I hate falling into the trap of simply responding to the hottest news headlines - because very few people get rich by reacting to headlines and pulling the trigger on investments based on "hot" trends in the market. At this point, computers can wipe the floor with most any day-trader, so if you think you can buy yesterday's news and still eke out a profit, you're probably wrong.
In the past couple weeks agriculture has been the hot topic on everyone's mind. First, fires in Russia caused wheat prices to double in less than a month as Vladimir Putin banned Russian wheat exports. In sympathy, many other crop commodities rose in price as well. Then Tuesday, BHP Billiton (NYSE: BHP), the world's largest mining company, put in a failed bid to buy Potash Corp (NYSE: POT), the world's largest fertilizer company.
Shares of agriculture companies of every stripe moved higher Tuesday. Normally, I'd avoid talking about this topic for the very reason that I'm not doing a very good job if I'm just parroting the news.
But I've been urging you to buy agriculture stocks for the past few months - well before any of this news about wheat or fertilizer - and more importantly, I still feel strongly about the long term trend for agriculture, in spite of the recent uptrend.
On August 9, I recommended buying shares of Archer Daniels Midland (NYSE: ADM). It's the largest agriculture company in the United States, and it provides more food products to the market than any other single company. If you bought shares on my recommendation, you're up nearly 8%. During the same period, the S&P 500 is down about 3%.
I've been asked by some readers to discuss why ADM has been so dominant. The short answer is: they do everything better than everyone else. But their ability to be the best is in many ways tied directly to the fact that farming has become a public trust. The FDA and the USDA have made it increasingly difficult to be a small farmer, or even a small agriculture company.
Here's just one example: if you're a cattleman and you want to slaughter beef on your property and sell it to the public, you have to have a dedicated restroom that's for USDA personnel only. That makes it impossible to be a small, locally integrated cattleman. If you're a small operator, you have to send your cattle to large processing plants that have the size to accommodate arbitrarily strict USDA rules. Instead of having niche beef producers that can directly service the public and police their own quality control, all beef must go through the big players. Small producers have to necessarily split their profits with companies like ADM.
And for certain, ADM employs some of the best agriculture traders in the business (I've met them); they have some of the best agriculture technology, the best scientists, etc.
In terms of innovations, ADM is finding new uses for corn every year - in many ways they're increasing America's appetite for corn, by finding new food additives, supplements and outlets. But they can afford to pursue such excellence, in part, because they're one of, if not the biggest recipients of subsidies and tax breaks.
ADM is the beneficiary of $billions of ethanol subsidies alone. That's billions, not millions or hundreds of millions. The government has been very generous with ethanol subsidies for decades now, and ADM receives a significant portion of those subsidies every year.
In short, there's a feedback loop between this nation's food authorities and ADM.
On a personal level, it rubs me the wrong way that ADM receives so much corporate welfare. I hate the idea of subsidizing one of the biggest companies in the world. But ADM is a great company. The fact that their profits are bolstered by the government and they have an artificial competitive advantage is a good thing for this company's shareholders.
I've been saying to buy ADM under $30 a share - as that seems to be a short and long term support level. I think that we'll see some minor corrections over the next few days as agriculture headlines wax and wane. If you haven't already, wait for shares to dip below $30 to start building a position.