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Why Don Coxe is still pounding the table on agriculture

Dead sunflowers in parched field.

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It's been been quite a year for those who are bullish on agriculture. Corn is up about 25 per cent, soybeans 27 per cent, and wheat 44 per cent.

Even the lowly corn kernel, the laggard of the class, has trounced gold, which is up only about 9 per cent.

Can agriculture's winning streak continue? With the crops all in and winter settling over the northern hemisphere, it's a good time to chat with Donald Coxe, who oversees the TSX-listed Coxe Global Agribusiness Income Fund from his office in Chicago.

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Mr. Coxe's take? Stay table-pounding bullish because the good times on the farm have a long time to roll. In his fund, he's been loading up on seed, fertilizer, pesticide and farm equipment companies, through quality names such as Monsanto Co., Agrium Inc., Syngenta AG and Potash Corp. of Saskatchewan Inc.

The sharp rise in major crop prices this year was the result of the summer drought in the United States. Contrary to what you might expect, the poor harvests have not hurt farmers, who tend to gain more from rising prices than they lose from output.

Corn production in the U.S., for instance, fell 13 per cent this year from 2011, but the rise in prices was nearly twice as large as the decline in output. That means farmers received a big boost to their income, and have money to spend with the crop input suppliers that Mr. Coxe favours.

It's still early going, but for at least one of next year's crops the outlook is already worrisome. Winter wheat is planted in the fall and harvested in the spring. In its last crop progress report, issued in late November, the U.S. Department of Agriculture said that 26 per cent of the winter wheat crop was in poor or very poor condition, double the figure for 2011.

Wheat is being hurt by the continuation of the drought on the U.S. Great Plains. The lack of moisture is a stress, as is the generally warm weather. Wheat that isn't properly hardened off (agricultural jargon for going dormant through exposure to gradual cold) is vulnerable to any sudden snaps of freezing weather.

Mr. Coxe cautions that it's rare to have two back-to-back years of weather-induced distress. Still, it could happen. "If we were to have a brutal winter and a late spring, then we're going to have another year of tension about crops," he says.

If winter wheat prospects continue to deteriorate, prices will lift off, another big win for farmers. But even if prices don't match the increase in 2012, there is a longer term case for investments in agriculture-related stocks.

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For one thing, this year's small harvest means that carryover stocks of grains are low. Prices are unlikely to plunge even if future harvests are decent because of the need to replenish inventories. "We have no surpluses on hand, no excess surpluses of anything now. We need a good crop year next year," Mr. Coxe says.

Even if prices don't move higher next year, they're still elevated by historical standards. Corn, for instance, used to trade in $2 (U.S.) to $3 a bushel range, less than half the current price. Lofty prices will keep farm incomes high, benefiting companies that cater to the sector.

Mr. Coxe figures crop prices could stay high for another five years before the inevitable forces of supply and demand drive them back down to earth.

In the meantime, he thinks the sweet spot for companies supplying everything from tractors to bug killers will continue. Among the other names in his portfolio are MBAC Fertilizer, Kubota Corp., Raven Industries, Du Pont and Rocky Mountain Dealerships.

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About the Author
Investment Reporter

Martin Mittelstaedt has had a varied reporting career at the Globe and Mail, covering politics, the environment and business. He opened up the Globe's New York bureau for the Report on Business, and has also been on the banking and capital markets beats. He's written extensively on investing themes. More


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