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Farmers who spent the year growing corn or milking cows may not have noticed that the U.S. government nearly shut down or that Europe is in a full-fledged debt crisis. That's because they were too busy turning record profits.
U.S. farm profits were up 28% in 2011, topping $100 billion for the first time ever. Crop sales exceeded $200 billion. Collectively, U.S. farms are sitting on more than $100 billion in cash – also a first.
But with farms thriving, agriculture stocks have yet to follow suit.
The DAXglobal Agribusiness Index (XETRA: DXAG), which tracks the movements of companies involved in the agriculture business that are traded on leading global exchanges, is down more than 13% YTD in 2011. The index has continued its decline in the week since the U.S. Department of Agriculture released its year-end farm report.
With agriculture stocks still lagging behind such hefty farm profits, it opens up a prime buying opportunity for investors. The boom in farm profits isn't a one-year occurrence but a harbinger of things to come in what famed investor Jim Rogers calls the next big bull market.
World population crossed the 7-billion person mark earlier this year. More people means more mouths to feed, and thus greater demand for agricultural exports. Demand in China and India, the two most populous countries in the world with a combined 2.5 billion people, is growing even more rapidly as those countries continue to expand.
Corn is in especially high demand. Companies are now using corn to make ethanol, which is a key ingredient in biofuel and, as an environmentally friendly alternative to fossil fuel, is one of the fastest growing products in the world. According to the International Energy Agency, world ethanol consumption increased by nearly 300% between 2000 and 2010, reaching 104 billion liters last year.
But corn isn't the only crop that's in a bull market. Soybean demand is also soaring in price. The consumption of soybeans, used in cooking oils, grew nearly four times faster than the world's population over the last decade.
As the world's largest grower and exporter of both corn and soybeans, U.S. farms stand to benefit most as global demand for the crops escalates.
With ETFs such as the Market Vectors Agribusiness (NYSE: MOO), which closely mimics the DAXglobal index, and the PowerShares DB Agriculture Fund (NYSE: DBA) – which tracks the price of corn, soybeans, wheat and cattle – trading near their 52-week lows, the time to make a play on the agriculture boom is now. Most agriculture stocks or ETFs are cheap buys now, but may not be for long.
There's a simple truth that should keep agriculture stocks relevant for years to come: Human beings need food to survive. With more humans than ever before – and another billion on the way by 2050, according to the United Nations – U.S. farmers will be scrambling to keep up with global demand. Since farmland is at a premium, the price of crops, livestock and farming supplies will go up. In turn, so will agriculture stocks.
Agriculture stocks are one place that I'll be looking for profits in the year ahead.