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Agriculture: The Good and Bad in a Sector that Looks Cheap*
By Martin Tillier, August 14, 2013 MOS) have borne the brunt of the losses in price as evidenced by a chart of an ETF that tracks them, Global X’s Fertilizer ETF SOIL . This has led many to conclude that there is value to be had there, but the news that caused the big drop at the end of last month is still relevant. The Belarusian Potash Company, a joint venture between Belaruskali and Russia’s Uralkali was unwound. This giant producer had enormous pricing power, and the ending of the cartel has produced a sharp drop in prices around the globe. The problem I see is that artificially high prices have, over the years, resulted in increased supply. This level of supply is still there and, at market pricing, it will be years before the supply and demand equation comes back into balance. In a few months, the recent bounce back may start to look like a pause in a medium term decline in the industry. Long term, it will undoubtedly present some opportunities, but the industry may well have further to fall before that happens. Agricultural supply companies not dependant on potash have also underperformed in general this year and the best value may be found there, but again, not all are equal. Monsanto ( MON ) is a controversial company because of their focus on genetic modification. That may continue to weigh on the stock, but my reasons for staying away have more to do with valuation and the technical look of the chart. The series of lower lows and lower highs evident here is hardly encouraging. Couple that with a P/E over 18 and the company looks, at best, fairly valued. The Good Valmont Industries ( VMI ) is not a pure play on agriculture. Their fabricated metal and coatings products have other applications, but the company was founded on irrigation systems and they are still their best known product. With a global concern about water usage and conservation, their expertise in that area should be invaluable in the future. They are a solid, profitable company and a P/E around 12 looks remarkably cheap. In this case, a bottom seems to have been found just above 130, which, if nothing else, gives a decent stop-loss level. Deere & Company ( DE ) is probably the best known agricultural supply company outside the industry, due to their consumer products division. They too have underperformed massively this year, losing a couple of bucks overall. Assuming continued gradual recovery in the consumer area and growing demand from agriculture, DE also looks good value at a P/E under 10. A more global play can be had by an investment in the IQ Global Agribusiness Small Cap ETF ( CROP ). This fund is actually up around 10% YTD, but has still underperformed the market. The fund’s focus on small cap agricultural businesses around the world makes it more risky than DE or VMI, but it is a pure bet on the growth of agriculture around the world. As demand increases, so technological advancement becomes key, and an investment spread amongst small companies makes it more likely that you will have a piece of “the next big thing” when it comes along. As the stock market continues to move basically sideways, the importance of identifying sectors with potential for growth is exaggerated. In the case of agriculture, the opportunity is there, but it is not universal. Internal dynamics could keep the fertilizer suppliers depressed for some time, but in other areas a simple return to the mean will provide a decent profit. We all eat (some more than others: see my picture above) and the world’s population continues to grow, so demand for the end product of agriculture is assured. It is possible to profit from this, but selectivity is the key. *I cannot tell you how strongly I had to resist the temptation to write a headline about “planting a seed” or “reaping a profit”! Read more: http://www.nasdaq.co…7#ixzz2c3QqpE81 Continue reading
There’s Money to Be Made in Food and Agriculture Stocks
By Selena Maranjian July 23, 2013 Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you’d like to add some agriculture-related stocks to your portfolio but don’t have the time or expertise to hand-pick a few, the cutely tickered Market Vectors Agribusiness ETF ( NYSEMKT: MOO ) could save you a lot of trouble. Instead of trying to figure out which companies will perform best , you can use this ETF to invest in lots of them simultaneously. The basics ETFs often sport lower expense ratios than their mutual fund cousins. The Market Vectors ETF’s expense ratio — its annual fee — is 0.54 %, and it recently yielded about 1.8%. This ETF has underperformed the world market over the past three and five years. It’s the future that matters most, though. And as with most investments, of course, we can’t expect outstanding performances in every quarter or year. Investors with conviction need to wait for their holdings to deliver . Why agriculture? It’s hard to say with much certainty what many industries will look like in the future, but we can be pretty sure that our planet’s growing population will continue to require food. More than a handful of agriculture-related companies had strong performances over the past year. Archer Daniels Midland ( NYSE: ADM ) , for example, surged 37%, and is admired for its vertical integration, featuring farms, processing plants, and more. Its last quarter featured revenue slightly up, but earnings down, in part due to last year’s droughts. The company remains a solid dividend payer , though (recently yielding 2.1%), and is looking to expand in Asia via its purchase of GrainCorp , Australia’s leading agribusiness. It has also been upgraded from underweight to neutral by analysts at JPMorgan Chase , who think it will benefit from lower corn prices, but it still features low margins and doesn’t seem very undervalued right now. ADM is considering selling its cocoa business amid falling cocoa prices. Deere ( NYSE: DE ) gained 14% and yields 2.4%. The stock seems attractively valued, with its current and forward P/E ratios of 10 and 9, respectively, well below its five-year average of 15. The company is posting robust growth, though its free cash flow has been in the red. Deere expects continued equipment sales growth , particularly from Latin America, but construction and forestry sales are projected to fall this year. Deere faces competition, too, such as from Japan, and some are looking for cost-cutting from the company. Other companies didn’t do as well last year, but could see their fortunes change in the coming years. Fertilizer giant PotashCorp ( NYSE: POT ) dropped 13% and yields 3.7%. (Its dividend has been hiked 25% this year and some 700% over the past few years.) With its current and forward P/E ratios well below its five-year average, the stock seems appealingly priced . Bulls like its low-cost structure and solid profit margins. Some of its fate is tied to massive developing economies such as China, where growth has slowed, and India, where there is reportedly a potash oversupply . Potash carries a lot more debt than cash, but it’s also generating more than $1 billion in free cash flow annually. Some worry about major fertilizer Brazil’s plans to wean itself off foreign fertilizer, but others doubt that it will succeed anytime soon. Fellow fertilizer concern CF Industries ( NYSE: CF ) shed 9%, and looks attractive with its forward P/E ratio below 7. Like Potash and others, the nitrogen and phosphate specialist may be hurt if Brazil stops importing fertilizer, but that’s not likely to happen soon. Meanwhile, some peers may be hurt by changes in India, but CF is better positioned there due to its product and sales mix. It has also been benefiting from low natural gas prices, as that’s used in nitrogen fertilizer. Rising nitrogen prices have helped , too. The big picture Demand for agriculture isn’t going away anytime soon. A well-chosen ETF can grant you instant diversification across any industry or group of companies — and make investing in and profiting from it that much easier. This agriculture ETF is quite intriguing, but there are others you might find even more compelling. To learn more about a few ETFs that have great promise for delivering profits to shareholders, check out The Motley Fool’s special free report ” 3 ETFs Set to Soar .” Just click here to access it now. Longtime Fool contributor Selena Maranjian owns shares of JPMorgan Chase. The Motley Fool owns shares of CF Industries Holdings and JPMorgan Chase. Try any of our Foolish newsletter services free for 30 days . We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy . Continue reading
World Food Demand Climbs But More Competitors Enter Field
Posted Aug. 1st, 2013 by D’Arce McMillan Many countries have the potential to expand arable farmland and help meet food demand. The expectation of big harvests across the Northern Hemisphere this year is pushing down crop prices. It seems to fit with the growing perception among traders that the period of strong commodity prices that started around 2005 is coming to an end. High prices encourage commodity producers, whether they be farmers, miners, oil drillers or metal processers, to invest in producing more. Once the supply-demand situation become balanced, commodity prices fall. Also, China’s phenomenal economic growth, which focused on infrastructure development for the past decade and which required massive quantities of metal, minerals and energy, is slowing. Economies usually slow as they mature and shift from infrastructure and export growth to slower domestic consumer-led growth. As well, demographics resulting from the one child policy mean China’s population is rapidly aging. However, if you have attended any farm meeting in the past 10 years, you likely encountered pundits who said the boom in agriculture was more sustainable. The increasing prosperity of many Third World consumers would cause them to improve their diets, incorporating more protein, mostly from meat. The increasing demands on livestock production meant rising demand for feedstuffs, from corn to oilseed meal, feed wheat to distillers dried grain. The pundits said there wasn’t a lot of new land available for cultivation so this increasing food demand would largely have to be met by increased crop yields. All that still holds true. However, a new team of pundits now coming out the woodwork say that maybe the food shortage thing is a bit overstated. An agricultural symposium this month hosted by the Federal Reserve Bank of Kansas City featured several speakers who said global agriculture has lots of resources to meet the increasing demand for food. Many of the presentations are on the bank’s website at www.kc.frb.org. Ray Wyse, senior director of trading and oilseeds for Gavilon, a multinational agricultural trader, had one of the more sobering presentations. He noted that the traditional annual consumption growth from food and animal feed has not changed much over the past 30 years if you take away the big demand growth for corn and oilseeds from the biofuel industry. Government policy-driven ethanol growth in the United States has plateaued and it appears the same thing is happening in other countries. Wyse disputes the argument that there is little new land to bring into agricultural production. About 136,000 acres, almost all of it outside the United States, have been added to grain, oilseed and cotton production since 2005. He notes that current cultivated land in the former Soviet Union is 74 million acres less than it was in the late 1970s and early 1980s. That is an area about the size of the U.S. soybean crop and could be brought back into production. One of the great agriculture stories of the past decade was Brazil’s huge growth. Its arable land stands at 170 million acres, but the country has the potential to add another 470 million. Africa has huge unrealized agricultural potential, Wyse said. The Democratic Republic of the Congo has similar climate and water resources as Brazil, and it has the potential to add 200 million acres with the potential to produce three crops a year. Although yield growth has stagnated in the U.S. in recent years, the expanding application of modern farming techniques in the rest of the world is leading to annual yield growth in corn of more than 10 percent outside of the U.S. The introduction of genetically modified seeds also leads to rapid yield growth. He noted that the introduction of B.t. cotton in China raised yields by 40 to 50 percent and in India by 70 to 80 percent. There can even be profound change in North America. He noted that the development of short season corn and soybean varieties has caused farmers in North Dakota and Canada to shift away from traditional small grains into corn and soybeans and are harvesting much larger tonnages per acre. The result of all this is that there is a growing list of competitors for the global market. Ukraine, Russia, Kazakhstan have joined Brazil and Argentina, and other export powerhouses might be possible in Africa in coming decades. These countries tend to have weaker currencies than the U.S. and Canada, making their grain cheaper. Also, they have neither the storage nor farm credit systems that give farmers here the market power to match the stream of supply to demand and wait out price dips. Wyse warned that the result of all this is crop price moderation. The follow-on implication is a risk for land prices in the U.S. and in Canada, which have risen to reflect the recent grain price boom. Reading the presentations from the Kansas meeting is a little depressing, but the reaction should be prudent debt and risk management and business planning rather than panic. No one really knows how much food demand will increase as formerly poor societies in Asia advance and become more wealthy. And while there might be lots of land that is potentially available for crop production, it will require enormous on-farm investment plus astronomical investment to tie it into the global export network. Developing that land also has environmental implications. Also, we seem to be moving into a period of more variable climate, which adds another wild card to the forecast. The last few years were exceptionally good ones for North American farmers. Nothing lasts forever, but the future isn’t necessarily bleak, either. Continue reading
