Tag Archives: archer
Investing For The Future Surge In Commodity Prices
Sep 23 2013 Buying farmland isn’t what it used to be. As stated by British born investor Jeremy Grantham in a re cent Wall Street Journal Article : “The investment implications are, of course, own stock in the ground, own great resources, reserves of phosphorous, potash, oil, copper, tin, zinc-you name it…and the most important of all is food. The pressures on food are worse than anything else, and therefore, what is the solution? Very good farming, which can be done. The emphasis from an investor’s point of view is on very good farmland” Increasing urbanization has changed the view on farmland in regards to investing and inflation protection. This disconnect hasn’t stopped many institutional and large investors, like Grantham, from seeing value in the “nooks and crannies” and adding high quality farmland to their portfolio’s. Arable land demand has increased substantially in the last decade as attested by record farmland values. The U.S. average price of farmland increased nearly 9% in 2011 and nearly 10% in 2012. (click to enlarge) (source: NASS ) On a global level, China’s Xinjiang Production and Construction Corps recently purchased 7.4 million acres of farmland in Ukraine . Indonesia also announced they were looking to buy 1 million hectares (roughly 2.47 million acres) of Austrialian farmland for cattle production. The growing number of countries purchasing farmland capacity seems to point to future concerns of food supply. As the Dow Jones Industrial and the S&P continue to touch record highs, investors may want to begin looking at alternative investments that have low to negative correlations to the “traditional” asset classes. You can invest in farmland and agriculture in a variety of ways. Below are few ways to play continued returns in farmland. Gladstone Land Corp ( LAND ) – A U.S. based farmland investment company that currently offers a plus 9% annual distribution. It owns and leases farmland in Florida, California, Michigan and Oregon with appraised land value of $79 million. The distribution is paid monthly which should attract income investors. MarketVectors Agribusiness Index ( MOO ) – A diversified agriculture ETF with holdings in a variety of the largest agribusiness companies globally. Holdings include Bunge ( BG ), Archer Daniel Midland ( AMD ), PotashCorp ( POT ) and Deere ( DE ). Cresud ( CRESY ) – An Argentinean based agriculture company that currently owns roughly 2.4 million acres of farmland in Argentina, Brazil, Paraguay and Bolivia. CRESY produces a variety of crops consisting of soybeans, corn, and sugarcane. It also has operations in beef cattle and milk production. In the second quarter , Cresud sold 4 of its farms for roughly $60.5 million and saw large gains in its farmland development business. CRESY is currently trading down roughly 60% from its highs back in late 2010. Many farming companies have struggled to release value for shareholders with the drop in crop prices but now many are beginning to see value with the sale of farmland. Adecoagro SA ( AGRO ) – Adecoagro is a Luxemburg based small-cap agriculture company. AGRO operates on roughly 300,000 hectares of land throughout Brazil, Argentina and Uruguay and produces a variety crops including sugar, corn, soybeans, cotton, rice and dairy. Since peaking in March 2011 at $13.91 a share, Adecoagro is currently trading near its lows at $7.45. I like AGRO for many reasons, but primarily due to it currently trading at a discount to the value of its land given recent sales. Along with its variety of crops, Adecoagro is also a large producer of ethanol in Brazil which has stabilized revenues to a certain degree in recent quarters as energy prices have remained high. As referenced earlier, some large investors have been heavily investing in agriculture with the value of farmland in fertile areas increasing substantially. AGRO is no different. Currently Soros Fund Management has a $200 million stake (roughly 21.3% ownership) in the company, making AGRO the one of the largest small-cap positions the fund has. Capitalizing on the value of its land in the fourth quarter of 2012, AGRO sold a portion (51%) of its stake in the Santa Regina Farm located in Brazil for $13 million (around $7,000 per hectare). AGRO purchased the entire property for $2.3 million ($625 per hectare) in 2002 and is expected to sell its entire portion of the land for a combined $26.1 since the buyer exercised its option to purchase the remaining 49% for $13.1 million in July. When calculating the cost of improvements that AGRO put into Santa Regina, the company disclosed they realized an internal rate of return around 34%. In terms of earnings, AGRO recorded adjusted EBITDA of $41.3 million for Q2 2013 up 39.3% from same period 2012. The total 6 month 2013 EBITDA is also up 123.2% to $70.5 million. As indicated by its Q2 press release, despite low agricultural prices AGRO has increased margins by 12.3% in 2013. This is a very good sign moving forward. Despite the fact that 70% of its 2013 earnings are expected to come from sugar and sugar based products (ethanol), the value of the land and the growing demand for its food products is hard for an investor to pass up. Farmland has long been considered to be the ultimate safe haven investment and now appears to be a good time to own a piece of the “farm”. Commodity Portfolio I currently own AGRO, ADM and SCPZF.PK for farmland exposure. My current commodity portfolio holdings and percentages are below. As I had mentioned in previous articles , I am expecting inflation to tick up as we enter into 2014. In response, I have been transitioning into an overweight commodity portfolio. Over the last year I have been taking profits as the market as climbed back from lows in 2009. I recently took profits in a few positions including Microsoft ( MSFT ), The Sherwin-Williams Company ( SHW ), Omega Healthcare Investors ( OHI ) and Wells Fargo ( WFC ). From my perspective, the economic outlook doesn’t support continued investment in those companies. A softening U.S economy and high debt levels will push investors into safe havens and real assets. Going forward I will be looking to add investments on my watchlist and trim other positions. It will be interesting to see how an overweight commodity portfolio will perform relative to the rest of the market. Continue reading
Ukraine Hopes To Cash In On Massive Corn Harvest
http://www.ft.com/cms/s/0/54852a9a-1ba2-11e3-b678-00144feab7de.html#ixzz2f3Up7YOa By Roman Olearchyk and Emiko Terazono Fifty years ago, inspired by a visit to the US cornbelt, Nikita Khrushchev’s grand plan to grow corn across the Soviet Union resulted in devastating crop failures and food shortages. Today, however, in one ex-Soviet state, his vision may be realised. This year, Ukrainian farmers are harvesting their largest corn crop, and as Serhiy Didyk, who farms on the steppes of central Ukraine, said: “Khrushchev’s dream of producing vast quantities of corn on our land is finally becoming reality.” With its rich black soil, Ukraine has historically been known as the “breadbasket of Europe”. Already a large wheat supplier to the Middle East, now Ukraine’s corn acreage is expanding as well, as it offers higher profits and faces far less state regulation than wheat markets. And unlike past efforts for mass production of the grain, these days better quality seeds, fertiliser and pesticides, and favourable weather have boosted yields. Changes in the weather patterns in Ukraine in the past few years have “made corn growing more attractive and less risky compared to other agricultural crops traditionally grown in Ukraine,” says the US Department of Agriculture. This year’s expected corn harvest of 29m tonnes has set the stage for a 35 per cent jump in exports to 18m tonnes, catapulting the eastern European country to the world’s second-largest corn exporter alongside Argentina and Brazil, according to the USDA. Kiev is pinning high hopes on its corn exports. In a rallying call, Mykola Prysyazhnyuk, Ukraine’s agriculture minister, last week said: “There will be strong demand for corn on global markets, with Asia, the Middle East and Africa increasing imports. Let’s make this Ukrainian corn.” The country’s corn boom is a bright spot for Ukraine, which is grappling with its second recession in five years, a ballooning current account deficit and also hit by the recent emerging market currency turmoil that has depressed Kiev’s foreign currency reserves to dangerously low levels. Grain exports – expected to total a record $5.5bn this year, according to consultancy Ukragroconsult – have not been able to offset the sharp declines in revenue from heavy industry and other resource sectors. However, with investments in agriculture expected to rise, the sector’s growth is expected to provide diversity for an economy that is regarded as being too reliant on exports of steel and minerals. Vladimir Pantyushin, regional economist at Barclays, said: “Agriculture has partially offset the decline of metals exports and can extend these gains over the short-to-medium term.” Ukraine aims to meet growing global demand for corn as rising incomes in emerging markets lead to higher meat and dairy consumption. The country’s first ever shipment of corn to China is expected to leave ports in the coming weeks as part of a $1.5bn loan-for-corn deal brokered by both countries last year. Countries including Egypt, Israel, and Spain are among the largest buyers of Ukrainian corn, while producers are also making inroads into Asia, exporting to South Korea, Japan and Malaysia, thanks to competitive prices compared to US and South American counterparts. Asian importers, traditionally reliant on US and Latin America, are also keen to diversify their sources after the worst US drought in 50 years in 2012 devastated corn crops, leading to a price surge. Ukraine’s rising prominence in the world agriculture markets has attracted Monsanto, the US agritechnology group, which announced plans to pump $150m into building a seed production facility, and Dupont Pioneer this summer started production at a $40m seed plant. However, the corn shift is not without challenges. Bumper grain crops worldwide have depressed international prices to three-year lows. Meanwhile the country’s infrastructure is desperately in need of investment in equipment, grain storage and logistics such as ports, roads and railroads. Leading agribusiness groups – international traders such as Cargill, Archer Daniels Midland, Bunge – are already in Ukraine, but Kiev needs more, say analysts. “The government needs to improve the investment climate in the country overall, reduce its role in the sector further and instead focusing on improvements in infrastructure in order to be prepared for more grains exports,” said Aivaras Abromavicius, partner at East Capital, which manages $5bn in emerging markets But these are challenges one ex-Soviet leader could only have dreamt of. Mr Didyk, the corn farmer, said that if Khrushchev were alive today, “he would be happy to see our big corn crop,” although he probably would not be as pleased to see Ukraine becoming such a leading independent agriculture player. Continue reading
US Ethanol Biofuels Mix Hits The Oil ‘Blendwall’
http://www.ft.com/cms/s/0/3dad8ae0-04fc-11e3-9ffd-00144feab7de.html#ixzz2cJfyChEp August 14, 2013 6:31 pm US ethanol biofuels mix hits the oil ‘blendwall’ By Gregory Meyer in New York In the slow-motion collision between US biofuels policy and the “blendwall”, it looks like the wall will be left standing. The blendwall is shorthand for the maximum amount of ethanol that the US oil industry will mix into petrol. Given demand constraints in the US, this is a tad more than 13bn gallons this year. But the federal Renewable Fuel Standard (RFS) requires 13.8bn gallons of corn-based ethanol to be blended this year, and even more when “advanced” biofuels are counted. Next year the law dictates a further rise. So policy is crashing into the reality of the blendwall. Congress has failed to address the problem, so the White House stepped in last week. In obscure bureaucratic language, the Environmental Protection Agency invoked powers to signal a reduction in the mandate next year. The move has implications for commodity markets from corn to petrol. It could reverberate not only in US farm states such as Iowa and Nebraska, but Brazil and Europe as they respectively export ethanol and petrol to the US. The US Energy Independence and Security Act of 2007 sharply increased how much ethanol fuel companies must blend into petrol each year. The law was passed just before the financial crisis and a shift towards more efficient cars. The increase could have been achieved in spite of weaker petrol demand if fuel companies had increased the ratio of ethanol in each gallon of petrol. But they have in most cases refused to go beyond 10 per cent, citing potential damage to engines. The EPA in past years rebuffed concerns about the blendwall. But last week it acknowledged that the maths did not work. For 2014, “the ability of the market to consume ethanol in higher blends . . . is highly constrained as a result of infrastructure- and market-related factors”, the agency said. It plans to reduce renewable fuel volume requirements in its rules for next year. Scott Irwin, a University of Illinois agricultural economist, called the move a “fairly significant strategic defeat for the ethanol and corn interests”, as their dreams of higher ethanol blend levels “are unlikely to ever be fulfilled”. The shift had an immediate effect on the volatile market for credits that fuel companies can use to comply with blending requirements. “Renewable identification numbers,” or RINs as the credits are known, have plunged 30 per cent since the EPA announcement. The EPA noted it would examine “advanced” biofuels requirements for fuels not distilled from corn. This could trim not only experimental biofuels refined from things like wood waste, but sugarcane ethanol imported from Brazil. Joel Velasco, adviser to Unica, the Brazilian sugar industry group, says: “How much? That’s the million-dollar question, or the billion-gallon question. That’s what the concern is about: how much are they going to have to reduce?” If Brazilian imports take a hit it could be slightly bullish for corn prices in the short term, Prof Irwin says. That is because corn ethanol refiners such as Archer Daniels Midland and Valero Energy would see less foreign competition. The sharp fall of the real, the Brazilian currency, and a rebound in the country’s sugar crop have made its ethanol exports more attractive. But even if advanced biofuels were eliminated the mandate would still require 14.4bn gallons of corn-based ethanol to blend. As the US Energy Information Administration projects 133bn gallons in total motor gasoline demand next year, this surpasses the 13.3bn gallons of ethanol needed under the 10 per cent blending ratio. Bob Dinneen, head of the US Renewable Fuels Association trade group, draws a line at 14.4bn gallons, dismissing as “nonsense” the idea it could not be met. “The narrative that the oil companies are suggesting that the RFS needs to be reduced to the level of the blendwall ignores the fact that one of the purposes was to move beyond 10 per cent ethanol in the motor fuel market,” he says. The oil industry is taking the opposite tack: this week it petitioned EPA to cut the ethanol mandate to below 10 per cent of petrol demand, warning the alternative will be “significant increases in the cost of fuel and substantial fuel supply shortages in the US”. As the political drama plays out, expect more sharp market moves ahead. Continue reading
