A Global Grain Powerhouse

The appeal of farmland as an investment is pretty clear in a market in which clarity on anything is hard to find. It starts with one basic premise: The global population is expected to reach 8 billion by 2030. There are certain inevitable outcomes we can take from this. The most reliable is that we’ll need to produce a lot more food.

Though not original, I don’t think the market quite realizes the challenge involved in feeding all those mouths. Now, I’m not saying we face mass starvation. I’m not saying it can’t be done. I am only saying there are challenges and constraints more acute now than in the past. And these constraints make for an appealing investment idea.

First, let me sum up the size of the demand. There are a lot of ways to present the same data. The most arresting is perhaps from the USDA projections. These show that the incremental acreage required to feed this population by 2030 is about equal to the planted acreage in the US, Brazil and Argentina!

That’s a lot of acreage and a good reason to own farmland as an investment over the long haul. Arable land per person – which includes both land under cultivation and land that could be farmed – is a dwindling resource.

One other added wrinkle is that so many countries have biofuel mandates. That means the governments of the world are basically forcing industry to burn food to make energy. This is a major force in the markets. For example, just in the US, about one quarter of the corn harvested winds up in an ethanol plant.

All of this simply means we need to get more out of every acre. This gives a nice tail wind to the companies that work up and down the agricultural chain – from irrigation equipment to fertilizers.

One of the best and safest ways to participate in the broad global agri-boom is to own shares of a company like Viterra (TSE:VT; PINK:VTRAF). Remarkably, recent events have pushed the stock price all the way down to where I first recommended it to my subscribers in 2006. The stock has rebounded recently, but remains well below its all-time highs. The stock market has handed investors a gift, and let me tell you why.

Viterra is one of the largest agribusinesses in North America. It is the largest grain handler and agri-retailer in Western Canada and Southern Australia, with 85 grain elevators and 1.9 million tonnes of storage capacity. It stores, handles, processes and markets grain. The second biggest contributor to profits is its 259 retail chains that sell fertilizer, seed, crop protection products and small-scale agricultural equipment.

The market is focusing on near-term earnings weakness, as a number of investment banking firms have ratcheted down their earnings projects for this year. The consensus guess is somewhere around 60-70 cents this year. At the current quote of only $9.45, the stock trades for about 13-15 times this year’s earnings. These same firms have Viterra earning 85 cents for next year.

However, I look at this stock very differently. I’m not focused on the quarter-to-quarter earnings swings. I am interested in the larger story of how Viterra is building a global grain powerhouse.

When I recommended Viterra initially, the company was pretty much limited to Canada and grain handling. But today, it has expanded its menu of offerings and its geography with significant operations in Australia. It has invested a lot of capital in building one of the world’s most efficient grain-handling operations, with access to all the important markets, particularly those in Asia. Book value is about $9.36 per share.

With its strong balance sheet, low valuation and diversified agri-platform, Viterra is my favorite low-risk way to play the agricultural markets. The market seems to trade it like a fertilizer stock, but a better comparable is probably Archer Daniels Midland or Bunge. It’s safer than, say, Archer Daniels Midland, a mainstream favorite. And is considerably less leveraged than, Bunge, a popular Brazilian soybean processor.

Viterra is a buy. I look for it to return to $11-12 per share as we get into early 2011. That $12 target is simply its historical 15 times multiple on a 2011 guess of 85 cents per share in earnings. Longer term, I believe the stock has greater potential as the slow, but sure agricultural story unfolds.


Chris Mayer
for The Daily Reckoning

The Daily Reckoning