Gambling With Dirt - Introduction

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Includes: ADM, AGCO, AGRO, ALG, BG, BRFS, CNHI, DE, FMC, LNN, MON, MOS, NTR, SQM, SYN
by: Shelby Cardozo

Summary

Food & agriculture exposed portfolios have a lifespan that lasts as long as humans do.

Global population growth and climate change is the unrelenting catalyst.

Food & agriculture fundamentals support long-term growth beyond the current cycle.

This is part one of the Gambling with Dirt series focusing on the food & agriculture sector.

"Farming is simply gambling with dirt." - Mark Twain

Investing in food & agriculture is a lot better than gambling with dirt. Food exposure in an investment portfolio is a very important and positive point to follow given that the food is sector has a lifespan that lasts as long as humans do. It does not matter where you go on earth, people need to eat.

The global population is expected to grow from 7.2 billion to 9.7 billion by 2050 and 11 to 12 billion by 2100 according to the United Nations. It is this kind of global view that is required when you think about investing in a market that will never go away. Now, you may be thinking you don't have to worry about this kind of growth since you may be dead, but it is important to remember that today, the food & agriculture sector accounts for 3% of GPP globally. This would make the sector worth $2.3 trillion according to the World Bank. Annual investments in food & agriculture are estimated at $220 billion with 75% coming from the private sector. That said, roughly every dollar invested in agriculture research and development would create roughly $20 in economic activity.

But even with all that is invested now, it is estimated that annual investments from 2015 to 2030 need to reach $480 billion to feed our growing population. Never mind oil prices, never mind the latest web application, food and agriculture is an investment theme that is never going to fade away.

The goal of this series to find the companies with the highest levels of exposure to food & agriculture and offer the best long term opportunities for investors like myself. In this article I'm going to focus on breaking down food & agriculture into smaller areas of focus and then follow up with an article on each area with specific analysis on companies with within that area.

Agriculture & Equipment

From tractors to heavy machinery, automation & agricultural robots, the growth in the senor technology is the driver for agricultural equipment and is key to meeting the food needs of a growing population by increasing productivity. The fundamental support for long term growth of agricultural equipment is the growing per capita consumption, growing population and the improved productivity mechanized farming produces. You might imagine that there hasn't been any advances in farming technology, but every day drones and senor driven tractors are improving how people till, harvest and plant for the future.

  • Deere & Company (NYSE:DE)
  • AGCO Corporation (NYSE:AGCO)
  • Alamo Group (NYSE:ALG)
  • CNH Industrial NV (NYSE:CNHI)
  • Lindsay (NYSE:LNN)

Plants & Yields

While improving plant yields have been the mainstay of production increases in the past, they are on the decline for major crops. Globally the rate of growth in yields of the major cereal crops has been steadily declining. It dropped from 3.2% per year in 1960 to 1.5% in 2000. Despite the drop there is room for vast yield improvement. Yield gaps exist with grain yields in emerging markets lagging those of developed countries. It has been reported that some of this gap is the result of geographic and climatic changes resulting in differing temperature and rainfall distributions.

Growers of today are more than just putting seeds in the ground. It is about pest protection, soil science, environment resistant seeds. Advances in these areas are going to have to continue in order to meet the global growth needs. These are the companies I believe best have high levels of exposure.

  • Agrium (AGU)
  • Monsanto (NYSE:MON)
  • Syngenta (NYSE:SYT)
  • FMC Corp (NYSE:FMC)
  • Mosiac (NYSE:MOS)
  • Potash Corp (POT)
  • SQM (NYSE:SQM)

Animals & Feed

As people are raised from poverty and as the middle class expands to 4.9 billion by 2030, so will demand for quality foods and for livestock. Demand for agricultural products are projected to increase by up to 100% by 2050 and the role of the agricultural business sector is key in connecting the harvest to the home and transforming farmers crops and livestock into products that serve to fulfill our growing population.

  • Adecoagro (NYSE:AGRO)
  • Bunge (NYSE:BG)
  • Archer Daniels (NYSE:ADM)
  • Brasil Foods (NYSE:BRFS)

A Long Term View

The simple every day activity of eating is a multi-trillion dollar business that is going to have to grow in order to support the billions of new individuals roaming the earth. It is this kind of slow, unstoppable catalyst that is often overlooked by some investors but will not be ignored by the market.

It is as certain as the earth revolves around the sun. These companies have the highest level of exposure to the continued growth of the food and agriculture sectors. While the market may move up and down the long term view is that these companies will be the ones to pick up the shovels after the bears have their fun.

A Preview of Lindsay Corporation

If you haven't heard the name Lindsay Corp you definitely aren't familiar with their the irrigation business segment. The Company's irrigation segment manufactures and sells center pivot, lateral move, and hose reel irrigation systems as well as replacement parts for irrigation systems and controls for its water pumping stations. Not to mention controls for the agriculture, golf, landscape and municipal markets and filtration solutions for groundwater and agriculture.

5 Year August Minimum Average Maximum
PRICE $79.05 $35.96 $73.26 $94.57
YIELD 1.42% 0.42% 0.74% 1.43%
PE 23.6 13.17 21.59 42.83

A 13 year dividend grower, that has for the past 5 years had an average dividend growth rate of 21.30% per year. Currently caught up in the industrial malaise that has set over the sector, Lindsay Corp is just one play we'll be looking at in part two of the Gambling With Dirt series.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.