Sunday, March 1

Week 191 - Key Food and Agriculture Companies in the Barron’s 500 List

Situation: Here's where your investment philosophy kicks in. At ITR, we have a vision that sees markets in shades of grey, never in black and white. You'll point out that investments would turn dark pretty quickly if there were a nuclear war or a highly lethal pandemic. Warren Buffett has said as much. A wave of bankruptcies would occur and some markets would undoubtedly freeze up for a while, years maybe. But some companies would do well: gold miners, food processors, agricultural suppliers, and farmland manager/brokers.

Survival of the human species depends of producing, processing and distributing food. Large food and agriculture companies, such as those in the Barron’s 500 List, would have to take the lead in resolving a food crisis. Which companies are best positioned to play key roles in supplying farmers & ranchers with tractors, combines, seeds, animal feed, fertilizer and herbicides? Farm products have to be processed, and packaged foodstuffs have to be distributed to grocery stores, hotels, restaurants and institutions. Bear in mind that the year-over-year value of these companies is determined as much by the weather cycle as the economic cycle. So, their stock prices are “non-correlated” relative to the price of the S&P 500 Index. That “non-correlation” and the "essential" nature of food explains why Omaha out-performed all other US cities during the 2007-2009 recession.

In constructing this week’s Table, we’ve looked first to companies that have high credit ratings and stable stock performance, as indicators of companies that can weather a crisis. To evaluate long-term performance, we’ve looked for companies that have less variance than the S&P 500 Index in share appreciation, as measured from the log-linear trendline of stock prices over the past 20 yrs, as shown in Column L of the Table. We came up with 14 companies, 9 of which are Dividend Achievers with at least 10 consecutive yrs of dividend increases (see Column Q in the Table). None of the companies are overpriced on every one of the 3 metrics that we use (see Columns J, K and L in the Table).

Bottom Line: Large food and agriculture companies underpin farmland values, and farmland has historically been the most productive investment to have (see Line 19 in the Table), in terms of Finance Value (Reward minus Risk). By various estimates covering over 100 yrs of data, after-inflation returns on farmland are ~9%/yr. Large food and agriculture companies have approximately the same returns but at much greater risk of loss in value during recessions and depressions (see Column D in the Table). But they’re the next best thing to owning farmland. The source of all that value is our dependence on food for survival.

Risk Rating: 5

Full Disclosure: I have no plans to buy or sell shares of companies in the Table, but own shares in half of them (MON, HRL, GIS, KO, PEP, DE, DD).

Note: Metrics that underperform our key benchmark (VBINX at Line 24 in the Table) are highlighted in red. All metrics are current as of the Sunday of publication.

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