Harvesting The Benefits Of Population Growth

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Includes: CNHI, DE
by: Swell Asset Management

Summary

Global population growth & the pull on grain intensive foods.

How technology is influencing agricultural manufacturers.

How we have positioned the portfolio to benefit.

Investing is never dull. We are constantly bombarded with information. Whether this emanates from sell side analysts, industry experts, governments, bloggers etc… whoever it is...we are awash with information. The Internet has taken the information of humanity to the edge of humanity. With all of this noise, it is becoming increasingly more difficult to separate the wheat from the chaff - pun intended. Our job as investors is to separate the quality information from the noise and this is becoming more challenging each year.

So occasionally, we appreciate a simple concept that we can all follow. Population growth is a given, it is happening irrespective of who is sitting in the White House, whether interest rates are 1% or 10%, or whether Australia is a republic or not. I am currently reading an interesting book called 'Living within Limits' by Garrett Hardin. A central theme is the growing world population and the implications for the world. Despite a number of high profile entrepreneurs working on attempts to colonise Mars, Earth remains the focus for us here at Swell. We see population growth creating a number of opportunities and challenges for earthlings. The major one being the rise of the middle class and its pull on grain intensive foods such as meat.

Currently, the global population is advancing at 1.13% per annum. Today, the population of the world stands at 7.45 billion. By the year 2030, only fourteen short years away, the world will add nearly 1.1 billion people (assuming population growth moderates to 1%). Staggeringly, this is the equivalent of adding 46 Australias, 3.4 USAs or almost another China (0.8). As global investors, we need to consider what the population of 8.5 billion people will demand and how we can position the portfolio to benefit from this growth.

We know that we are unable to produce more land, this is a fixed constraint. Therefore, to meet the demand of a growing population, we will need to produce higher yielding crops. To produce higher yields, farmers will need to invest in technology. Despite the rapid progression of autonomous cars, farm machinery has not progressed at quite the same rate. However, we see significant opportunity to increase crop yield through precision planting and autonomous tractors. Throw in a couple of drones for good measure and you can quickly see that the days of farmers' harvesting themselves are numbered.

We like industries where we can identify a technology tail wind. This ensures that the industry is growing and generally provides a more benign competitive environment as each industry participant is able to grow at least at the industry growth rate while maintaining market share. We were encouraged that Case IH, the agricultural machinery unit of CNH Industrial NV (NYSE:CNHI), unveiled a new machine at the Annual Farm Progress Show in Boone, Iowa. CNH released their first iteration of an autonomous tractor with one obvious difference to traditional machinery: there's no cab for the driver.

Another agricultural company, John Deere (NYSE:DE) is presently locked in a battle to acquire Precision Planting LLC to gain a strangle hold on the high speed precision planting market. This technology will form the basis of a leap forward in higher yielding crops. Coupled with this technology, the growth in big data and analytics has the capability to significantly enhance a profession that hasn't changed in a very long time. To date, this information was either learned through trial and error or passed down through the generations. Not anymore.

The other constraint affecting farmers is labour leakage which has been migrating to the cities, known as urbanisation. This means that farmers need to do more with less hands. Enter the new technology. The kicker for early investors is that the agricultural industry is currently in an upheaval. Farm machinery sales in North America have retreated 60% from its 2013 peak. Over the last three years, Deere management hasn't stood still. They have made a number of significant investments that will become important as the industry conditions begin to thaw. The investments include:

  • New distribution centres in South Africa, Argentina, Brazil and India
  • New factories in China and Brazil
  • Multiple new product releases from forage harvesters to round balers

The problem with being a value investor is that you often get to the party early. You can foresee the recovery but the timing of the recovery is unknown. The stock market eschews uncertainty. At Swell we are happy to buy uncertainty and wait for the recovery, patience is a virtue and it is this patience that separates us from our competitors.

We make no apologies for this. To beat the herd, we need to think differently. We look forward to this investment generating strong returns for our investors' over the next five years. If we are right, we will be handsomely rewarded. If we are wrong, we should not impair our clients' investment capital. These are the two most important features of most important features of our investment process.

Disclosure: I am/we are long DE.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.