Archer Daniels Midland Company (ADM), Bunge Ltd (BG), Cosan Limited(USA) (CZZ): Dangerous Valuations in Farm Products

The world needs its farm goods, and the market is well aware of this. The problem with something that everyone knows they need is that the price can become insane. The following are some examples of companies that at first glance look like stocks in which you might want to wait for a dip before buying.

The burden of a good reputation

Archer Daniels Midland Company (NYSE:ADM) has some good things going for it. As a diversified provider of agricultural services, such as trading, storage and transportation, Archer Daniels Midland Company (NYSE:ADM) has a strong level of vertical integration. Rated by Fortune as the most admired food production company from 2009 to 2011, the company also has a strong reputation. With a 2.1% dividend yield, Archer Daniels Midland Company (NYSE:ADM) also has a solid line on being an income investment.

Unfortunately, there are some problems here. For one, despite $91.3 billion in trailing annual sales, the company is only rocking a 1.4% profit margin. This could indicate that if a problem occurs, Archer Daniels Midland Company (NYSE:ADM) may have difficulty keeping its operation running smoothly. Also, trading around 19 times its earnings means that the company’s price is a bit steeper than much of the S&P 500 — not exactly a bargain. While you could find good value in Archer Daniels Midland Company (NYSE:ADM), I would recommend buying in on a dip or waiting until the next quarter to see if the profits pick up.

Skipping a step

Bunge Ltd (NYSE:BG) operates in 40 countries and does a lot of work in international soybean export and grain trading. The sheer volume of international exposure Bunge Ltd (NYSE:BG) carries gives it a great deal of currency resistance — using currencies from all over can help keep earnings stable. The company is also a decent income play, with a 1.6% dividend. It has also carried a clean environmental record since 2006, having mended its factories to bring them into compliance.

However, there are issues keeping Bunge Ltd (NYSE:BG) from being a great buy. For one thing, the company is barely earning a profit, holding only 0.2% profit margins. While Bunge Ltd (NYSE:BG) is trading almost exactly at its book value, it is also trading at around 96 times its earnings. This raises serious red flags about the company’s prospects of gaining value. For a company with a $10 billion market cap, this is a pricey situation.

Beyond this, there is a vital gap in the integration process that Bunge Ltd (NYSE:BG) is missing, and that’s the actual production of basic components. While the company works in transportation, fertilizer and processing, growth is the most important aspect of produce. This opens Bunge Ltd (NYSE:BG) up to a lot of volatility based on commodity prices, which can make the stock even riskier.