Global Agribusiness Should Outperform The Broader Market In 2013

Includes: ADM, AGRO, BG, CRESY
by: Zvi Bar

Bunge Limited (NYSE:BG), a large grain merchant and processor, has performed exceedingly well over the past few months. Though the company is roughly even with its year ago valuation, BG and most other's involved in grain processing and wholesaling business performed exceptionally poorly through the spring and summer of 2012. Over the last six months, Bunge has appreciated by about 25 percent, and the company has gained over six percent so far in 2013. This year may be a very good year for entities producing and processing grains, and if Bunge's recent performance is an indicator of the industry's broader near-term performance, several peers may be poised to appreciate in the coming months.

Last year, Alberto Weisser, Bunge's Chairman and Chief Executive Officer, commented:

"The current market environment, shaped most notably by the severe U.S. drought, has been and will continue to be volatile and complex for everyone who participates in our industry. Stocks of corn and soybeans are tight, and the world is adjusting typical trade flows."

Bunge is scheduled to report its Q4 2012 results next month, on February 7. In October, Bunge reported that its third-quarter net income increased to $297 million or $1.92 per share, from $140 million or 89 cents a share in the same period a year earlier. Bunge's net revenue increased 10.7% to $17.293 billion, which fell below average Wall Street estimates of about $17.75 billion. Similarly, adjusted earnings were $2.08 per share versus $0.86 cents, which fell below average estimates of $2.17.

One would expect that BG's misses last quarter would have hurt its share performance, but the equity has gained more than 10 percent since reporting. Some of this recent strength is likely based on the company's decision during the third quarter to increase its quarterly dividend from $0.25 to $0.27.

Several competing agribusiness companies, such as Archer Daniels Midland Co. (NYSE:ADM), have underperformed BG in the recent past and may be poised to outperform BG in the coming weeks and months. Archer Daniels Midland's underperformance is based on many factors, including the 2012 drought, ADM's risks associated with exposure to U.S. government spending on subsidies for ethanol and other agriculture programs, and that ADM did not increase its dividend in 2012. ADM was a dividend aristocrat that had increased its dividend for well over two decades going into last year, but that streak is now over.

Another reason for Archer Daniels's underperformance is that Archer Daniels Midland has made a somewhat hostile bid to acquire GrainCorp, Australia's largest grain handler. Archer Daniels Midland already owned about one sixth of GranCorp before making the offer. ADM has underperformed BG by a significant among in the second half of 2012. While Bunge appreciated by over 25 percent though the last six months, ADM gained less than six percent. Over the last three months, shares of ADM have gone almost nowhere, while BG gained over ten percent.

While Archer Daniels Midland looked to Australia to expand global operations, Bunge may be looking to South America. During Q4 of 2012, Bunge's CEO commented that:

"The world needs record crops to rebuild stocks, and today's high prices are sending a strong signal to farmers, especially in South America, to plant. Early indications are that soybean production will be at record levels. As new crops are harvested, we should see a more balanced supply-demand situation, which will be good for consumers and for the market overall."

Whether or not Bunge is looking to acquire farmland in South America, increased planting by South American farmers would appear likely to at least temporarily cause the region to gain global market share, in addition to strategic importance as a trading partner. Companies that could benefit from such a trend would include Cresud Sociedad (NASDAQ:CRESY) and Adecoagro (NYSE:AGRO), both of which own substantial agricultural property in South America.

These companies and the farms they own could become acquisition targets by larger global enterprises, though some may remain wary of exposure to the region due to concerns that would include political uncertainty. The potential for socialized nationalization of corporate entities, and particularly of foreign-owned domestic assets, may deem some nations too risky for an ownership interest.

International growth is of key importance to ADM and BG. Archer Daniels Midland currently makes just under half of its revenue internationally, with its international growth likely to outpace its domestic business in the coming years, especially within Asia. GrainCorp appears to be a sensible acquisition target for ADM, because it is a market leader that is well positioned to service growing global demand for food, including to the valuable Australian market and the ever-appreciating Chinese market. The company handles around 60 percent of the grain crop produced in eastern Australia, and operates multiple east-Australian ports that ship grain in bulk.

Various tailwinds may come to the industry and its constituents. Strangely, ADM looks poised to benefit from either the completion or cancellation of its attempt to acquire GrainCorp. The market penalized ADM shares immediately following the announcement of its pursuit of GrainCorp, possibly discounting ADM's potential overpaying for the business. If ADM ends its pursuit, shares may benefit from the elimination of this market discount and the possibility that ADM use the funds earmarked for GrainCorp to repurchase shares or increase the company's dividend.

A repurchase announcement would likely buoy ADM shares, or help them appreciate out of their recent trading range. In late 2012, Bunge approved a $275 million increase to the size of its existing share repurchase program, and indefinitely extended the program. Bunge repurchased approximately $474 million of its common shares through the third quarter of 2012, and indicated it has approximately $500 million remaining under its expanded program for future share repurchases. BG has appreciated by about eight percent since announcing that repurchase plan increase, about six weeks ago.

Commodity price fluctuations have remained volatile for the last few years, with many long-term investors continuing to anticipate continued heightened volatility again in 2013 and beyond. Additionally, many consumers are noticing higher and ever-increasing food prices. For investors that are expecting further commodity-based inflation, these grain producers and processors may act as a long-term inflation hedge as well as a source of income. As such, this industry looks likely to outperform the market in 2013.

Disclosure: I am long ADM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.