Next time your stomach growls, I want you to think about stocks.
That might sound a bit strange at first, but when you think about it, it makes perfect sense.
Food is one of the very few things that every single person in the world has in common. The rules are pretty simple; if you don’t have it, you aren’t living.
That means people are willing to kill for it.
That was on full display last week with the Tunisian food riots.
This wasn’t some medieval crisis in a 3rd world country; Tunisia has a highly developed political and economic infrastructure. But the normally stable and reliable country found itself rocked by an angry mob of protesters upset over rising food prices, leaving more than 50 people dead and forcing the president to flee for his life.
And don’t think it was a freak accident or some political anomaly, because the same thing happened a week before in Algeria, a respected member of the United Nations and OPEC, when protesters ransacked government buildings, banks and post offices after a young college student set himself on fire to protest the high cost of food staples like sugar, flour and oil.
Food is a Precious Resource
This kind of violence has been popping up all over the place as food production and inventories fail to meet demand.
The simple fact of the matter is that there isn’t enough money in the world to keep everyone fed.
The FAO (Food and Agriculture Organization of the United Nations) is projecting ongoing global food shortages after its Food Price Index jumped 23% in 2010 to its highest level ever.
And that’s just the index, taking a look at individual agricultural commodities is even scarier.
Corn at a 30-month high as US exports continue to surge. Soybeans up 75% in the last 6 months on production issues in South America. Wheat hitting a new multi-year high after a crippling heat wave forces Russia to ban exports. Coffee at a 40-year high after Brazil’s annual production comes in below expectations. Cotton jumps 40% in 12 months.
This bullish trend in agriculture has produced big gains for the farming industry, with equipment, fertilizer, seed and agribusiness companies all cashing in on the mania.
Let’s go ahead and take a closer look at our top picks in the category.
Top 3 Agriculture Stocks
Likely a familiar name, Deere is a global leader in farming equipment and machinery with a market cap of $28 billion. There’s a story about the California Gold Rush that says the people who made the most money we’re the ones selling shovels. That’s why a stock like this is called a pick and shovel play, selling tools to the guys on the front lines. That makes DE’s business more insulated from volatility in grain prices.
Deere is strong both domestically and internationally. About 52% of its total revenue comes from North America, with the United States and Canada being major players in the global agriculture scene.
It has a strong international presence as well, with markets in Asia, Western Europe and Latin America. Its Latin American business has seen the biggest gains on the region’s growing agricultural exports.
It’s also a bigger name, so it likely wouldn’t have the upside of a small or mid cap, but it also has a much more established business with very high barriers to entrance. Which means this is a well insulated company.
Deere also looks attractively valued, trading with a forward P/E of 16X against its peer average of 18X.
CF is a fertilizer company that specializes in nitrogen and phosphate with a market cap of $11 billion. Fertilizer companies are enjoying record demand right now as the world’s farmers work to increase yield and output to satisfy growing demand.
CF is a midsized player in the fertilizer industry, which means it has an established reputation but also the ability and desire to keep growing. That came into focus last year when CF acquired a competitor and expanded production capacities at two key facilities.
It also happened to be the target of a takeover attempt itself, choosing to reject a hefty offer from industry giant Agrium, Inc. Cross-industry player Potash Corp., a potash specialist, was also the target of a huge takeover attempt last year, with global mining conglomerate BHP Billiton offering $40 billion for the company. Another great example of the premium that the market is placing on companies that control resources that are important for food production.
But in spite of the strong fundamental profile, the stock is actually undervalued, trading at just 11X forward earnings, a nice discount to its peer average of 18X. And when you throw in the fact that there could be further consolidation in fertilizers and mining, this looks like a solid pick.
Bungee is an integrated play on agriculture, operating in four business segments with a market cap of $10 billion. Its diversified business model provides it with protection against weakness in any single market.
Its largest segment is its Agribusiness, where Bunge operates as a grain wholesaler. This group also includes storage and distribution services. Although Bunge works in a number of grain markets, its specialty in soybeans, representing a large portion of its total volume and revenue.
Its three other segments are fertilizer, food/ingredients and sugar/ bio energy.
The company has strong international exposure too, with operations in South America and Canada, both hotbeds of agricultural production.
Taking a quick look at valuations, the last time grain prices were this high, in 2008, Bunge trade at 18X forward earnings. Right now, shares are trading at 12.5X. So when you factor strong earnings growth on high grain prices with a full valuation, Bunge looks like it has some solid up side.
And Two for the Road
It’s actually pretty easy to think of this company as John Deere Jr. The only difference is that it’s smaller and operates exclusively in the United States and Canada, so it’s more of a local play. AGCO is also a lot smaller than Deere, with a market cap of just $4.5 billion. That means that in the era of bigger is better, a company like AGCO could be a takeover target. We saw that play out mining equipment when industry giant Caterpillar scooped up smaller-name Bucyrus for a big premium. That could be a model for other industries to look at.
Syngenta is the world’s largest seed and crop protection specialist, based out of Sweden with a market cap of $29 billion. In a world where we still have to grow most of our food, a global seed and crop protection company looks like a good place to make a long-term investment. The valuation picture looks good too, with a forward PE of 17X a nice discount to the industry average of 21X. Throw in the bullish 18% growth projection and Syngenta could be a good way to cash in on surging food demand.
Until Next Week
That’s it for this week. In meantime, here is one piece that discusses the FAO’s outlook on food prices and another that talks about how to file your taxes for free.
FAO Says Food Prices to Surpass Record High
Your Investment Partner,
Mike
