Sunday, November 30

Week 178 - Agricultural Cooperatives, Part B

Situation: (This is the second blog in a two-part series.) Agricultural Cooperatives represent a tried and-true-method for maximizing farm productivity. But they don’t do much for the bottom line of anyone other than their farmer-owners, and the companies the co-ops do business with (the focus of our blog for this week). Production Agriculture is at the mercy of the weather. When it’s good, crop prices fall; when its bad, crop prices rise. That’s a roller-coaster ride for farmers but investors seek out asset classes that don’t track GDP, and for the obvious reason (which is to reduce the volatility of their portfolios). The companies that supply farmers (and buy their grain & cattle) are certainly in that category. 

For last week’s and this week’s blogs, we are studying a 14-county section of Central Nebraska to see which public companies co-locate with farmer’s cooperatives. In last week’s blog (Week 177), we analyzed the 7 largest Agricultural Cooperatives in that reference area. For this “pure-Ag” region of the country, we’re not surprised to find that the operations of public companies are clustered around 6 cities, which are all situated near the main source of water for the region, the Platte River. Those cities are: Columbus, Grand Island, Hastings, Kearney, Lexington, and North Platte. We found 21 public companies that service farmers and ranchers in that reference area. Table A shows the juxtapositions of 7 cooperatives and 21 public companies, county by county. In last week’s Table A, those companies were denoted only by their stock tickers because we wanted to wait until this week to focus on financial activities and investment metrics (see this week’s featured Table B). For reference, we’ve included Table A from last week’s blog. You’ll need to work back and forth between these two Tables, since there’s a lot of material to consider. 

All 3 major seed producers are represented: Monsanto (MON), Syngenta AG (SYT), and DuPont-Pioneer (DD), as are the 3 largest farm-equipment manufacturers: Case-International Harvester (CNHI) which manufactures combines in Grand Island; John Deere (DE) which has sales & service outlets in all 14 counties, and Caterpillar (CAT) which has sales & service outlets in Grand Island and North Platte. The Andersons (ANDE) has a large grain storage and marketing facility in Kearney. Other agri-business companies include CF Industries (CF) which produces fertilizers, and Flowserve (FLS) which manufactures irrigation pumps. Archer-Daniels-Midland (ADM) is the largest company in the farm products industry and it operates an ethanol plant in Columbus. Green Plains (GPRE) operates ethanol plants in Hall and Merrick counties. Fastenal (FAST) has sites for manufacturing building components throughout the area. Cummins (CMI) manufactures and services the diesel engines that are the typical power source for center-pivot irrigation systems. Raven (RAVN) manufactures GPS guidance and assisted steering systems for tractors. Tractor Supply (TSCO) has outlets throughout the area. Both of the major center-pivot irrigation companies have plants there as well: Valmont Industries (VMI) and Lindsay (LNN). Tyson Foods (TSN) and JBS South America each have a large meat-packing plant here. NOTE: In 2007, JBS S.A. (JBSAY) acquired Swift & Company (based in Greeley, CO). The US subsidiary of JBS S.A. is Pilgrim’s Pride (PPC), based at the former Swift & Company headquarters in Greeley. 

For the most part, farmers in the area buy their building materials, hardware and other construction supplies from local privately-owned companies, so Big-Box discount stores are underrepresented. Home Depot has one store (in Grand Island) but there isn’t a Lowe’s in our reference area (there’s one in Lincoln, NE). Ace Hardware has 5 stores, with one in Kearney, one in Hastings, and 3 around Grand Island. Wal-Mart Stores (WMT) are found in each of the 6 major cities, and Grand Island has two. Looking again at Table A to see where cooperatives and public companies congregate (Column AK), activity focuses on 3 cities that are within 40 miles of each other, those being Kearney, Hastings and Grand Island, also known as the “Tri-City Area” (Est. population 150,000).

To the uninitiated, it can seem that the production of agricultural commodities would differ little from the production of other commodities, like oil or iron ore. Our first guess would be that facilities can only be expanded slowly and at great cost. Following the laws of supply and demand, one would estimate that technological advances will occur and expansion costs will be met only when supplies are insufficient to meet demand. The resulting bounty is initially profitable but then overproduction turns that bounty into a glut. Prices for those now (too) abundant commodities will fall, and fall far enough to match demand. Agricultural commodities, however, have two advantages over other commodities: 1) Governments cannot remain in power if food is scarce; 2) food production doesn’t depend on the economic cycle (it depends on the weather). Those two facts give investors an advantage. They know that famines won’t be tolerated, and they can hedge their bets on the economic cycle by investing in the companies that sustain Production Agriculture. And, it won’t be long before they’ll also be able to invest in the agricultural cooperatives that are at the heart of Production Agriculture.

Bottom Line: As shown in Table B, your options for investing in Production Agriculture (as practiced in Central Nebraska) come down to 21 publicly-traded common stocks and one preferred stock (CHSCP) which is issued by CHS Inc., the largest agricultural cooperative in the US. For the most part, these companies are not in the business of processing food for sale in grocery stores, although there are two meat-packing plants in our 14-county reference area. Approximately 40% of grain produced there is destined for one of 9 plants in the area that make motor fuels (soydiesel or ethanol), with animal feed being a major byproduct of those plants.

Risk Rating: 7

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

Note: All of the metrics in our Tables are current as of the Sunday of publication.

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