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Recession or no, we need to eat. But that doesn't mean this downturn has been an easy one for agricultural stocks.
Even now that investors dare to dream of economic recovery, the clouds hanging over Big Ag haven't lifted quite yet. On May 27, bad news came from agricultural products powerhouse Monsanto (MON). Based on enthusiasm for its genetically modified seeds, which boost farm yields, Monsanto was a top-performing stock of recent years. However, the company disappointed investors on May 27 by warning 2009 earnings could fall on the lower end of a previously predicted range.
The problem is not Monsanto's seed business, but its older herbicide business, sold under the brand name Roundup. Gross profits from that division could fall from a previous forecast of $2.4 billion to about $2 billion, the firm warned.
Monsanto Chairman and Chief Executive Hugh Grant emphasized the positive. "Even in the face of a $400 million decline in our expected gross profit from Roundup, we can see a path to our fifth consecutive year of 20% or greater earnings growth," Grant said in prepared remarks at an investment conference.
The patent for Monsanto's Roundup has expired and overseas competitors are producing a glut of cheap generic "glyphosate" herbicide. Citigroup (C) analyst P.J. Juvekar cites "an onslaught" of glyphosate from China. "Longer term, we remain positive on the company's growth prospects as Monsanto's pipeline of agricultural biotech products is unrivaled by competitors," Juvekar wrote May 17. But lower-cost competition on its ag chemical division creates "near-term pressures," he said.
UBS (UBS) analyst Don Carson lowered estimates for Monsanto, citing both Chinese competition and also problems from bad weather affecting corn and soybean planting. "The delayed planting season in the U.S. farm belt has prolonged the period of weak demand that began this past fall," he wrote May 27.
And the farming sector still hasn't shaken off the effects of last fall's financial and economic meltdown. Farmers are still have trouble getting financing, said Credit Suisse (CS) analyst Rohan Gallagher in a May 25 note on the sector's outlook. Both farm income and capital expenditures should hit a six-year low this year, he predicted. "Farmers continue to delay fertilizer purchases [and] no material improvement demand is expected short term," Gallagher wrote.
Still, there is good news in farm country: Commodity prices—for grains and other farm products—have risen along with hopes for the economy. As a result, some ag stocks have also moved higher. Monsanto shares did fall 6.3% on May 27, to 79.88. That erases all the stock's gains for the month of May. But shares of fertilizer giants Mosaic (MOS) and Potash (POT) are both up about 40% in the past month.
This year has been a "miserable year" for demand for potash, a key fertilizer ingredient, according to Juvekar. However, the Citi analyst upgraded fertilizer producers on May 21, saying the stocks could perform well as grain prices continue to rally. Tight grain supplies and the delayed U.S. planting season are supporting grain prices, along with "the easing of credit conditions and the stabilization of some industrial and consumer markets."
Ag stocks swing wildly based on commodity prices, good or bad weather, and the ups and downs of credit markets and the economic outlook.
To do well, investors must look beyond current conditions and try to predict the dynamics in future growing seasons. Morgan Stanley (MS) analyst Vincent Andrews says Monsanto shares "could remain in the penalty box" for a while. But one "potential favorable catalyst" for the stock is "the likelihood that  could be a record year of profitability for U.S. corn farmers," he wrote May 27.
Many ag investors take an even longer view. Russell Croft, manager of Croft Value Fund (CLVFX) owns shares of both Monsanto and Potash.
Asked about his agriculture exposure, Croft cites the "powerful story of the emerging middle class [around] the world." Wealthier populations in India, China, and other emerging countries spur more demand for meat. Fertilizer and genetically modified seeds are needed to boost yields for the grains that feed animals like cattle, pigs, and chickens. Yes, the trend "might get slowed down by the global recession," Croft says, but "it can only slow down for so long."
This sort of logic prompted Monsanto and fertilizer stocks like Potash to hit stratospheric heights in June 2008. The stocks then plunged, and value investors like Croft started to scoop them up.
Monsanto would need a 75% rally to regain its peak, while Potash shares would need to more than double.
The question for ag stocks, then, is whether last year's optimism is gone forever—or if it can be coaxed back up through the soil in the coming year by a global economic recovery.
Steverman is a reporter for BusinessWeek's Investing channel.