A rare consensus nowadays is that food prices will continue to rise. Emerging economies are closing the consumption gap as they continue growing faster than developed ones. As much as Apple (AAPL) and Nike (NKE) fanboys enjoy their "consumer goods" and subsequently expect beneficiaries of emerging market growth to follow them to Niketown (or The Apple Store), the category could also be said to include anything from tree bark to copper wire. Increasing consumer demand always starts with food. Afterward, cultural and individual preferences determine additional consumption.
I won't deny that similarities exist across cultures. In fact, more do today than have in many centuries. But differences are significant too. Remember that most people, even in BRIC countries, are "emerging" from poverty, under which starvation and malnutrition are leading daily concerns. Food prices, quite clearly, stand to benefit first and foremost from EM growth.
Commodities-king Jim Rogers notes also that stockpiles are historically low. And production conditions, from quantity of land in use to increasing regulation, are highly unfavorable. In his honor, I'll cut this session of retail bashing short and get right into an overview of some of the most accessible and attractive food investments for U.S. investors.
- ETFs and ETNs: You can avoid potential pitfalls of business operations by purchasing shares of funds that trade or hold physical commodities. The following offer diversified exposure to agricultural commodities:
Powershares DB Agrigulture Fund (DBA): The most heavily traded public index of agricultural products is up 50% over the last year and currently sits 30% off an all-time high reached in 2008.
ELEMENTS Rogers Commodities Index: The Agriculture Total Return ETN (RJA) is managed by none other than Jim himself. It's the alternative to DBA for broad agriculture exposure and has been the better performer, within 15% of 2008 highs and up over 60% in the last year.
*Coffee (JO), Sugar (SGG) and other individual commodities are also traded on major exchanges but are subject to greater volatility.
Agriculture stocks: It is important for investors to distinguish between publicly traded agriculture producers. The American diet is not the average diet worldwide. While meat and dairy demand will rise in emerging markets, the vast majority of demand there is for fresh produce. Furthermore, I believe Americans are starting to eat healthier, which skews demand even more in favor of fruits and veggies. Three major producers are:
Fresh Del Monte Produce (FDP): The first thing I noticed about this stock is the slew of recent insider selling. Given that no sales were significant compared to individual holdings and other insiders made significant buys a year ago with no subsequent sales, I don't consider it a red flag. Of the stocks I'll mention, FDP has been the most consistently profitable in recent years and garners the highest valuation based on sales and earnings.
Chiquita Brands International (CQB): Streamlining operations appears to be working well for Chiquita, having earned profits in 2009 and 2010 after losing money, despite higher food prices, in 2007 and 2008. Revenues have been declining, but at a price of 11x trailing earnings and 20% of annual sales, value investors may like what they see.
- Dole Food Company (DOLE): Despite bringing in revenue approximately equal to the preceding two companies combined, Dole didn't earn a profit in 2010. The company went public in 2009 and has a lot of debt, so ultimately I see CQB and FDP as better investments.
