By Scott A. Mathews
As the dust settles in Tahrir Square and investors try to make sense of the messages sent by protestors, it is important to take a step back to gain insight. While the main take-away from these protests is seemingly that citizens are fed up with having their rights abused and voices stifled by autocratic regimes, if one takes a simple look at the very beginnings of these protests one can easily find a call to the market and subsequently to investors: Inflation is sending food prices higher throughout the developing world. The UN reported that prices for food commodities are up 28% over the past year. This has a huge impact in the developing world. On average, 80% of incomes in developing countries goes on food.
As agricultural commodities prices have risen, households have felt a severe pinch. Thus, before chants became overtly political, protestors in the Maghreb—where the events sweeping the entire region took root—were reclaiming basic commodities at more reasonable prices.
The events in the Middle East, while a very visible catalyst of commodities prices, are in no way isolated indicators of a massive growth in demand for agricultural commodities and the products and services rendered to producers of these commodities. To once again beat a dead horse, the population is growing and not only that, it is getting richer. With increased population and purchasing power there is a steady, growing demand for food. It is as simple as that. While one could try to play the demographics game more tightly and focus investments in companies with outsized exposure to certain growth markets, we feel confident that the traditional players we’ve found along with a Brazilian name offer a good first look for investors who are committed to this investment thesis.
We don’t advocate speculating on the agricultural commodities market, but rather suggest that investors might find opportunities to invest with companies that benefit from these two “mega trends” Amongst the many lessons we can pull from the events unfolding on the streets of the Middle East, from Tunis to Manama, is that commodity prices are rising and the world is going to need more food over the next century. Here are some names that will continue to respond to the world’s food needs. We believe these names are a good starting point for your research but think many are currently trading at high multiples. Investors would be well advised to wait for a pullback before picking up shares. If you’re looking for 2 other ideas to profit from the Middle East uprising, check out the article we published on Friday.
The Mosaic Company (MOS) With a market capitalization just over $37 billion this giant of the fertilizer world is prepared to feed to the soil that grows the world’s agricultural diet. What’s more, it vertically integrates the production of two of the three core inputs, potash and phosphate, that go into its fertilizer product. Despite a very bullish run in the past year, as recently as late January, RBC Capital Markets reiterated its outperform rating for the company. However, we believe shares are overvalued on a discounted cash flow basis, and investors would be advised to add a position on a pullback.
Potash Corporation of Saskatchewan (POT) The eponymous producer of the fertilizer input, PotashCorp, maintains its number one position globally in the potash game. If you listen to the analysts over at UBS, which as with all analysts we would caution you to do with prudence, PotashCorp might well be gold. Despite a massive run up in the price of the stock, UBS reiterated a buy rating for the stock at the end of January. Its quick rise might mean it is due for a price correction in the short term, but it remains a fundamentally sound name in its space.
CF Industries Holdings Inc. (CF) A smaller player with a regionally concentrated market in the central United States, CF Holdings is another fertilizer name that has steady growth prospects for the long term. Its 5-year projected EPS are 8.5%. it should be noted that it, like others in the sector, has experienced a marked run up in its stock price recently. Investors may want to keep an eye on it to see if its price comes in line with their own calculations for an allocation in their portfolios.
Monsanto Company (MON) Generating revenues in excess of $10 billion in 2010, this Midwest firm with global reach defined the space that it operates in: seed production. Seed production, specifically the R&D that goes into seed engineering, may well hold the answer to increasing crop yields. With fixed land inputs and growing demand it may well be the investment best aligned with alleviating hunger in the world. As we detailed here, we think Monsanto should be a name on investors’ watchlists.
Syngenta Corp. (SYT) With over 4 billion dollars of cash on hand and a one-year forward EPS projection of nearly 25% Syngenta is a solid name. This Swiss company competes in two major agricultural arenas: crop protection and seed production. Given that it is an underdog amongst the more established genetically modified seed producers, Monsanto and DuPont (DD), it may well be this mentality that drives it to continue its aggressive investment in R&D and succeed in closing that gap and sating global appetites.
Archer-Daniels Midland Company (ADM) Income and revenue have jumped nearly a third YoY for ADM with a 5-year EPS projection of a very steady and respectable 8%. The company is heavily involved in ethanol so investors strongly committed to this play or those simply looking to add a bit of ethanol exposure to their books without direct commodities investments might be attracted to this venerable name.
Deere & Company (DE) If ever there was a name brand in the agriculture business the iconic John Deere tractor is it. This behemoth of agricultural machinery manufacturing controls more than 50% of the US market, but has seen the growth of its non-US sales rate tear upward and away from its US sales rate in recent years. The company has outperformed over the past 12 months, but so long as you believe in the broader macro thesis and subscribe to the brand loyalty Deere has built and its long history of competitive innovation you might consider adding it to your portfolio.
Brasil Foods S.A. (BRF) Brasil Foods distributes thousands of products to over 100 countries. It is a leader amongst Brazilian food companies. To the many consumers of its frozen food products it is more commonly known by its public-facing name of Perdigao. With a middle class constituting a majority of the population for the first time in Brazil it bodes well for demand of the pre-made meals on offer. It should be noted though, that the stock itself has performed well and is currently trading at the top of its 52-week band.
MarketVectors Agribusiness ETF (MOO) A good way to buy exposure into the agricultural space that diversifies your company-by-company allocation is this ETF that is strongly geared toward the big names of the industry. Its top holdings include, in order, Monsanto, Potash, Mosaic, Deere & Co. and Singapor traded Wilmar International. Indicative of the interest in the sector generally, the daily volume of MOO shares has spiked significantly over the past month and half.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.