Sunday, November 23

Week 177 - Agricultural Cooperatives, Part A

Situation: Agriculture has become big business in the US, and investing in it requires an understanding of a collection of businesses that support AgriBusiness. These businesses are collectively grouped under the title of “Production Agriculture.” They supply the farmer and market his crops. To really understand Production Agriculture you need to understand farmer’s cooperatives. Most farmers band together in local or regional cooperatives, designed to meet their need for supplies (fuel, tires, feed, seed, crop protectants, fertilizer and equipment) and provide a place to deliver their crops. Nationwide, this $3 Trillion cooperative industry is almost entirely funded by member-owners. However, some of the larger regional cooperatives are finding that they need to issue stocks or bonds to finance opportunities for growth. 

What this means for investors is that investing in Production Agriculture requires paying attention to companies that sell to farmer’s cooperatives. You’ll need to know which companies do business in close association with the farmer’s cooperatives. For example, seed companies pursue a dual path. One group of salesmen will market to “seed advisors” who work with individual farmers but a larger group will market to farmer’s cooperatives. It is obviously important to place seed production plants near cooperatives. 

According to the US Department of Agriculture, there are ~2300 agricultural cooperatives in the US. In 2013, those had record sales of $246B and record net income (before taxes) of $6.2B. A third of those cooperatives had sales under $5M but 33 had sales over a billion dollars. Earnings are either retained by the Cooperative for reinvestment or returned to member-owners. 

The largest agricultural cooperative is CHS, in St. Paul, MN. CHS issued a convertible preferred stock (CHSCP) on March 24, 2003, and a second series (CHSCM) on September 16, 2014. While that route to capitalization brings CHS under regulation by the Securities and Exchange Commission (SEC), it allows CHS to expand into international markets. The growing need for capital simply could not be met by a partnership-style corporation. Over time, most of the largest regional cooperatives will have to go to Wall Street for capital, if they want to grow their brands globally. Those stocks and bonds will be attractive to investors for the simple reason that weather patterns (and growth of the middle class in Asia), govern the profit of farmers cooperatives, not economic patterns. Every investor has to take an interest in such non-correlated assets. Why? Because over time those types of assets will reduce the volatility of her portfolio (Beta). Think of it as insurance against stock market crashes.

This week’s blog will introduce you to farmers' cooperatives here in the Platte River valley of Central Nebraska where I live. We’ll take a close look at AgriBusiness in 14 counties (see Table A). Those counties had a population of 285,282 in 2011, which translates into 26 people per square mile. Ah, yup, that’s right--when you do the math, it means that there are 25 acres per person. And for readers who live in cities, that probably sounds like there are a lot of lonely places. There are also 6 cities with enough people in the urban core (10 to 50 thousand) to be classified as a micropolitan statistical area (microSA): Columbus, Grand Island, Hastings, Kearney, Lexington, and North Platte. The largest microSA is Grand Island, with a population of 73,551, and the smallest is Lexington microSA. There is scheduled airline service at Kearney, Grand Island, and North Platte. The largest college is the University of Nebraska at Kearney, with 7100 students. The 14-county area straddles US highway 30 for 276 miles along the Platte River in the east-west direction, with the halfway point east of Lexington. US highway 281 spans the greatest north-south dimension for 72 miles, with the halfway point at Grand Island.

Seven of “The 100 Largest Agriculture Cooperatives” have operations in that 14 county area (see Table A):

   1. CHS Inc., based in St. Paul, MN, with revenues of $37B in 2011 (including branded fuels). CHS is a Fortune 100 Company with almost ~$90B in assets. It owns and operates two oil refineries. Those support more than 1400 CENEX service stations in 19 states, including stations in all 14 of our reference counties (see Column N in Table A). CENEX co-brands with Cabela’s to offer a VISA card with a rewards program. For every $100 spent at a CENEX station (or Cabela’s) the cardholder is entitled to $2 off on a her next purchase of outdoor equipment at Cabela’s. CHS mainly produces food ingredients from US soybeans for sale worldwide. CHS food brands are marketed by Ventura Foods and include Dean’s Dips, Marie’s salad dressings and dips, and LouAna peanut oil.

   2. Land O’Lakes Inc., based in St. Paul, MN, with revenues of $13B in 2011. Dairy foods are marketed under the Land O Lakes, Alpine Lace, and Kozy Shack brands. Animal feeds are marketed under the Purina Animal Nutrition (formerly Ralston Purina) and Land O’ Lakes Feed brands. Seeds, and crop protection products, are marketed under the WinField brand. NOTE: CHS is partnering with WinField to operate 6 “CHS, WinField Seed and Agronomy Centers” in Nebraska; the first store opened this summer in Minden.  

   3. Ag Processing Inc. (AGP), the world’s largest soybean processing cooperative, is based in Omaha, NE, and had revenues of $4.4B in 2011. Branded products include SoyGold (biodiesel) and AminoPlus (a “bypass protein” that cannot be degraded in a cow’s rumen). AGP’s Nebraska plant is located in Hastings. AGP also partners with Masterfeeds, the second-largest animal feed company in Canada. 

   4. The recently merged Central Valley Ag and United Farmers cooperatives (together they’re now called CVA) is based in York, NE, and had consolidated revenues of $1.0B in 2011.

   5. Aurora Cooperative Elevator Company Inc., based in Aurora, NE, had revenues of $0.9B in 2011. It is the dominant cooperative in our reference area (see Column I in Table A).

   6. Cooperative Producers Inc. (CPI), based in Hastings, NE, with revenues of $0.7B in 2011.

   7. Ag Valley Co-op, based in North Platte, NE, with revenues of $0.4B in 2011.

This week’s Table, called Table A, lists activities by county. Cooperatives are ranked left to right by revenues. Then there is a gap (at Column L) followed by 22 columns arrayed under the ticker symbols for 22 companies (including CHS) that have operations in our 14-county reference area. Those companies will be the focus of next week’s blog, where Table B (which will accompany next week’s blog) will list those companies in descending order of their Finance Value. That order is the same as the left-to-right order of their appearance in this week’s Table A. Looking again at Table A, you’ll see another gap (at Column AI) followed by locations of the 6 ethanol plants that aren’t operated by either Archer-Daniels-Midland (ADM in Column T of Table A) or Green Plains (GPRE in Column AF of Table A), and locations of the 5 Cargill railheads (see Column AK in Table A). Cargill is a large private company based in Minneapolis, MN, with worldwide food logistics and meat-packing operations. 

Bottom Line: This 14-county area in the center of Nebraska is a hot zone of agricultural activity. More than half the profits go to farmer’s cooperatives. Wall Street banks have no interest in those, aside from the largest one, CHS, which issues preferred stocks listed on public exchanges (CHSCP, CHSCM). More cooperatives will offer stocks and bonds if they want to have the capital needed to market their products throughout Asia. People saving for retirement need to pay attention to these developments because the fate of production agriculture stocks and bonds will depend on weather and growth of the middle class in Asia, not global economic patterns. In the meantime, investors can pick stocks from companies that work hand-in-glove with farmer’s cooperatives. You’ll find 20 of those in Table B, which accompanies our blog for next week: Agricultural Cooperatives, Part B. That blog will also include Table A, for ready reference.

Risk Rating: 7

Full Disclosure: I dollar-average into WMT and MON, and also own shares of CF, FLS, CMI, DE, and DD.

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