These companies will thrive as prices of meats, grains and dairy rise this year. By Thomas M. Anderson, Contributing Editor March 19, 2010 People have to eat. As the economy recovers, expect demand for food to grow and prices of meats, grains and dairy to rise. Goldman Sachs named food inflation one of its top nine investing themes for 2010. The agricultural sector will benefit broadly from this trend, and we have identified five stocks that will thrive in such an environment.Let’s break it down by the numbers. The U.S. Department of Agriculture forecasts that food prices will rise 2.5% to 3.5% this year, up from a 1.8% increase in 2009. Several factors will put pressure on food prices. Producers of cattle, dairy cows, hogs and poultry cut their output in 2009 because of high feed prices. That, in turn, reduced the supply of meat and dairy products. At the same time, a growing number of people around the world, particularly in fast-growing emerging nations, such as China and India, are consuming more protein. Add to the mix the ethanol industry’s heavy reliance on corn, the main source of animal feed. The result is higher demand for meat and grains. So farmers need to grow more grain to feed more animals, and that takes more fertilizer. Producers of potash, a key fertilizer, should prosper mightily from food inflation. Goldman analysts expect farmers to boost potash consumption significantly from weak 2009 levels. If potash volume declined again this year, it would be only the second time since 1960 that volume dropped for three consecutive years, Goldman analysts say. Advertisement The price of potash has already started to recover from declines sparked by the Great Recession. After peaking at more than $1,000 per ton in 2008, the price fell to about $350 per ton in January 2009. On March 5, Canpotex, the international marketing arm for the three top producers -- Potash Corp. of Saskatchewan (symbol POT), Mosaic Co. (MOS) and Agrium (AGU) --announced that it was raising potash prices to $400 a metric ton. Edlain Rodriguez, an analyst with Broadpoint AmTech, sees prices increasing throughout the year. That’s why he’s bullish on the trio of fertilizer stocks. Potash Corp., which , controls 22% of the world potash supply, expects rising prices to be reflected in its bottom line. On March 11, the Saskatchewan, Canada, company raised its first-quarter earnings estimate to $1.30 to $1.50 per share, from the estimate of 70 cents to $1 per share it made in January. The company says “the increase in potash sales volumes this quarter represents the beginning of a return to long-term growth in demand.” Potash Corp.’s stock has been on a wild ride. The stock, as low as $9 in July 2002, ran up to $230 in June 2008 before collapsing to $53 in December 2008. At its March 18 close of $122.88, the stock traded for 24 times estimated 2010 earnings of $5.10 per share. Advertisement Mosaic, Potash Corp.’s top rival, is also optimistic about the prospects of a potash rebound. Chief executive James Prokopanko says potash sales have picked up since November and expects growth to continue through 2010. Mosaic’s stock tracks a boom-and-bust pattern similar to that of Potash. At $59.56, Mosaic shares are up 55% since the stock market bottomed on March 9, 2009. Mosaic trades for 15 times the $3.95 per share analysts expect the Plymouth, Minn., company to earn for the 12 months ending in May 2011. Agrium, which sells seeds as well as fertilizer, is more diversified than Potash Corp. and Mosaic. Potash accounted for 4% of the company’s total 2009 sales of $9.1 billion. Agrium recently dropped a bitter yearlong bid for CF Industries, which makes nitrogen and phosphate fertilizer products. Agrium shares have leapt 120% since the market’s bottom. At $70.71, they trade at 15 times estimated 2010 earnings of $4.68 per share. Once you have the fertilizer, you need the seeds. No company in the seed business is more dominant (or more despised) than Monsanto (MON). The St. Louis company faces an antitrust investigation by the Justice Department and, as a top producer of genetically engineered seeds, has drawn fire from activists about its business practices and the long-term effects of its products on the food supply. Politics aside, UBS analyst Don Carson expects Monsanto to gain market share in the growing market for corn seeds through 2012. Advertisement Monsanto’s stock, which advanced by a factor of 20 between March 2003 and June 2008, has stood still during the current bull market. The stock, at $72.03, is up just a couple of bucks a share since March 2009. It trades for 16 times estimated earnings of $4.40 per share for the year that ends August 2011. Carson rates the stock a “buy” and thinks it is worth $94 per share, with $60 of the value coming from Monsanto’s pipeline of new products. A moderate amount of food inflation tends to be good for grocers, and one of the best-positioned supermarket chains is Safeway (SWY). The company, which has more than 1,700 grocery stores in the U.S. and Canada, slashed costs aggressively in 2009. The belt-tightening means that Safeway’s profits should improve this year and that the Pleasanton, Cal., company should have more money to return to investors in the form of dividends and share buybacks. Scott Mushkin, a Jefferies & Co. analyst, estimates that Safeway will generate more than $1 billion in free cash flow per year for the next five years even if business remains challenging. (Free cash flow is net income plus depreciation and other cash charges, minus the capital expenditures necessary to maintain the business.) The stock, at $24.65, trades for 14 times estimated 2010 earnings of $1.81 per share. Mushkin rates the stock a buy and has a 12-month price target of $30.