Down on the Farm: Do Farm Stocks Have a Place in a Balanced Portfolio?

 |  Includes: BLERF, CRESY
by: Roger Nusbaum

This week's post from Jeffrey Saut took a look at a different type of Permanent Portfolio that, not shockingly to long time readers, I found to be very intriguing even if very difficult to implement. Maybe more correctly, impossible to implement... for now anyway.

Saut took the idea from a mentor in his early days in the business named Lucien Hooper who liked the idea of putting 25% into equities, 25% into bonds, 25% into precious metals and 25%, not into cash like Harry Browne, but that last 25% into farmland.

I've written quite a few times about farmland as a potential investment and while it is intriguing on some level it is difficult to access. Saut mentioned Cresud (NASDAQ:CRESY) from Argentina, which owns a lot of farmland but also owns a lot of cattle. There is an English version of the website if you're so inclined to learn about it.

In the post, Saut also mentioned an area in the Ukraine where the "black earth" is very suitable for farming without mentioning the one stock I have looked at casually before: Black Earth Farming which is listed in Sweden with ticker BEF-SDB and on the US pinksheets with ticker OTC:BLERF. He does suggest (clients have their reps) call "the desk" for specific names.

There are other stocks around the world, but not many, and they are not easy to trade or even closely follow, but conceptually stocks of this sort from Malaysia, Indonesia or elsewhere in Latin America could be of interest. On a related note, by the way, Paraguay (mentioned the other day as being the world's fourth largest grower of soybeans) is too small of a market, according to Schwab, to be accessed, but maybe that will change some day. The guy I spoke to said no one had ever asked him about Paraguay before, interestingly though Cresud has some operations in Paraguay. Maybe we'll hop on down to Asuncion to open an account. Ahem.

Zooming back out a little the concept makes for a good discussion but I am not inclined to follow the specifics. While I concede that my single digit weight to commodities is small for most folks, while 25% just to precious metals is way past where I want to go. At some weighting, before getting to 25%
, in my opinion, you start to drift from hedging to giving a high probability to the end of the world (metaphorical or otherwise).

I am open to the idea of owning a stock like BLERF or CRESY but in looking for a zig-zag effect both names went down more than the SPX during the latest bear market but they did both bottom in November 2008 compared to March 2009. Some may think of that as zig-zag and some may not. Part of the idea of buying a farm stock probably needs to be a reasonable expectation of a new differentiation or other catalyst. Globally speaking I think there is plenty in the way of catalysts for the theme, not sure about the stocks.

Obviously if demand burgeons then the theme will become more accessible as companies create product. I think it is very worthwhile to explore these types of ideas but then again all I do all day is read stock market stuff. At some point I can see working in something along these lines as an across the board holding but the average volume on a lot of the ones I have looked at is not great.

I think I first wrote about farm stocks in mid 2008 and I am still working on the theme. Hopefully this underscores an important aspect of thematic investing which is that if it is a theme as opposed to a fad or mania or just not really a theme there is no rush to be in yesterday. True themes play out over years.