How Investors Can Profit From Farm Subsidies

Apr.17.10 | About: Boswell (J.G.) (BWEL)

This nation now spends about $3 billion a year to subsidize various crops. This was originally done to protect “family farms” from the volatile cyclic swings in crop prices. The problem is, unlike the graduated tax system we are painfully familiar with, in which if you make above x dollars in this area or y dollars in another, you are ineligible for deduction x or y, with farm subsidies the bigger you are the more you get with no cap on revenue or earnings. And you don’t have to be a family farmer. So most of these dollars go to what many would call corporate welfare.

There are two reasonable responses to this sad state of affairs: change the system or profit by it. I’d like to change the system – but profit by it until we can effect intelligent change.

I can recommend for your further research just one company that profits from the current subsidies but which I also believe would be quite successful without any subsidies whatsoever. Now -- you may not like how tough it is to buy the company, sell it or get information on it. With just 974,132 shares outstanding, California’s Boswell (J.G.) Company (OTCPK:BWEL) doesn’t issue financial statements unless they feel like it, since they have too few shareholders to have to file with the SEC. They are a public company but getting your hands on an annual report depends on the company’s decision to print one and, if you aren’t a shareholder, some institution or individual scanning it onto the Internet.

Boswell is the biggest cotton farmer in America. They also grow tomatoes – millions of them – as well as wheat, sunflowers, and safflowers. More importantly, they own 142,000 acres of prime California land and 30,000 more in Australia.

Even more importantly, they grow all this smack-dab on top of the now-dry Tulare Lake bed. And underneath Tulare Lake is an aquifer big enough to provide water for some 3 million California residents – midway between the Kings River high Sierra snow melt and the ever-more-thirsty city of Los Angeles. Chinatown, Jake.

With California water agency valuing water at $10,000 per acre foot, I figure that values Boswell’s water rights, depending on the various estimates engineers use to determine the size of the aquifer and the annual flow from the Kings River at somewhere between $4 billion on the low end and $10 billion sort of in the mid-range. That’s $4 to $10 billion without counting the land. Or the crops. Or the land they are quietly developing for the return of people fleeing the big cities to the Central Valley.

I’ve bought the stock everywhere between $745 a share and $455 a share. Since you can almost never buy more than 10 shares at a time, at least not without moving the price, you can average a pretty good blended entry price by adding to your position on downswings. For the shares I bought at $455, I’m getting a yield of 3.1%. I figure $455 is about 90% of way-understated book value. (How do you value real estate right now? Or what water is worth to a drought-prone state?) The stock is currently $575 or close to undervalued book.

The catalyst for a move is that the patriarch of the family died just last year. He was the 2nd generation. It’s usually the 3rd generation who decide that work is no fun and who demand the break-up of the company so they can get “their” money. If that happens in this case, as well, I would expect to see a private sale at 2 or more times book. Another possibility is a 10:1 split which allows some of the growing family of heirs to sell some shares in a more liquid marketplace. Either would be good for the stock.

Of course, this is just speculation on my part. America’s biggest cotton grower and holder of more water rights than any other non-government entity does not confide their future plans in me. Or their shareholders. Or anyone else.

By the way, don’t hold your breath or worry unduly for the perks of corporate agri-farmers... The politicians who would have to approve changes to the current system start with Senate Agriculture Chairman Democrat Blanche Lincoln -- of Arkansas and the ranking Republican on the committee, Saxby Chambliss -- of Georgia. Hey, just a cotton-pickin’ minute! Aren’t Arkansas and Georgia two of the biggest cotton-growing states? Why, yes, they are…

Note: I am indebted to Bob Howard of Positive Patterns ( / 417-887-4486 to inquire about a free trial) for introducing me to Boswell.

Author's Disclosure: We and / or clients for whom this investment is appropriate, are long BWEL.PK. We hold it for the LONG TERM and simply buy more when it is cheap. Cheap is relative – anywhere below $475 works for us…

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