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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
A Corn Boom Starts to Wilt
MARK PETERS And JESSE NEWMAN OAKLEY, Ill.—The boom in corn prices that helped propel the U.S. farm economy is fading amid expectations for a record-high harvest. Jesse Newman/The Wall Street Journal Farmer David Brown says producers will start bargaining for lower rent. Prices are down more than 40% from last year’s all-time highs, to their lowest point in nearly three years. The decline is bringing relief to meat producers and other food companies hurt by steep costs for animal feed and other ingredients made from corn. Lower corn prices also could curb supermarket prices for beef. But the slide is bad news for farmers who saw their incomes surge to the highest levels since the early 1970s, adjusted for inflation, while farmland values ballooned so much that some analysts worried about a bubble. Lower corn prices will squeeze profit margins, farmers who rent land for their crops might struggle to make money, and sales of tractors and other farm supplies likely will suffer. Corn is the largest U.S. crop, grown on more than 400,000 farms. The total area harvested for the grain is as big as New Mexico. On Friday, corn traded in the futures market for slightly more than $4.65 a bushel, down from $8.31 a bushel last August. Prices for soybeans, the U.S.’s second-biggest crop, are down more than 20% from a year ago. Many analysts predict even sharper declines. Goldman Sachs Group Inc. last week lowered its 12-month price forecast to $4.25 a bushel. If prices stumble that far and stay there, it would “put a serious crunch in the margins,” says T.J. Shambaugh, whose family has grown corn here for more than 150 years. The 53-year-old Mr. Shambaugh expects his 2,000-acre farm to yield about 200 bushels an acre this year, up from 85 bushels last year. He sold half of his expected crop for more than $5 a bushel earlier this year. “For 2013, we’re gonna be OK. 2014 and 2015 might be a different story,” he says. Corn prices hovered at less than $2.50 a bushel for most of the past decade. Prices surged in 2008 because of flooding and growing demand by the ethanol industry. The recession knocked prices back down, but they rebounded even more strongly, fueled by foreign markets such as China and a drought that crimped supplies. Prices largely have stayed above $6 a bushel in the past two years. The Department of Agriculture has projected this year’s U.S. corn harvest, which starts next month, to haul in about 14 billion bushels, up from 10.8 billion bushels last year and 12.4 billion bushels in 2011. Officials are expected to increase the estimate slightly in a monthly crop report due Monday. Some of the bumper crop might be threatened by frost damage before it can be harvested. And farmers could decide to plant less corn in the future if profit margins shrink too far. That would reduce the corn supply and help prop up prices. For now, farmers need a boost in demand, which has been weak. U.S. corn exports have fallen to levels not seen in decades as competition from South America and elsewhere increases. And runaway growth in U.S. ethanol production is easing as the corn-based fuel supplement hits limits on how much can be blended into gasoline. “We’re returning to a more normal scenario following a period of really abnormally high prices,” says Darrel Good, an agricultural economist at the University of Illinois. “Everyone kind of acknowledged on the way up these prices were not sustainable, but for producers they were pretty easy to get used to.” Tyson Foods Inc. earlier this month said it expects feed costs in its chicken business to decline by $500 million in the coming fiscal year. Milk producer Dean Foods Co. also expects lower feed costs. Archer Daniels Midland Co., the grain-handling giant, said it expects to benefit from having more corn and soybeans to store and process. “This is a recharge that is just essential for ADM,” Craig Huss, the Decatur, Ill., company’s chief risk officer, told investors Tuesday. It isn’t clear how much consumers will benefit from lower corn prices. Burrito chain Chipotle Mexican Grill Inc. said it was no longer considering a price increase that it had said might be needed to compensate for pricier ingredients. A closely watched index of world food prices dropped for the third straight month in July, helped by declining corn prices. Still, USDA economist Richard Volpe said supermarkets use lower prices as leverage to rebuild margins battered in recent years by higher costs and tougher competition. Cropland values in the Midwest already are losing steam after a surge of nearly 80% in the past four years to an average of $6,980 an acre. The latest appraisals done by farm lender Farm Credit Services of America show that land-value gains slowed in the first six months of the year. Purdue University forecasts a decline in land values in parts of Indiana in the second half of 2013. Farm-debt levels remain low on average, so few lenders or analysts are worried that further declines in corn prices could spark a devastating collapse in cropland values like the one that hit the U.S. housing market. Still, farmers who rely heavily on rented land, and borrowed to start or expand operations during the corn-boom years, could struggle. “Will landlords be willing to retrace their rents as corn prices go down?” asked David Brown, standing beneath a canopy of towering corn stalks on his 4,000 acre farm near Decatur, Ill. The 60-year-old farmer, who rents 60% of his land, says producers will start bargaining with landowners for lower rent if commodity costs keep falling. “It used to be that marketing corn was your toughest job. Now negotiating rent is as demanding as selling your product.” Lower corn prices will help beef producers who suffered as last year’s drought dried up pastures and drove feed prices higher. The yearlong corn-price slide and recent rains already have brought relief to many cattle farmers. “Going from $7 or $8 corn to $5 corn, that’s going to help quite a bit,” says Brian Price, manager of Brookover Feed Yard in Garden City, Kan., where cattle are fattened before slaughter. A steady corn supply “should keep the price at a level we can live with.” Continue reading
Woodland Values Rise In Line With Timber Demand
Gemma Mackenzie Thursday 08 August 2013 Strong capital appreciation and a buoyant outlook for the long-term timber market continue to drive demand for woodland. Commercial spruce plantation values have typically risen 30% over the past two years and amenity woodland price rises are not far behind, according to chartered surveyor John Clegg & Co. “People are viewing commercial forestry, typically large plantations of spruce in Scotland and the north of England, in a similar way to agricultural land. Long-term capital appreciation is the key driver, with forestry outstripping most other investment classes,” said John Clegg from the company’s Buckinghamshire office. “Investors are also looking at medium- to long-term global commodity prices, which are forecast to rise sharply as the recession ends and global population continues to rise.” Forestry management was more straightforward than agriculture, adding to its attraction, he said. “It also costs less to invest per acre and ticks the same taxation boxes as farmland, provided it can be shown to be commercially managed.” Commercial spruce plantation values averaged £6,000/ha, allowing for open ground and other species, said Edinburgh-based colleague Patrick Porteous. Pure lowland stands near to harvest could fetch £15,000/ha, he added. “For the past five years we have seen phenomenal growth in capital values, around 14% a year, mainly due to the value of timber, which has risen substantially since the early 2000s,” he said. “We have seen a shift in global timber trends with China absorbing a lot of output from Russia, Eastern Europe and Scandinavia. Although the UK still imports 65-70% of its timber requirements, rising transport costs and demand from new housing, plus a relatively stable exchange rate, should mean good returns for home-grown spruce.” A looming shortage of domestic supply was fuelling optimism, said Mr Porteous. “We have not seen nearly enough planting since 1988 – as the average rotation is 35 years, UK timber supply is going to tail off.” He believed that created a real opportunity for growers in accessible areas in southern Scotland on marginal land. “A lot of this area is ideal spruce country and growers stand to get very good returns. These plantations also provide good livestock shelter and have been shown to provide an extra month of grass growth.” More remote areas could also cash in. Loch Duagrich Hill, 430ha of highly attractive hill ground on the Isle of Skye, provided a good opportunity for an investor prepared to offer more than £485,000, he said. It had significant Forestry Commission grant income, allowing the new owner to plant and create mixed woodland with hill grazings, stalking and loch fishing. Amenity woodland values generally range from £8,500-20,000/ha, with smaller parcels near population centres and/or with sporting rights at the upper end, added Mr Clegg. “Like farmland, many people like the idea of owning woodland, and smaller blocks of mixed or broadleaved woodland offers lifestyle and amenity benefits,” he said. The 7.44ha Callins Wood, near Minehead, Somerset, at the more commercial end of the scale, was heavily stocked with valuable mature conifers and ready to yield immediate thinning income, he said. It is priced at £100,000 or £13,400/ha. Ash dieback remained the one big unknown in this sector. While prices for woods containing a small percentage of the species were unlikely to be affected, the picture was less certain where ash was more prevalent. “It will depend how much disease is found this autumn – we may see quite an increase in reports as people have become more aware of symptoms. The age of trees is also important – older trees will take several years to be affected and you can still use the timber,” said Mr Clegg. Outlook for timber The latest Timber Bulletin from forestry consultant and management company UPM Tilhill highlights the improving market, underlined by a 4% rise in UK processors’ market share to just under 45% of volume. Investment in forestry continues to provide outstanding returns compared to practically any other investment, said timber operations manager Peter Whitfield. In 2012 the return on investment was 18.3%, according to the IPD Annual Forestry Index, and the annualised return over the past 10 years was 16.3%. The latest National Forest Inventory Report had taken a more rigorous look at the private forest sector and estimated that overall softwood availability would average 16m cu m a year for 25 years. That, said Mr Whitfield, was an encouraging forecast. “There is no evidence of a shortage, although supply and demand is closely balanced.” Although clearance of commercial woodland, for example for heathland restoration and wind farms, was a concern, there was good evidence the level of timber market activity should continue as it has for the past few years. This will be driven by favourable exchange rates, continued investment and growth of domestic processors, available timber and the demand for biomass, said Mr Whitfield. Continue reading
