Plant Now, Harvest Profits Later

05/14/2013 9:45 am EST

Focus: STOCKS

Chris Versace

Editor, PowerTrend Bulletin, Growth & Dividend Report, and PowerTrader

This company is benefiting from the growth in farm income across the US and around the world, says Chris Versace of PowerTrend Profits.

Food prices are one of the things I've been concerned about, since the drought we encountered last summer sent the prices of certain commodities—corn, wheat, and soybeans in particular—substantially higher.

That was one of the reasons why I recommended buying Potash (POT) shares in February. Since that recommendation, the USDA shared that stocks of those commodities were challenged exiting 2012.

Worse yet, the National Oceanic and Atmospheric Administration (NOAA) called for a warm, dry spring, which it forecast as leading to persistent drought conditions. At the time NOAA issued the view, just several weeks ago, 51% of the continental United States was in moderate to exceptional drought, with the key areas of the central and western regions especially so.

With that as a backdrop, strong demand for seed and fertilizer was more than likely, and that's what we've heard this week from DuPont (DD), Dow Chemical (DOW), and our own Potash.

Both Dow and Potash reported better-than-expected March quarter results—Dow, due to strong demand among US farmers for its seeds and pesticides, while Potash experienced a 78% increase year over year in sales volume, due to improved global potash demand and record first-quarter nitrogen contributions.

Adding fuel to the fertilizer fire, Potash's earnings release shared that "first-quarter domestic shipments from North American potash producers rose 56% above those of the same period last year, and dealers' need to secure additional product remained high as the quarter closed."

To me, that indicates the near-term outlook for our POT shares remains bright. And that's before we factor in the removal of industry capacity last week, given the fertilizer plant explosion in Texas. Therefore, with more upside ahead, let's continue to hold our POT shares.

Now, that's a good, if not great, story on its own, but like most good stories, plays, or movies, there tends to be more than one act to the show. What I'm talking about here is simple math that goes like this—high commodity prices multiplied by greater acreage means good things for farm income.

Generally speaking, when farm incomes are high, farmers tend to replace their equipment—tractors, combines, and the like. In other words, there is another investment opportunity in the pain point that is high commodity prices, low crop inventories, and increasing planted acreage.

Let's buy shares of Deere & Co. (DE), which is not only one of the larger agricultural equipment companies based in the United States, but is also serving the rebounding construction industry. Roughly 20% of Deere's equipment sales are to this market, which is benefiting from the rebound in single- and multi-family housing.

While that housing rebound is a key reason why we're involved with ADT (ADT) shares, it's also nice to have when it comes to Deere-two businesses firing are far better than just one.

Favorable comments from construction equipment rental and leasing company United Rentals (URI) points to improved demand for this type of equipment, and that's good for Deere. Also, unlike some of its competitors, Deere's primary market is in the United States, which also happens to be its most profitable one.

I see upside in the shares to $100 or $105. Keep in mind that this price target doesn't factor in the company's 51-cent quarterly dividend, which equates to a 2.4% annual dividend yield at the current price.

Given the rash of favorable farm-related results with more on the way, let's be sure to start buying our DE position, lest we miss out. We will not be using a stop price for this pick.

Subscribe to PowerTrend Profits here...

Related Articles:

Deere Caught in Headlights

Why Deere Is Not Cummins

Battle of the Tractors: Deere vs. Caterpillar

Related Articles on STOCKS