The Case For Agriculture, From Hedge Fund Passport Capital

John Burbank's hedge fund firm Passport Capital has put out numerous interesting research pieces in the past and we've tried to detail some of their intriguing investment plays, such as their curve steepener. This time around though, they have taken an in-depth look at the agricultural sector as an attractive investment going forward. Their bullishness on the sector is noted through their newly opened Agriculture fund that debuted in March of this year and has seen solid performance. Additionally, they have large agricultural stakes in their portfolio, as some of their top holdings include the likes of Potash (POT) and Mosaic (MOS). Their research piece is entitled, "The Case For Agriculture" as they provide a compelling case from how you go from dirt to the dinner table. The overall meme of investing in agriculture is by no means new and is largely contingent on global growth, expanding populations, and increased consumption of product. That said, Passport expands on these arguments below in their exclusive look.

The hedge fund's specific view is that "growing global demand for agricultural commodities and food products with constrained supplies, processing capacities, and distribution channels provides an attractive investment opportunity." While they cite the typical arguments of global population increase and increased demand for crops, they also delve into the cycles as illustrated below:

(click to enlarge)

As you can see above, they've laid out the secular trends with cyclical influences to lay out four stages in the global food cycle. There are two extremes in which you see supply destruction and/or demand stimulation where prices obviously are most likely to rise and then you see demand destruction and/or supply stimulation where crop prices are most likely to fall. They also highlight the fact that demand for food has not historically declined as significantly as demand for other goods during times of economic constraint. After all, people have to eat to survive.

As middle class workers around the world begin to accumulate wealth, they are able to enjoy a more protein rich diet that they were previously not used to. Passport identified this trend and has also noticed demand for agricultural products is rising. They cite those two reasons as major growth drivers and also note the fact that agricultural demand has outpaced production, thus limiting inventories and raising prices.

Overall, they believe a unique opportunity has arisen due to tight credit conditions and reduced asset values. They are particularly focused on fertilizer producers, sugar producers, as well as companies that produce proteins through various dairy or meat products. They think the agricultural industry is set for a shift and is in the early part of a metamorphosis. We've already touched on the rising demand for agricultural products, but they believe this is set to rise even further as the global population is predicted to "increase by more than one-third, to a staggering 9 billion people by 2054."

(click to enlarge)

If you're looking for a solid long-term trend to play, this could very well be a nice place to look. Don't forget that there are also a few other strong proponents of the agricultural sector in addition to Passport. Ex-Quantum Fund manager and noteworthy investor Jim Rogers has been bullish on agriculture for a while now. Additionally, market Strategist Don Coxe also likes the sector.

While we saw the stocks of fertilizer producers and various ag companies run rampantly higher preceding the crisis, they too were hit in the equities downturn. While they have rallied back with the rest of the market, it will be interesting to see if they can outperform over the long-term as this investment idea is focused on capturing the trend shift. Passport has compiled an excellent presentation on the sector and you can access their excellent in-depth look below.

CLICK HERE to view & download Passport Capital's presentation entitled, "The Case For Agriculture."

For more on John Burbank's hedge fund Passport Capital, make sure you also check out their curve steepener play, an overall bet on inflation. Additionally, you can check out our post covering Passport's portfolio to see what other ideas they're playing.

Comments

[Joseph L. S...:]

Passport and I could not agree more. Even if the world’s population does not increase by a single person – hardly likely – as people increase their wealth level from subsistence to even some disposable income, the first thing they want to do is eat better. The idea of dining on chicken twice a week and, dare to dream, pork or beef once or twice a month, is the first dream to fulfill after a lifetime of eating beans and rice or pig-corn and potatoes or another subsistence protein combination.

That fact alone bodes well for the producers of the earth’s bounty of quality potash, nitrogen, and potassium. It also bodes well for those nations with good soil and abundant water. (Hence my recent “O Canada!” trilogy of articles for SA – Canada boasts endless miles of grain, massive amounts of clean water, and the home-grain energy needed to produce and transport it all.)

In addition to Passport’s picks of fertilizer mining firms Potash and Mosaic, interested investors may want to also take a look at Norwegian giant Yara Intl (YARIY) and Israel Chemicals (ISCHF), both traded in the USA…

Oct 12 07:38 PM

[yellowhoard:]

CRBQ is the one stop shop for everything ag and metal.

Oct 12 07:52 PM

[socrateaz:]

Interesting! Agriculture is those who sell to agriculture. I agree long term. I do not agree for next year. I think most farmers are squeezed too tight on the cost side and
inputs which are too expensive will be the first to not be used because loans are being held back based on historic return on expenses... By the way potash is potassium in case you wanted to appear knowledgeable. I think a year of real food shortages is due before agricultural inputs will thrive. But what do I know?

Oct 12 08:20 PM

[kevin2:]

The Agriculture is just begin it has to go a long way & this artical is really very interesting........bit.ly/Sv3Jv

Oct 13 01:19 AM

[Vuke:]

Somewhat disagree. Check VIC.UN on TSX for an example of how these things are taking off.

Potash, BTW, is K2CO3.

On Oct 12 08:20 PM socrateaz wrote:

> Interesting! Agriculture is those who sell to agriculture. I agree
> long term. I do not agree for next year. I think most farmers are
> squeezed too tight on the cost side and
> inputs which are too expensive will be the first to not be used because
> loans are being held back based on historic return on expenses...
> By the way potash is potassium in case you wanted to appear knowledgeable.
> I think a year of real food shortages is due before agricultural
> inputs will thrive. But what do I know?

Oct 13 12:38 PM

[Kevin_T:]

Population growth will continue to pressure agricultural supply. Yield increases from the "green revolution" of improved plant varieties are slowing. Also high-yield agriculture is energy intensive so increases in energy costs pressure prices upward and may make marginal land unprofitable for farming.

In many places water for irrigation is becoming harder to get as aquifers are drained and there is more competition from soaring city populations.

This all at a time when environmentalists are trying to stop agricultural land expansion. Grain surpluses have been decreasing in recent years .

The fact that people need to eat above all other needs makes agriculture a good bet for investment, at least in the long term. National Geographic magazine has an interesting article on agriculture in the June 2009 issue.

Oct 13 05:06 PM

[User 422955:]

POT and other current potash producers are increasing production in response to high 2007 prices. New entrants can will appear in about 2010 -11. I think significantly higher prices will have to wait until price cutting has eliminated enough producers.

Disclosure: long POT put

Oct 13 08:57 PM

[Past Tense:]

I've got a dairy farmer friend whose farm has been in his family since Australia was first invaded by us whites, when his father operated the farm it employed 6 men and produced around 740,000 litres per annum (a vast improvement of his grandfather's day), he now has a casual and produces 1,100,000 litres per year. Naturally I pay significantly less for milk than my parents did, as do you.

My point is that solutions are often driven by shortages and high prices, did any western government truly take energy policy seriously before $140 a barrel was reached?

Yeah, I like commodities but I'm not for 1 minute preaching doom and gloom, as history has shown a steady rise in the standard of living (for thousands of years), as demonstrated by our aging population. I giggle when I read articles saying that you need physical gold under the bed "why? are the Romans going to invade?"

Will resources run out? No, they will simply be returned to our improving manufacturing processes in ways we have not invented yet, perhaps micro-machines will turn last nights dinner into tonight's - if you know what I mean. Long the techos, recyclers and inventors and short the critics, doomsayers and depressives.

Oct 13 09:12 PM

[manuel:]

additional capacitY from brownfield will come in 2011 or 12 but greenflield takes more years, if you cut prices now the Big PlaYers will not be able to cover their investment, they say Prices have to stay at least around 350 or 400$ to justifY the Billions they invested, for the new entrants the price has to stay at least around 600 $(Mosaic Ceo just said that on the annual meeting) because greenfield is much more expensive, so for the next years Prices can not drop so much, they are to low already for the greenflield projects to be continued, and all the Big PlaYers (Potash Corp., Mosaic, Uralkali) all have invested Billions, so nobody has the interest of seeing prices fall further, the World needs more Potash and if it wants more Prices have to rise, if they don´t neither the Big ones nor the new ones will produce it. So nobodY is interested in further price cuts......


On Oct 13 08:57 PM User 422955 wrote:

> POT and other current potash producers are increasing production
> in response to high 2007 prices. New entrants can will appear in
> about 2010 -11. I think significantly higher prices will have to
> wait until price cutting has eliminated enough producers.
>
> Disclosure: long POT put

Oct 14 02:02 PM

[manuel:]

and they have been increasing production not in response of 2007 Prices but they started years ago because they knew demand was rising years back. Do you have any idea of how much moneY theY invested? There is not the need to have producers eliminated, but there is the need to stimulate demand, so that is why they cut the price, not to eliminate anyone. And if you expect the greenfield to be eliminated why do you short POT who only could be advantaged?

Oct 14 02:18 PM