Sunday, September 23

Week 64 - Food Production Companies

Situation: All investors are interested in gaining information about the Next Big Thing that will drive movement in the markets. We think that could be food production because 
   a) there’s not going to be enough land under cultivation to feed 9 Billion people by 2050; and
   b) the land that is under cultivation will produce less food given there are more droughts such as those we’ve been experiencing. 

Food production has many moving parts, most of which are in a continual state of flux and difficult to document. Weather, technology (“The Green Revolution”), soil erosion due to flooding and wind, global warming, population growth, availability of fuel for power grids and farm machinery, irrigation requirements for water, estate taxes that break up family farms, diseases that affect plants and animals, internet access to regulated futures exchanges and weather forecasting websites, diversion of food grains to fuel production, transportation of food to markets, and financing needed to purchase farm machinery, farm land, seeds, insecticides, veterinarian services, futures contracts, and well digging equipment. All of these listed items change from season to season and year to year, and impact market prices.

This last item listed above (financing for farmers) is of particular interest to us as investors but is, unfortunately, “flying under the radar.” That is, stocks and bonds aren’t issued by finance firms to successful farms for listing on public exchanges where fair prices can be arrived at through active trading. Family farms are about as amenable to high finance as family homes, and we have witnessed the results of what happened when bonds were created from thousands of mortgages: prices were inflated. So, “high finance” for a farmer = belonging to a farmer’s co-operative. These local/regional organizations pool money from several or many farmers to invest in farm necessities and market farm products. Farmers (i.e., the co-op members) share in the proceeds. If you buy gas at a Cenex station or enjoy Land O’Lakes butter, you’re paying into a farmer’s co-operative. The 100 largest co-operatives in the US earn over $200 Billion a year in revenue. The largest is CHS Inc. (Cenex), based in Minnesota, with sales of over $40 Billion/yr and profits of over $1.5 Billion/yr. They do pretty much all things “Ag” and in most every location, including operating their own oil refineries (Laurel, MT & McPherson, KS). Land O’Lakes is the second biggest co-operative, handling 12 Billion pounds of milk annually and operating the Purina Mills animal feed business.

Current estimates are that 1.3-1.6 Million more acres have to be brought under cultivation using Green Technology before there will be enough food to support a world population of 9 Billion by 2050. That will be even more difficult in the face of global warming. I decided to get a ringside seat to observe this fight against nature: I moved from Cleveland, OH, to Hastings, NE, last spring. I expected to have to wait a few years before a humdinger of a drought got everyone’s attention but soon found my timing was perfect. Our editorial office will remain in Baltimore, MD.

Bottom Line: Investors need to think about how large populations are fed, and then move beyond buying stock in McDonalds. The accompanying Table shows how the 25 food production companies in the S&P 500 Index are doing, i.e., not very well for the most part. People need food but many are out of work and unable to spend much on food.In addition, the costs of food production are soaring. The result is that companies attempt to pass along those increased costs by raising prices only to see people respond by buying less. Some companies have done well: Monsanto, Hormel Foods, General Mills, Potash, Flowserve, and FMC are sound enterprises that are relatively low-risk. However, this is widely known so their stock is somewhat overpriced. Higher risk names that are also sound enterprises include Caterpillar, Deere, Mosaic, and Dupont. Their stock is either fairly priced or underpriced. 

For the seasoned investor, who knows fixed income investments are where the smart money hides out, there’s the Cenex preferred stock issue (CHSCP) paying 6.25% as of 9/12. Cenex is an $84 Billion company that shows strong continual growth due to its worldwide reputation in the food game. It’s a farmer’s co-operative so stock is not issued and it isn’t regulated by the SEC. What is known is that the company’s book value has grown at a rate of 9.65%/yr over the past 5 yrs. Bankruptcy is not even a remote possibility, yet it pays twice the interest of a US Treasury bond. Why? Because investors know nothing about farmer’s co-operatives and aren’t going to know anything until headlines appear in The WSJ such as: “Why isn’t there enough food?” and “Can Farmer’s Cooperatives be Capitalized Better?”

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