Wilted Ag Sector May Grow Anew

The government's bailout plan, I believe, is too little and too late to make any significant difference in the current credit crisis that continues to worsen.

The meltdown is far beyond Wall Street and the banking industry, because available credit is frozen everywhere, from large corporations to small businesses, and many companies are having a difficult time even meeting payroll because of the inability to borrow short-term money.

We certainly have extreme readings on sentiment indicators in the market, and we are certainly very oversold. Rate cuts, around the world, are a possibility, and that would certainly spark at least a short-term rally. However, I don't know if the rally will have any legs, and we will have to examine the action as indices hit heavy resistance levels.

One area that looks extremely attractive to me and is heavily oversold is the agricultural sector. Many companies in this sector are down between 50% and 70%, all because of forced selling as funds moved to quickly raise cash.

I like the fact that the agricultural sector isn't dependent on worldwide economic growth, but on population growth, which isn't slowing, especially in developing markets.

In addition to this population growth, income growth will also increase the demand for food. Even a modest amount of income growth in developing countries will increase demand for food.

Even though the U.S. is in, I believe, a Wall Street-induced recession, the Chinese economy will continue to expand along with consumer incomes all across Asia. That means the demands for agricultural foods, beef and related products will continue to expand no matter what the U.S. economy does.

Let's take a look at a couple of exchange-traded funds that may give investors an opportunity to take advantage of extremely oversold conditions in this sector.

The first fund is the Market Vectors Agribusiness . This fund's objective is to closely replicate the price and performance of the DAX Global Agribusiness Index. The fund's mandate is to invest at least 80% of its total assets in equity securities in worldwide companies engaged in agriculture.

The top five holdings of this fund are Syngenta , Monsanto , Potash , Deere and Mosaic . The fund holds 7% to 8% of its assets in each one of these companies.

The chart below shows that since the high in June, the price of the ETF has fallen more than 50%. Currently, many of the companies in this fund are trading at extreme discounts to earnings, and that may signal an opportunity to contrarian investors.

If you want to invest directly in the commodities, consider the Powershares DB Agricultural ETF. This fund is set up to track the Deutsche Bank Liquid Commodity Index, which is intended to reflect the agricultural sector. The index currently consists of commodities such as corn, soybeans, wheat and sugar.

Tthis fund has also had its troubles, dropping more than 30% from its July highs. The current price is extremely oversold and due for at least a snapback rally.

Current market conditions can certainly push these funds lower than they are now, but over the longer term I think that the agricultural sector will turn out to be an extremely profitable venture. The key of course is to take small bites and to use protective sell-stops in case the selling accelerates.