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By Jeremy Glaser and Adam Fleck, CFA | 11-19-2012 01:00 PM

Will These Ag Trends Spoil a Stock Harvest?

Rising input costs and global food consumption will be key factors in the coming years for agriculture-related stocks, according to Morningstar's Adam Fleck.

Jeremy Glaser: For Morningstar, I am Jeremy Glaser. I am here today with Adam Fleck. He is the associate director of industrial research at Morningstar. We're going to look at whether high agricultural prices are here to stay and what the investment implications are.

Adam, thanks for talking with me today.

Adam Fleck: Thanks for having me, Jeremy.

Glaser: So, certainly over the last couple of years we've seen pretty significant increases in lot of agricultural inputs. Is this something you think is going to persist or is this just kind of a short-term blip?

Fleck: Yeah, if you look into very long term, our opinion is that the long-term secular trend for agricultural prices is probably up, probably positive. However, it's important to remember that much of the high crop prices we have now are due to weather. We had a horrible drought this year, obviously. So, we think that the cyclicality will likely remain, and in any given year weather is most likely to drive high or low crop prices, but certainly the secular trend is positive.

Glaser: Looking out over the future, then, we see those higher prices kind of inching our way there. What are some of the drivers of this? What do you expect to be moving those prices up?

Fleck: On the supply side some of the biggest drivers we found are the inputs; fertilizers, water, of course, and soil availability.

On the fertilizer side, one of the biggest concerns we have is for phosphate. This is a rock that is mined; it is necessary for growing crops. If you look out many, many years, several decades really, the country of Morocco controls the vast majority of phosphate reserves in the world. If they monopolize that in any way or even are unable to produce the necessary amount of phosphate, that could drive prices up pretty well.

On the soil side, this doesn't get a lot of mainstream press, but we're probably eroding soil 10-40 times faster than we're forming it for new soil. This is an issue that can largely be solved we think by no-till farming, so not plowing over the field every year. That's going to help alleviate, of course, some of the fertilizer requirements, but many developing markets are still well behind the U.S. on no-till farming, and that's something that will probably be a long-term issue that's talked about quite a bit.

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