I talk to a lot of professional investors on a daily basis on MicroCapClub, and more and more investors are expecting a bull market of epic proportion in agriculture stocks over the next decade. The key difference between a potential bull market in agriculture versus, let's say technology, is the scarcity of microcap agriculture companies. There are tons of microcap technology companies, but very few microcap agriculture companies. A couple of Ag-food analysts I've spoken to are scouring the Earth trying to find the next big thing in Ag. The Agriculture-Food industry is dominated by a few large multinational behemoths. In this article, I'll highlight some trends in food and mention a few potential microcap benefactors for the coming agriculture boom.
As the population grows and wealth grows, so does the overall demand for food. Worldwide food demand is expected to double by 2050. The trickle down effect on the food supply is quite immense. Let me give you one example: The Chinese have increased their per capital consumption of pork more than threefold since 1980, from 11kg to 38kg. If the Chinese were to match what the average Hong Kong resident eats (80kg), it would require an additional 160m tonnes of corn to feed the pigs. That amount of additional corn is equivalent to half the harvest in the U.S., the biggest corn producing country. I could give you many other examples of how shifts in food demand/habits can quickly outstrip supply, but I think you get my point.
JG Boswell (BWEL.PK) is the largest farm in the United States (150,000 acres), and probably the most interesting small cap you never heard of. JG Boswell is one of the largest cotton farmers in the world, as well as other crops such as tomatoes and alfalfa. The Boswell farm is so big, if you were at one end of the farm and you drove 150 miles towards the other end, the equivalent of Washington, D.C. to Philadelphia, you would still not reach the other side. The company is very secretive, and you can't even get a peek at the financials unless you are a shareholder. At a $1 billion market capitalization, JG Boswell isn't a microcap, but it deserves a mention due to its size and legacy as one of the largest farms in the world.
The increasing demand for food isn't a new theme, and much of the increased production has come from increased yields. In 1960 each U.S. farmer provided food for about 25 people. Today, each U.S. farmer feeds more than 144 people. Science has played a big role into getting higher yields out of every acre, and new hybrid seeds enable crops to be grown in areas thought to be infertile. S&W Seed (SANW), whose CEO came from JG Boswell, is a leading producer of high yield alfalfa seed. The company has historically produced a seed that can be grown in dry climates. The company has increased alfalfa seed production from 2.4 million pounds a few years ago to an estimated 9-10 million pounds in 2013. S&W Seed continues to innovate with a new dormant alfalfa seed meant for colder climates to begin production in 2014. The company also just announced the acquisition of Seed Genetics International, which will make S&W Seed the largest non-dormant alfalfa seed company in the world. The company is followed by two analysts with an average price target $13.00. Analysts estimate $27.83 million in revenues with a loss of $0.04 EPS for fiscal 2013 (ending June 30th), and $37.36 million revenues and $0.13 EPS for fiscal 2014.
Here are a few other microcap agriculture producers:
Alico (ALCO) was founded in 1960 and is one of the largest landowners in the state of Florida, with over 140,000 acres, and is also one of the largest citrus growers in Florida. Florida makes up 70% of the total U.S. orange production (~200 million boxes). Alico grows and harvests ~5% of Florida production. The company has also diversified into sugarcane (44,000 acres) and cattle (7,400 cows and bulls). You can view an interactive map of their holdings [HERE]. The company is covered by two analysts with an average price target of $35.00, well below the current $46 PPS. Analysts estimate $118 million in revenues and $1.98 EPS for fiscal 2013 (ending September 30th), and $124 million in revenues and $1.50 EPS for fiscal 2014.
Calavo Growers (CVGW) is the global avocado-industry leader. The company was founded in 1924 after the Avocado Growers Exchange planted the first avocado tree in California. The company is seeing huge demographic tailwinds from the growing Hispanic population. Avocado production is up 65% from five years ago, just to meet the growing worldwide demand for avocados. The company handles roughly ~26% of the California avocado crop, and ~22% of the Mexican avocado crop, and 6% of the Chilean avocado crop. The company is covered by four analysts with an average price target of $31.50. Analysts estimate $634 million in revenues and $1.54 EPS for fiscal 2013 (ending October 30th), and $677 million in revenues and $1.75 EPS for fiscal 2014.
Limoneira Company (LMNR) was founded in 1894 and is one of the largest growers of lemons in the U.S., and it is also the avocado industry's second largest grower. Is there a tie in to Calavo? Yes, Calavo owns 15% of Limoneira. The company produced one of the first disease resistant lemons in the 1940s, which is still the most popular lemon consumed even today. The company is also one of the leaders in niche citrus products such as mandarins, blood oranges, Pummelos, super reds grapefruit, and others. The company also manages a rather large real estate portfolio with several projects ongoing. The company is covered by two analysts with an average price target of $27.95. Analysts estimate $86.52 million in revenues and $0.40 EPS for fiscal 2013 (ending October 30th), with no estimates for fiscal 2014.
Food production has historically been very inefficient. Data suggests it takes 10 calories of fossil fuels to produce 1 calorie of food energy. Americans are also inefficient eaters, with each U.S. household throwing away 1.5 pounds of food each day on average, which represents between 25-50% of the food produced in the U.S. The irony is even though we throw away a lot of the food we buy, consumers are getting pickier about what they eat. Arguably, the biggest consumer trend in the U.S. (perhaps in the world) is consumers caring more about their food, and the best way to play this trend is a microcap stock. Where Food Comes From (WFCF.PK) is the U.S. leader in third party identification, verification, and traceability solutions for livestock and agriculture industries. The company provides verification services for Whole Foods (WFM), Chipotle (CMG), Sysco (SYY), Tyson (TSN), Cargill and many others. As consumers demand organic, non-hormone, humane, gluten-free, grassfed, cage-free and other certifications, those large multinational food producers need the services of Where Food Comes From. The truth is most of the food labels that you and I take for granted aren't third party verified, and that is going to change. Where Food Comes From is further monetizing the data it collects by launching its own food label providing true source of origin directly to the consumer. CEO John Saunders presented at the MicroCapClub Invitational, and you can view it [HERE]. The company isn't covered by any analysts.
As I stated earlier, food production is very inefficient, so a company like Hemisphere GPS, which recently changed its name to AgJunction (HEMGF.PK) is an interesting company to look at. The company provides precision farming data applications. Millions of acres of farmland are farmed under the guidance of AgJunction's guidance systems. The company holds numerous patents (8 patents issued in 2012), and recently launched mobile applications and cloud computing data analytics. AgJunction is covered by three analysts with an average price target of $1.06. Analysts estimate $63.92 million in revenues and $0.02 EPS for fiscal 2013. Another microcap that is trying to increase efficiency for grocery stores is Park City Group (PCYG). The company's SaaS platform allows a grocery store to have unprecedented inventory tracking and communication with suppliers. Park City Group's slogan of Sell More - Stock Less - See Everything is very fitting, and its platform has been adopted by industry leading grocers such as Publix, Food Lion, Safeway (SWY), Stop & Shop, Wal-Mart (WMT), Costco (COST), Kroger (KR), and many others. The company isn't covered by any analysts.
World demand for agriculture equipment is expected to grow 6.8% per year through 2016, so you might be asking, what about the companies that sell equipment, tools, and machinery to farmers? Most of those companies are large multinational companies like Caterpillar (CAT) or Deere & Company (DE), but there is a microcap called Art's-Way Manufacturing (ARTW). The company was founded in 1956 and holds a dominant share in the sugar beet harvesters, and it had a record year in 2012. It also produces feed processors, forage blenders, and several other products. The company isn't covered by any analysts.
I'm sure many are thinking, what about the fertilizer/potash microcaps? My experience with potash junior exploration companies is that it is really tough for these potash juniors to make a real go at it. When a company is trading at a $50-100 million market cap and the CapEx to build the potash operation is $1 billion+, the inherent financing-dilution risk almost always kills the stock. Too many investors sit around hoping for an off-take agreement or buyout from a major that never comes to fruition. The potash market is dominated by an oligopoly of sorts. The potash cartel, as some call it, continue to get bigger because they are the only ones that have the cash to fund new mines and development. I do believe you will see them make acquisitions from time to time, but I'm sure they know they can buy assets cheaper as the juniors decline as they run out of cash.
In the months and years ahead, I believe the premise of investing in agriculture will likely hit the masses. The worldwide population keeps growing, food habits are changing as wealth increases, and this will put further strain on the food supply. The scarcity of microcap benefactors will produce a huge tailwind amongst the small group of agriculture names that exist. It is important for investors to keep track of these small microcap agriculture stocks since the new leaders could emerge from this group. I've listed several microcaps that are worth noting, but this doesn't mean they should be bought. Educate yourself on the agriculture industry and perform the necessary due diligence. If anyone knows of any other microcap agriculture related companies, please let us know and comment below.
Disclosure: I am long WFCF.PK.