With the Middle East chaos still surging, one fact remains a constant. With a look at the beginnings of the protests in Tunisia, Egypt, Libya, Yemen and Syria, one can easily find a call to the market and subsequently to investors: Inflation is sending food prices higher throughout the developing world. The U.N. reported that prices for food commodities are up significantly in the past year. This has a huge impact in the developing world. On average, 80% of incomes in developing countries go to food and the Middle East is no exception.
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 out-sized exposure to certain growth markets, we feel confident that the traditional players 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."
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.
Potash Corporation of Saskatchewan (NYSE:POT): The eponymous producer of the fertilizer input, Potash 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 listen with prudence, Potash might as well be gold. Potash shares experienced a few stairstep leaps in price last year, but have fallen back a bit to $55.
Potash is used for corn crop production, among many other things; and corn prices have skyrocketed upwards as of late. Wet weather is delaying corn seeding, according to the department of Agriculture. In the intermediate run, farmers should be more willing to pony up for more potash given that potash broadcast on corn acres produces significant yield increases for farmers (at least in North America). The political class appears interested in continuing ethanol subsidies, and Potash is certainly to be a fat beneficiary of ethanol mandates for years to come.
CF Industries Holdings Inc. (NYSE: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 five-year projected EPS are 8.5%. it should be noted that it, like others in the sector, it 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. Plantings appear to be moving along in Iowa and Illinois, looking at Department of Agricultural reports, which are key distribution points for CF products. With over 1 billion in cash on hand and a market cap of only $10 billion, CF is a potential takeover target and therefore may deserve more of a multiple premium than it is currently provided by the market.
CF is near its 52-week high of 158.42. We recommend interested buyers pursue a put-selling strategy, or hold off for lower prices before acquiring shares.
Monsanto Company (NYSE: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. The flooding on the Mississippi will also benefit Monsanto because the company has quality short-season seeds once re-planting gets underway for washed out fields. This should manifest itself in quarterly earnings over the next few earnings cycles.
Monsanto shares have hovered between $60 and $75 per share over the last half-year. We think shares should head higher on the back of positive macro news headlines that affect company sales.
Syngenta Corp. (NYSE:SYT): With over $4 billion 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 among the more established genetically modified seed producers, Monsanto and DuPont (NYSE: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. Sygenta will benefit in the same manner as Monsanto as it has mid-season and early-season maturity crop seeds that will be purchased for replanting. The company is also spearheading an expansion in its genetic traits products with a new research facility at its Triangle Park operations. We think this is a good move, and anticipate more IP to come from Syngenta's R&D efforts.
Archer-Daniels Midland Company (NYSE:ADM): Income and revenue have jumped nearly a third YoY for ADM with a five-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. ADM is brilliantly building a storage terminal in a special trade zone in Uruguay. With access through the Uruguay River, ADM will be able to better marriage Brazilian crop production with European and North American markets by sea.
Deere & Company (NYSE: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 U.S. market, but has seen growth of its non-U.S. sales rate tear upward and away from its U.S. 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. We think Deere's penetration of the Chinese market is in its early stages. The company is building its seventh mainland production facility, this time in Harbin near the JD Jiamusi Works site. John Deere Jiamusi is already the leading equipment supplier in many categories in China.
Brasil Foods S.A. (NYSE:BRFS): Brasil Foods distributes thousands of products to more than 100 countries. It is a leader among 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 it offers. Warren Buffett's Berkshire (NYSE:BRK.A) is all about BRFS as it continues to acquire shares. Brasil Foods is the product of a 2009 merger between food packaging companies Perdigao S.A. and Sadia S.A. We think there are legs to this story.
MarketVectors Agribusiness ETF (NYSEARCA: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 (NYSE:MOS), Deere & Co. and Singapore-traded Wilmar International (OTCPK:WLMIF). Indicative of the interest in the sector generally, the daily volume of MOO shares has spiked significantly over the past eight months.
MOO shares have bounced between $50 and $60 per share since the beginning of the year. MOO is a solid long-term holding, with 66% of its holdings in companies mentioned in this article: DE, ADM, SYT, MOS, SYENF and BRFS, among others.
The Mosaic Company (MOS): With a market capitalization just over $29 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.
We believe that the pullback since late February has presented investors with a good entry point. Mosaic pays a token dividend of 20 cents per share each year. Shares trade at a modest multiple around 11-12x and forward growth rates are reasonable, and lend themselves to a PEG that hovers around 1. We think that some investors are concerned about the distribution of MOS shares by Cargill, which is really a tax-free transaction for Cargill stakeholders. There was no real dilution but the influx of 115 million shares including the overallotment weighed on the price. Consider it a gift.