Small Cap Agriculture Stocks

Small-Cap Stock Investments in the Growing Agricultural Sector

The boom in agricultural prices has been the best underreported story over the past few years. And the expanding agricultural sector offers investors a great opportunity to grow their portfolios.

The professionals on Wall Street have taken notice of the price increases in agriculture commodities over the past decade. Rising grain prices impact profits by cutting into food producers’ margins. And economic indicators like the consumer price index are also showing the impact rising agricultural prices are having on the American family’s budget, which only decreases the amount of money left for discretionary spending. From corporate profits to discretionary spending, Wall Street is seeing the impact of rising agricultural prices throughout the markets.

But Bigger Isn’t Always Better

While the average money manager on Wall Street may see the trend, he or she can’t always use the best strategy to invest in this agricultural boom. Managers can be restricted by sector or by the size of company in which they can invest. And with limited resources to do research into niche markets, money managers are usually left investing in only the biggest agricultural firms.

So when you do see representatives of large brokerage houses talking in the financial media about agriculture, they will likely be talking about companies like John Deere, Archer Daniels Midland, Monsanto or Bunge. And while these companies certainly are the blue chips of the agriculture sector, individual investors would be wise to look at smaller agricultural companies that haven’t been bought up by the Wall Street crowd. Small-cap agricultural companies still offer values to the investor willing to scratch around in the dirt and do some homework.

Invest in the Inputs

When the Gold Rush hit California, it normally wasn’t the gold miners who made the big money. It was the people who sold the miners their equipment, lodging, food and other inputs required to mine gold. Investments that take advantage of booms in a certain sector by providing the inputs to that sector are often referred to as “pick and shovel” plays.

And the agriculture sector is full of small-cap pick-and-shovel investments yet to be recognized by the majority of investors and Wall Street. Fertilizers, pesticides, irrigation, machinery and equipment are all required for farmers to produce their crops. And there are some small-cap companies that provide those goods and services.

Chemicals to Help Plants Grow and Improve Yield

In mature and technologically advanced agriculture markets, like those of the United States and Canada, farmers are constantly looking to improve the quality and quantity of their harvest, called the crop yield.

One small-cap company is focused on pesticides, fungicides and herbicides as a future source of improved yields for its farming customers. Rather than producing fertilizers that make the plants grow quicker or bigger, American Vanguard (NYSE:AVD) creates chemical compounds that prevent crop destruction from insects, fungus and weeds. The net effect creates a higher yield for farmers using American Vanguard’s products. American Vanguard acquires niche product lines with mature products, rather than pursuing expensive research and development into new compounds.

American Vanguard is a very small company based out of Newport Beach, Calif. Most of the company’s growth has happened within the last 10 years, with share price going from under $1 to as high as $22. With a market cap under $400 million, and around 300 employees, this company is just too small for Wall Street tycoons, but easily accessible to individual investors wanting to take advantage of the agricultural boom.

While a company like American Vanguard won’t be the talk of the cocktail party circuit anytime soon, the company produces chemical compounds with a proven track record of minimizing crop damage, improving crop yields. With soaring agriculture prices, farmers will be looking for ways to minimize crop damage and improve crop yields, maximizing revenue. American Vanguard has just the products that farmers need to take advantage of high agricultural prices.

Getting Water to the Crops Puts Money in the Bank

While a farmer would prefer to have the clouds water his crops, the reality is that irrigation is required to grow crops, particularly in the semiarid Western United
States. One small-cap company has been growing by leaps and bounds, providing irrigation systems to the agriculture industry, while banking profits for investors.

Lindsay Corp. (NYSE:LNN) manufactures irrigation systems designed to save energy and water, while providing controlled plant growth. The company also offers remote monitoring equipment and chemical injection and flow control systems.

Business has been very strong for Lindsay over the past few years. Year-over-year earnings continue to climb, and the company continues to raise the dividend annually. Just like American Vanguard, Lindsay has the products that agricultural producers need to improve productivity and increase revenues, as well as profits.

Agriculture Isn’t Sexy; It’s Just Profitable

Let’s face it: Investing in the agriculture sector isn’t sexy. Try telling a friend you’ve got a hot tip on an irrigation manufacturer. Or better yet, when everyone is talking about investments in biotechnology companies, toss out the idea of investing in a pesticide company. The feedback on this concept will be swift and decidedly negative.

But that’s the whole key to contrarian investing: investing where others don’t or won’t invest. And the crowds won’t bother to get into this sector for the simple reason that the vast majority of investors just don’t dare stray from the herd. So with a bit of hard work and imagination, independent investors will find small-cap agriculture firms that are reaping profits.

Make no mistake. The number of hungry mouths on Earth is growing. And demand from the developing world, which has over half the population of the planet, is for more and better sources of food. And while the big boy ag producers like Archer Daniels Midland and Bunge will certainly profit from this growth in demand, it is the small-cap agriculture producers that will be returning two, three, five or even 10 times your investment. These small-cap agriculture firms are nimble and ready to profit from the agricultural boom.