slowed agricultural demand "misplaced" in a Sunday note on agricultural commodities.

"We are not suggesting that a global slowdown will have zero impact on grain demand, but [we] want to highlight the weak historical correlation," Yu said. "The point is that fertilizer stocks are being grouped with industrial metals and energy when the supply-demand characteristics are arguably very different."

Shares rallied throughout the agribusiness sector on Monday as Yu said rising cattle and hog prices coupled with low global grain stockpiles bode well for fertilizer fundamentals. Increased meat consumption keeps corn in high demand since the crop accounts for 61.0% of animal feed. That, combined with tight global grain supply, means farmers will continue to invest in fertilizers as a way to maximize crop yields. The Market Vectors Agribusiness exchange-traded fund gained 80 cents, or 1.6% to close Monday's trading session at $49.95.

Soaring fertilizer prices sparked investor concerns of a bubble, especially as corn prices went on a six-week slide on reports that Midwestern flooding didn't destroy as many crops as initially feared. (See " Crops To The Rescue.")

"There is a big different between equities that trade at a low multiple because fundamentals/pricing/earnings are deteriorating and equities that trade at a low multiple [since] earnings expectations are rising while prices have lagged," Yu said, adding that he thinks fertilizers fall into the latter category and reiterating "buy" ratings on Agrium (nyse: AGU - news - people ), CF Industries (nyse: CF - news - people ), Mosaic (nyse: MOS - news - people ), Potash (nyse: POT - news - people ) and Terra Industries (nyse: TRA - news - people ).

Mosaic shares gained 6.1%, adding $5.90 to close Monday's session at $103.42, and CF Industries rose 1.9%, or $2.43, to $131.38. Agrium and CF Industries both added $2.03, or 2.6% for Agrium, which closed at $80.44 and 1.9% for CF Industries, to close at $131.38. Potash rose by 0.1%, adding 23 cents to $170.04.

Yu believes Potash's sell-off--the stock has lost nearly 19.0% in the last month--is overdone, especially since data on Friday showed potash producer inventories fell by 10.0% since July.