The Agricultural Investment You Need to Make Right Now

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 U.S., 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, as the nearby chart shows.

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 U.S., 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 an emerging grain powerhouse right here in the U.S. Remarkably, recent events have pushed the stock price all the way down. The market has handed us a gift, and let me tell you why.

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. At the current quote, the stock trades for about 11–13 times this year’s earnings.

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 it’s building a global grain powerhouse. Today, it’s expanded its menu of offerings and its geography with significant operations in Australia. It’s 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.

With its strong balance sheet, low valuation and diversified agri-platform, this company 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.

This company is an absolute buy. I’m expecting its share price to gain 60% by next year. Longer term, I believe the stock has greater potential as the slow, but sure agricultural story unfolds.

Chris Mayer
Whiskey & Gunpowder

June 14, 2010

The Daily Reckoning