It’s widely known that Midwestern agriculture has generated record profits the past few years. The obvious beneficiaries have been operating farmers and absentee landowners. Yet, others have benefitted as well. For example, rural businesses frequented by farmers (both ag and non-ag) have seen greater success, primarily because farmers have more money to spend. And as might be expected, larger agricultural companies have flourished, e.g. equipment manufacturers, seed and chemical producers, and grain processors. A recent article on the University of Illinois farmdoc web site (Performance of Publicly Traded Agricultural Firms) points out that while plenty of money is being made at the country level it is also being made at the corporate level as well.
To help track profits and performance of these larger firms, an index of 21 publicly traded agriculturally related companies was created. The returns from this index were then compared with the returns from the S & P 500. Except for 2008 (when commodity prices and farm income was down), the ag index has greatly exceeded the S & P. Part of this can easily be attributed to fact that farmer will upgrade equipment and increase fertilizer usage when excess funds are available, especially since these expenses are typically a great way offset income for tax purposes. Yet, many have also speculated that there may be some “price gouging” from certain companies, especially those that farmers must buy from every year in order to plant a crop. Regardless, when money is being made in an industry, everyone wants a little (or big!) part of the pie.
As land prices have risen beyond the reach of many investors, I think that buying stock in agricultural companies may be the best, and easiest, way to ride the food wave. Demand for agricultural products will continue to grow in the future, and the companies that are heavily involved in the industry should continue to be profitable.
