Situation: Investors should pay attention to asset classes that fluctuate in value out-of-sync with the S&P 500 Index. Such asset classes are said to have minimal or negative “correlation” with large-capitalization US stocks. Emerging markets and raw commodities are important examples. Those are a natural pair, given that most countries in the emerging markets group have an economy that is based on the production of one or more raw commodities.
The idea that you can find a safe haven for your savings, one which will allow you to ride out a crash in the US stock market, is a pleasant fiction. Articles in support of that idea are published almost daily. But unless you are a trader who can afford to rent or buy a $500,000 seat on the Chicago Mercantile Exchange, you probably aren’t deft enough to arbitrage the various risks accurately enough before they develop (and at low enough transaction costs) to avoid losing money in a crash.
If you really want to ride out most crashes, invest in a bond-heavy balanced mutual fund that is managed by real humans. The Vanguard Group offers one best, and it comes with very low transaction fees (Vanguard Wellesley Income Fund or VWINX). To refresh yourself on the competitive advantages of investing in food and agriculture companies, see our most recent blog on the subject (see Month 91). To refresh yourself on the competitive disadvantages, study this month’s Table and Bottom Line carefully.
The essential fact is that economies require money for spending and investment. That comes down to having consumers who are confident enough about their employment prospects and entrepreneurs who are confident enough about their ability to invest. Those consumers and entrepreneurs can be relied upon to transfer their successes to the larger economy by saving money, taking out loans, and paying taxes. National economies are interlinked. Because of the size and innovation of its marketplace, the US economy is the main enabler for most of the other national economies. Logic would suggest that the valuation for any asset class will roughly track the ups and downs of the S&P 500 Index, either as a first derivative or second derivative.
Mission: Use our Standard Spreadsheet to analyze US and Canadian food and agriculture companies that carry at least a BBB rating on their bonds (see Column R).
Execution: see Table.
Administration: Of the 25 companies listed in the Table, only one meets Warren Buffett’s criteria of low beta (see Column I), low volatility (Column M), high quality (Column S), strong balance sheet (Columns N-R), and TTM (Trailing Twelve Month) earnings plus mrq (most recent quarter) Book Values that yield a Graham Number which is not far from the stock’s current Price (Column Y). That company is Berkshire Hathaway. We use a Basic Quality Screen that is less stringent as his: 1) an S&P stock rating of B+/M or better (Column S), 2) an S&P bond rating of BBB+ or better (Column R), 3) 16-Yr price volatility (Column M) that is less than 3 times the rate of price appreciation (Column K), and 4) a positive dollar amount for net present value (Column W) when using a 10-Yr holding period in combination with a 10% discount rate (to reflect a 10% Required Rate of Return).
Bottom Line: Only 8 companies on the list pass our Basic Quality Screen (see Administration above): HRL, COST, PEP, KO, DE, FAST, CNI, UNP. At the opposite end of the spectrum, 9 companies have a below-market S&P bond rating of BBB. So, those stocks represent outright gambles.
Aside from Berkshire Hathaway, none of the 25 companies can be said to issue a reasonably priced “value” stock. We’re dealing with 24 “growth” stocks, only a third of which are of high quality. Three of the 9 with BBB bond ratings have high total debt levels relative to EBITDA (see Column O in the Table) that are unprotected by Tangible Book Value (Column P): SJM, MKC, GIS. The good news is that only one of the 9 appears to be overpriced, and that company (MKC) is a quasi-monopoly that has little risk of bankruptcy because it has “cornered” the US spice market.
In summary, you can do well by investing in this space as long as you understand that you’re dealing with a fragmented food industry, one that is flush with companies of dubious quality. You might like to be well-informed about these companies because food, like fuel, is an essential good, and the food industry enjoys steady growth. Why? Because the number of people in Asia & Africa who can afford to consume 50 grams of protein per day grows by tens of millions per year.
Risk Rating: ranges from 6 to 8 (where 10-Yr US Treasury Notes = 1, S&P 500 Index = 5, and gold bullion =10).
Full Disclosure: I dollar-average into TSN, KO and UNP, and also own shares of AMZN, HRL, MO, MKC, BRK-B, CAT and WMT.
"The 2 and 8 Club" (CR) 2017 Invest Tune Retire.com All rights reserved.
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Showing posts with label agribusiness. Show all posts
Showing posts with label agribusiness. Show all posts
Sunday, April 28
Sunday, January 27
Month 91 - Food and Agriculture Companies - Winter 2019 Update
Situation: We all have to eat, so food is an essential good. Even in a commodity bear market, the valuations of food and agriculture companies will likely hold up better than the S&P 500 Index ETF (SPY - see Column D in this month’s Table). Which is amazing, given that grains and livestock account for 29% of the Bloomberg Commodity Index. Another way of saying this is that the volumes of food sold are inelastic, much like gasoline. This gives investments in food and agriculture companies a special, almost unique, competitive advantage.
The most important development in recent years is that the sugar in corn kernels is being processed into ethanol for gasoline. And, to a lesser extent, soybean oil is being processed into diesel fuel (see Week 364). Two US companies are leaders in biofuels production, i.e., Valero (VLO) with a capacity of 1.4 billion gallons per year, and Archer Daniels Midland (ADM) with a capacity of 1.6 billion gallons per year. Animal feeds are an important by-product of ethanol production, marketed as dry and wet distiller grains, that capture 40% of the energy in a kernel of corn.
Mission: Use our Standard Spreadsheet to highlight important metrics for listed companies in the Food and Agriculture sector.
Execution: see Table.
Administration: The 21 companies in the Table meet specific standards for quality, which are: S&P Bond Rating of BBB or better; S&P Stock Rating of B+/M or better; and trading records that extend for 16+ years to allow analysis by the BMW Method.
Bottom Line: In the aggregate, common stocks of these companies look to be a good bet (see Line 23 in the Table). Don’t be fooled. Eight of the 21 stocks track the ups and downs of futures markets in raw commodities (see red highlighted companies at the bottom of Column D in the Table). To build a position in any of those stocks you’ll need to employ dollar-cost averaging. And, only the two companies at the top of the Table have clean Balance Sheets (see Columns N-Q in the Table).
To invest successfully in this sector, you’ll need to do a lot of research on a continuing basis. For example, note that fertilizer companies and seed companies are missing from the Table. Why? Because of the recent wave of mergers and acquisitions. If you had been an investor in now extinct companies like Monsanto, duPont, Dow Chemical, Potash Corporation of Saskatchewan, and Agrium, you’ll have gained from the pain but also lost money.
Risk Rating: 8 (where 10-Yr US Treasury Notes = 1, S&P 500 Index = 5, and gold bullion = 10)
Full Disclosure: I dollar-average into TSN, KO, CAT, UNP and WMT, and also own shares of HRL and MKC.
The most important development in recent years is that the sugar in corn kernels is being processed into ethanol for gasoline. And, to a lesser extent, soybean oil is being processed into diesel fuel (see Week 364). Two US companies are leaders in biofuels production, i.e., Valero (VLO) with a capacity of 1.4 billion gallons per year, and Archer Daniels Midland (ADM) with a capacity of 1.6 billion gallons per year. Animal feeds are an important by-product of ethanol production, marketed as dry and wet distiller grains, that capture 40% of the energy in a kernel of corn.
Mission: Use our Standard Spreadsheet to highlight important metrics for listed companies in the Food and Agriculture sector.
Execution: see Table.
Administration: The 21 companies in the Table meet specific standards for quality, which are: S&P Bond Rating of BBB or better; S&P Stock Rating of B+/M or better; and trading records that extend for 16+ years to allow analysis by the BMW Method.
Bottom Line: In the aggregate, common stocks of these companies look to be a good bet (see Line 23 in the Table). Don’t be fooled. Eight of the 21 stocks track the ups and downs of futures markets in raw commodities (see red highlighted companies at the bottom of Column D in the Table). To build a position in any of those stocks you’ll need to employ dollar-cost averaging. And, only the two companies at the top of the Table have clean Balance Sheets (see Columns N-Q in the Table).
To invest successfully in this sector, you’ll need to do a lot of research on a continuing basis. For example, note that fertilizer companies and seed companies are missing from the Table. Why? Because of the recent wave of mergers and acquisitions. If you had been an investor in now extinct companies like Monsanto, duPont, Dow Chemical, Potash Corporation of Saskatchewan, and Agrium, you’ll have gained from the pain but also lost money.
Risk Rating: 8 (where 10-Yr US Treasury Notes = 1, S&P 500 Index = 5, and gold bullion = 10)
Full Disclosure: I dollar-average into TSN, KO, CAT, UNP and WMT, and also own shares of HRL and MKC.
"The 2 and 8 Club" (CR) 2017 Invest Tune Retire.com All rights reserved.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, October 21
Week 381 - Dividend-paying Production Agriculture Companies
Situation: Now we come to feeding the planet. Yes, row crops are a commodity so spot prices can go to extremes and stay there awhile. And yes, agricultural equipment makers can only sell product if farmers have money to spend. On the other hand, there have been improvements in satellite-based technology, 3rd party logistics, and financial services that dial back much of the risk introduced by weather. However, markets and prices have become sufficiently reliable that major countries no longer back up food supplies with large reserves. Similarly, investors are left to cope with consolidation brought on by global sourcing and improvements in planting and harvesting technologies. The supply chains for insecticides, herbicides, fungicides, and fertilizer have been disrupted to such a degree that companies have had to enter into wave after wave of cross-border merger & acquisition activity. To their credit, Dow Chemical and DuPont are US leaders in the Ag Chemical space who have merged without bringing in companies from other countries. Even DowDuPont will have to split into 3 companies in order to devote one enterprise to Ag Chemicals and Seed Development: Corteva Agriscience.
Mission: Highlight the leading companies that support farm production by using our Standard Spreadsheet. Include beef, pork, and poultry processors that have a controlling interest in animal breeding and egg production facilities. Include IBM because it has a monopoly on weather satellites and owns The Weather Channel.
Execution: see Table.
Bottom Line: This is a dicey area for investors, even those who make a study of it. The good news is that the common stocks in all 10 companies remain reasonably priced (see Columns Y-AA), which is saying a lot.
Risk Rating: 8 (where 10-Yr US Treasury Notes = 1, S&P 500 Index = 5, gold bullion = 10)
Full Disclosure: I dollar-average into IBM and CAT, and own shares of HRL.
"The 2 and 8 Club" (CR) 2017 Invest Tune Retire.com All rights reserved.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Mission: Highlight the leading companies that support farm production by using our Standard Spreadsheet. Include beef, pork, and poultry processors that have a controlling interest in animal breeding and egg production facilities. Include IBM because it has a monopoly on weather satellites and owns The Weather Channel.
Execution: see Table.
Bottom Line: This is a dicey area for investors, even those who make a study of it. The good news is that the common stocks in all 10 companies remain reasonably priced (see Columns Y-AA), which is saying a lot.
Risk Rating: 8 (where 10-Yr US Treasury Notes = 1, S&P 500 Index = 5, gold bullion = 10)
Full Disclosure: I dollar-average into IBM and CAT, and own shares of HRL.
"The 2 and 8 Club" (CR) 2017 Invest Tune Retire.com All rights reserved.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, June 24
Week 364 - Ethanol Producers
Situation: “Market research analysts at Technavio have predicted that the global bio-fuels market will grow steadily at a CAGR of almost 6% by 2020”. But arguments against blending ethanol with gasoline are building. In 2016, 15.2 billion gallons were produced at 214 plants, with Archer Daniels Midland (ADM), Valero Energy (VLO) and Green Plains Renewable Energy (GPRE) being the main publicly-traded producers. For example, those 3 companies operate 4 ethanol plants in Nebraska that together produced 2.2 billion gallons, representing 31% of the state’s crop. Not only is fuel a big business for the agriculture sector, but the by-product (“distillers grains”) is a rich source of animal feed. For every ton of ethanol produced, there are 0.24 tons of distillers grains.
You need to think of ethanol plants as a permanent feature of the Corn Belt, i.e., the 11 states of the Upper Midwest. Government subsidies for ethanol plants in Europe and the United States aren’t going away, for two important reasons. Ethanol is a renewable fuel, and adding it to gasoline makes tailpipe emissions less damaging to the atmosphere. Furthermore, ethanol plants represent the only stable market for the dominant farm product of those 11 states (North Dakota, South Dakota, Nebraska, Kansas, Minnesota, Iowa, Missouri, Wisconsin, Illinois, Indiana, and Ohio). But, before you buy shares in one of the 6 companies we highlight here, you need to understand a number of factors that impact the feedstocks and ultimate markets served by those plants. Start by reading this summary prepared for Green Plains (GPRE) investors.
Mission: Analyze the 6 publicly-traded US companies in the ethanol business, using our Standard Spreadsheet.
Execution: see Table.
Administration: Ethanol plants have changed the lives of farmers in the Corn Belt from being a speculator to being a professional businessman. Iowa, the state that produces the most corn, almost exclusively grows #2 field corn destined for ethanol plants. 20% of that corn becomes “distillers grains”, and dry distillers grains are shelf-stable and greatly valued as animal feed all over the world. So, that’s a stable and global market. And, ethanol is increasingly being shipped out of the US, either separately or blended with gasoline. For example, China recently adopted the same 10% ethanol content requirement for gasoline that the US has been using. That is seen as an export opportunity for US ethanol plants.
Bottom Line: Corn Belt = ethanol plants. That’s the equation you need to remember. It’s all based on #2 field corn. The #1 sweet corn that we like to eat is rarely grown in the Corn Belt. A state outside the Corn Belt (Washington) is the leading producer. But it’s only been 11 years since the Bush Administration pushed Congress to blend 10% ethanol with gasoline. Yes, hundreds of ethanol plants were built as a result but the economics of running those plants is only now being sorted out. If you invest in any those, you’re a speculator by definition.
Addendum: Here’s the definition of a red line for “speculation” given in the May 28, 2018 Bloomberg Businessweek on page 8: “...a conservative threshold for volatility, typically lower than that of the broader market for relevant assets…” Column M in all of our tables lists the 16-year volatility of each company (with the required trading record) and highlights in red those that have a greater volatility than the Dow Jones Industrial Average (DIA). Of the 6 companies in this week’s Table, even Archer Daniels Midland (ADM), the longest-established (and highest rated by S&P) company, has a volatility well above that of DIA.
Risk Rating: 8 (where US Treasury Notes = 1, S&P 500 Index = 5, and gold bullion = 10)
Full Disclosure: I dollar-average into Archer Daniels Midland (ADM), which is a member of “The 2 and 8 Club” (Extended Version; see Week 362).
"The 2 and 8 Club" (CR) 2018 Invest Tune Retire.com All rights reserved.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
You need to think of ethanol plants as a permanent feature of the Corn Belt, i.e., the 11 states of the Upper Midwest. Government subsidies for ethanol plants in Europe and the United States aren’t going away, for two important reasons. Ethanol is a renewable fuel, and adding it to gasoline makes tailpipe emissions less damaging to the atmosphere. Furthermore, ethanol plants represent the only stable market for the dominant farm product of those 11 states (North Dakota, South Dakota, Nebraska, Kansas, Minnesota, Iowa, Missouri, Wisconsin, Illinois, Indiana, and Ohio). But, before you buy shares in one of the 6 companies we highlight here, you need to understand a number of factors that impact the feedstocks and ultimate markets served by those plants. Start by reading this summary prepared for Green Plains (GPRE) investors.
Mission: Analyze the 6 publicly-traded US companies in the ethanol business, using our Standard Spreadsheet.
Execution: see Table.
Administration: Ethanol plants have changed the lives of farmers in the Corn Belt from being a speculator to being a professional businessman. Iowa, the state that produces the most corn, almost exclusively grows #2 field corn destined for ethanol plants. 20% of that corn becomes “distillers grains”, and dry distillers grains are shelf-stable and greatly valued as animal feed all over the world. So, that’s a stable and global market. And, ethanol is increasingly being shipped out of the US, either separately or blended with gasoline. For example, China recently adopted the same 10% ethanol content requirement for gasoline that the US has been using. That is seen as an export opportunity for US ethanol plants.
Bottom Line: Corn Belt = ethanol plants. That’s the equation you need to remember. It’s all based on #2 field corn. The #1 sweet corn that we like to eat is rarely grown in the Corn Belt. A state outside the Corn Belt (Washington) is the leading producer. But it’s only been 11 years since the Bush Administration pushed Congress to blend 10% ethanol with gasoline. Yes, hundreds of ethanol plants were built as a result but the economics of running those plants is only now being sorted out. If you invest in any those, you’re a speculator by definition.
Addendum: Here’s the definition of a red line for “speculation” given in the May 28, 2018 Bloomberg Businessweek on page 8: “...a conservative threshold for volatility, typically lower than that of the broader market for relevant assets…” Column M in all of our tables lists the 16-year volatility of each company (with the required trading record) and highlights in red those that have a greater volatility than the Dow Jones Industrial Average (DIA). Of the 6 companies in this week’s Table, even Archer Daniels Midland (ADM), the longest-established (and highest rated by S&P) company, has a volatility well above that of DIA.
Risk Rating: 8 (where US Treasury Notes = 1, S&P 500 Index = 5, and gold bullion = 10)
Full Disclosure: I dollar-average into Archer Daniels Midland (ADM), which is a member of “The 2 and 8 Club” (Extended Version; see Week 362).
"The 2 and 8 Club" (CR) 2018 Invest Tune Retire.com All rights reserved.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, April 15
Week 354 - Production Agriculture
Situation: Commodity production is quietly starting its next ~20-Yr supercycle. The last one was strong, due to the epic buildout of the Chinese economy. The coming supercycle also will be based in China, which is emerging as a superpower. For a capsule view of what’s happening, look at US soybean exports in 2016. Soybeans mainly become animal feed, and pork is the favorite source of protein for China’s burgeoning middle class. However, raw commodities in general and grains in particular remain underpriced. Why? Because advances in technology and logistics almost guarantee that supplies will outstrip demand:
“In business literature, commoditization is defined as the process by which goods that have economic value and are distinguishable in terms of attributes (uniqueness or brand) end up becoming simple commodities in the eyes of the market or consumers. It is the movement of a market from differentiated to undifferentiated price competition and from monopolistic to perfect competition. Hence, the key effect of commoditization is that the pricing power of the manufacturer or brand owner is weakened: when products become more similar from a buyer's point of view, they will tend to buy the cheapest.”
Farmers worldwide see that their average income tends to fall, as prices paid for their average harvest tends to fall. In most years, they can’t afford to pay as much for inputs to next year’s harvest as the prior year. We’re seeing a wave of consolidation among companies that supply farmers with seeds, insecticides, herbicides, fungicides and fertilizer chemicals. Famous companies like Agrium, duPont, Dow Chemical, Syngenta, Potash Corporation of Saskatchewan, and Smithfield Foods have either merged with a competitor or been acquired.
Mission: Use our Standard Spreadsheet to analyze the few long-established companies that remain active supporters of farm production.
Execution: see Table.
Bottom Line: Production agriculture has become commoditized. (No surprise there.) But investors can still make money in that financial space from vertically integrated meat producers, i.e., the top 4 companies listed the Table. Why do they stand out? Because China is a big country and has gone far toward eliminating poverty. A long-standing love of pork products in particular will continue to track growth of the middle class. That appetite for animal protein resulted in a 8-26% increase in beef, pork and chicken products from the US in 2017 alone, compared to an increase of only 5-6% for confectionary items, fruit, and nuts.
Risk Rating: 8 (where 10-Yr US Treasury Notes = 1, S&P 500 Index = 5, and gold bullion = 10)
Full Disclosure: I dollar-average into MON, and own stock in Hormel Foods (HRL) and Union Pacific (UNP).
"The 2 and 8 Club" (CR) 2018 Invest Tune Retire.com All rights reserved.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
“In business literature, commoditization is defined as the process by which goods that have economic value and are distinguishable in terms of attributes (uniqueness or brand) end up becoming simple commodities in the eyes of the market or consumers. It is the movement of a market from differentiated to undifferentiated price competition and from monopolistic to perfect competition. Hence, the key effect of commoditization is that the pricing power of the manufacturer or brand owner is weakened: when products become more similar from a buyer's point of view, they will tend to buy the cheapest.”
Farmers worldwide see that their average income tends to fall, as prices paid for their average harvest tends to fall. In most years, they can’t afford to pay as much for inputs to next year’s harvest as the prior year. We’re seeing a wave of consolidation among companies that supply farmers with seeds, insecticides, herbicides, fungicides and fertilizer chemicals. Famous companies like Agrium, duPont, Dow Chemical, Syngenta, Potash Corporation of Saskatchewan, and Smithfield Foods have either merged with a competitor or been acquired.
Mission: Use our Standard Spreadsheet to analyze the few long-established companies that remain active supporters of farm production.
Execution: see Table.
Bottom Line: Production agriculture has become commoditized. (No surprise there.) But investors can still make money in that financial space from vertically integrated meat producers, i.e., the top 4 companies listed the Table. Why do they stand out? Because China is a big country and has gone far toward eliminating poverty. A long-standing love of pork products in particular will continue to track growth of the middle class. That appetite for animal protein resulted in a 8-26% increase in beef, pork and chicken products from the US in 2017 alone, compared to an increase of only 5-6% for confectionary items, fruit, and nuts.
Risk Rating: 8 (where 10-Yr US Treasury Notes = 1, S&P 500 Index = 5, and gold bullion = 10)
Full Disclosure: I dollar-average into MON, and own stock in Hormel Foods (HRL) and Union Pacific (UNP).
"The 2 and 8 Club" (CR) 2018 Invest Tune Retire.com All rights reserved.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, December 17
Week 337 - Agriculture-related Companies in “The 2 and 8 Club” (Extended Version)
Situation: We’ve narrowed our “universe” to large & established US companies that reliably pay a good & growing dividend, and called it The 2 and 8 Club. Why? Because “good ” means 2% or better and “growing” means 8% or better. We use a wash/rinse/repeat method to find those companies.
In the “wash” cycle, we collect companies that are listed at each of the 3 online spreadsheets we value: 1) The capitalization-weighted FTSE High Dividend Yield Index for US companies, which is simply the 400 companies in the Vanguard High Dividend Yield ETF. 2) The S&P 100 Index, which has the advantage of price discovery through the requirement that stocks in these large companies have active markets in Put and Call Options. 3) The BMW Method List of statistical data for stocks that have been traded on a public exchange for at least 16 years.
In the “rinse” cycle, we look up information online about each stock that passed through the wash: 1) We make sure bonds issued by that company have an S&P Rating of A- or better. 2) We make sure stocks issued by that company have an S&P Rating of B+/M or better (go to your broker’s website). 3) We make sure the company’s annual dividend payout has been growing 8% or faster over the past 5 years, i.e., we get a list of payouts from the relevant Yahoo Finance page then put the most recent year’s payout and the payout for 5 years ago into a Compound Annual Growth Rate calculator.
In the “repeat” cycle, we take the same steps 3 months later, then select stocks to add or delete by using a brokerage that charges you a flat fee of ~1% of Net Asset Value/yr. This allows you to trade without incurring transaction costs (including dividend reinvestment).
If you’re a glutton for punishment, you can extend your oversight beyond S&P 100 stocks to include those on the Barron’s 500 List, published each year in May, which has the advantage of ranking companies by using 3 cash flow metrics. Then you’ll be running the Extended Version of The 2 and 8 Club, which currently has 32 companies (see Table for Week 329). This week’s blog drills down on the 10 companies in the Extended Version that ultimately depend on feedstocks provided by farmers, to ultimately market foods & beverages, motor engine fuels, animal feed, cigarettes, cotton shirts, and plastics made from corn.
Mission: Set up a Standard Spreadsheet of those 10 companies.
Execution: see Table.
Administration: Farmers operate a capital-intensive business that requires large-scale production on ~1000 acres to justify the cost of chemicals and fertilizer plus the main cost, which is for the purchase and maintenance of equipment (e.g. combines, tractors, grain carts, center-pivot irrigation systems, sprayers, semi-tractors that haul 30 tons of grain, grain-drying bins, grain storage bins, and satellite navigation links needed for weather forecasting and precision agriculture). Their mobile powered equipment requires diesel fuel, and their grain-drying bins require natural gas or propane.
Archer-Daniels-Midland is the only pure Ag company on the list. ADM collects crops at railheads for further shipment and initial processing, and distributes products worldwide. Much of that distribution begins by loading grain onto barges in the Mississippi River.
Weather is the key variable. The software and hardware on weather satellites is IBM gear, and IBM owns The Weather Channel. GPS-based software is an important part of precision agriculture, and similarly depends on satellites running IBM equipment. Cummins (CMI) and Caterpillar (CAT) provide diesel engines, and ExxonMobil (XOM) is one of the largest sources of diesel fuel. CAT also makes skid-loaders and backhoe/end-loaders that some farmers use.
PepsiCo (PEP) and Coca-Cola (KO) process a variety of farm products (including milk, cheese, oranges, oats, coffee and tea) into dozens of branded foods and beverages that are found worldwide. Altria Group (MO) processes tobacco plants into cigarettes and smokeless tobacco for the US market. VF Corporation (VFC) is the largest company that fabricates clothing for a variety of markets, and depends on farmers to produce its main feedstock (cotton). Target (TGT) markets clothing, and Super Target stores offer a large variety of foods and beverages.
Bottom Line: Farm incomes have fallen 20%/yr over the last 3 years, but appear to have stabilized with this year’s harvest. Cost-cutting and scaling-up are the main survival strategies. Farms that are large enough to sustain a family are multi-million dollar enterprises that cultivate more than a square mile of ground. When farmers are forced to cut costs, suppliers are forced into being acquired by (or merged with) other companies. To further complicate matters, efficient transportation networks now circle the planet. The supply of crop commodities outstrips demand enough that the effects of drought or war in one place are mitigated by bumper crops in another place.
Risk Rating: 8 (where 10-yr Treasury Notes = 1, S&P 500 Index = 5, gold bullion = 10).
Full Disclosure: I dollar-cost average into KO, XOM, and IBM, and also own shares of CAT and MO.
"The 2 and 8 Club" (CR) 2017 Invest Tune Retire.com
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
In the “wash” cycle, we collect companies that are listed at each of the 3 online spreadsheets we value: 1) The capitalization-weighted FTSE High Dividend Yield Index for US companies, which is simply the 400 companies in the Vanguard High Dividend Yield ETF. 2) The S&P 100 Index, which has the advantage of price discovery through the requirement that stocks in these large companies have active markets in Put and Call Options. 3) The BMW Method List of statistical data for stocks that have been traded on a public exchange for at least 16 years.
In the “rinse” cycle, we look up information online about each stock that passed through the wash: 1) We make sure bonds issued by that company have an S&P Rating of A- or better. 2) We make sure stocks issued by that company have an S&P Rating of B+/M or better (go to your broker’s website). 3) We make sure the company’s annual dividend payout has been growing 8% or faster over the past 5 years, i.e., we get a list of payouts from the relevant Yahoo Finance page then put the most recent year’s payout and the payout for 5 years ago into a Compound Annual Growth Rate calculator.
In the “repeat” cycle, we take the same steps 3 months later, then select stocks to add or delete by using a brokerage that charges you a flat fee of ~1% of Net Asset Value/yr. This allows you to trade without incurring transaction costs (including dividend reinvestment).
If you’re a glutton for punishment, you can extend your oversight beyond S&P 100 stocks to include those on the Barron’s 500 List, published each year in May, which has the advantage of ranking companies by using 3 cash flow metrics. Then you’ll be running the Extended Version of The 2 and 8 Club, which currently has 32 companies (see Table for Week 329). This week’s blog drills down on the 10 companies in the Extended Version that ultimately depend on feedstocks provided by farmers, to ultimately market foods & beverages, motor engine fuels, animal feed, cigarettes, cotton shirts, and plastics made from corn.
Mission: Set up a Standard Spreadsheet of those 10 companies.
Execution: see Table.
Administration: Farmers operate a capital-intensive business that requires large-scale production on ~1000 acres to justify the cost of chemicals and fertilizer plus the main cost, which is for the purchase and maintenance of equipment (e.g. combines, tractors, grain carts, center-pivot irrigation systems, sprayers, semi-tractors that haul 30 tons of grain, grain-drying bins, grain storage bins, and satellite navigation links needed for weather forecasting and precision agriculture). Their mobile powered equipment requires diesel fuel, and their grain-drying bins require natural gas or propane.
Archer-Daniels-Midland is the only pure Ag company on the list. ADM collects crops at railheads for further shipment and initial processing, and distributes products worldwide. Much of that distribution begins by loading grain onto barges in the Mississippi River.
Weather is the key variable. The software and hardware on weather satellites is IBM gear, and IBM owns The Weather Channel. GPS-based software is an important part of precision agriculture, and similarly depends on satellites running IBM equipment. Cummins (CMI) and Caterpillar (CAT) provide diesel engines, and ExxonMobil (XOM) is one of the largest sources of diesel fuel. CAT also makes skid-loaders and backhoe/end-loaders that some farmers use.
PepsiCo (PEP) and Coca-Cola (KO) process a variety of farm products (including milk, cheese, oranges, oats, coffee and tea) into dozens of branded foods and beverages that are found worldwide. Altria Group (MO) processes tobacco plants into cigarettes and smokeless tobacco for the US market. VF Corporation (VFC) is the largest company that fabricates clothing for a variety of markets, and depends on farmers to produce its main feedstock (cotton). Target (TGT) markets clothing, and Super Target stores offer a large variety of foods and beverages.
Bottom Line: Farm incomes have fallen 20%/yr over the last 3 years, but appear to have stabilized with this year’s harvest. Cost-cutting and scaling-up are the main survival strategies. Farms that are large enough to sustain a family are multi-million dollar enterprises that cultivate more than a square mile of ground. When farmers are forced to cut costs, suppliers are forced into being acquired by (or merged with) other companies. To further complicate matters, efficient transportation networks now circle the planet. The supply of crop commodities outstrips demand enough that the effects of drought or war in one place are mitigated by bumper crops in another place.
Risk Rating: 8 (where 10-yr Treasury Notes = 1, S&P 500 Index = 5, gold bullion = 10).
Full Disclosure: I dollar-cost average into KO, XOM, and IBM, and also own shares of CAT and MO.
"The 2 and 8 Club" (CR) 2017 Invest Tune Retire.com
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Sunday, October 15
Week 328 - Precision Agriculture
Situation: Production Agriculture has created its own problems. Worldwide supply has exceeded demand for years. In early 2017, the USDA projected that farm income would fall for a 4th straight year. But it hasn’t turned out to be that bad, since crop prices have coalesced near last year’s levels, and sales volumes have risen. Much of the oversupply results from technological improvements in farming, starting with the buildout of center-pivot irrigation in the 70s and 80s. Weather prediction started improving in the 1990s, and the National Oceanic and Atmospheric Administration (NOAA) now has a number of online tools available to farmers at no cost.
To integrate weather information with soil characteristics on a given farm, we now have professional agronomists who provide specific advice on the use of seeds, fertilizer, water, insecticides, herbicides and fungicides. Agronomists are sometimes employed by equipment or seed vendors, who offer Wi-Fi connections that link information collected on tractors to agronomists. More often, Agronomists are employed on retainer by farmers. Many have university degrees, and others with less training work under supervision for an agronomy service, such as Servi-Tech, Inc.
The application of Global Positioning Systems to agriculture began with patent approval in 1998. Increasingly, agronomists encourage farmers to adopt GPS-based services addressing their entire set of specific needs, a tactic called “Precision Agriculture.” For example, satellite imagery and soil sampling can be used for variable rate seeding and watering. Results at harvest time are analyzed using Wi-Fi linked to a crop-yield computer program on GPS equipped combines. Trimble, Inc. (TRMB) is a leader in this technology, and new combines are increasingly equipped with Trimble receivers.
Mission: Present a table of publicly-traded companies that provide precision agriculture equipment, and explain in the Administration section the specific offerings of each company in the Table.
Execution: see Table.
Administration:
SYNGENTA AG
* Provides a variety of digital tools through strategic collaborations with 1) Lindsay Corporation (manufacturer of center-pivot irrigation systems) to match soil and seed characteristics with water needs; 2) Ag Connections to present a complete range of farm management software in a digital platform.
DEERE
* Recently purchased Blue River Technology, because it makes “tractor-towed robots that can analyze crops and apply fertilizer and pesticides plant-by-plant.”
MONSANTO
* Has started using its experience with thousands of corn seed varieties in various soil conditions in “self-teaching algorithm” to predict how a particular seed variety will perform after a farmer plants it. But the key to Monsanto’s emerging dominance of precision farming is due to a subsidiary: The Climate Corporation. It’s FieldView Platform is mounted on tractors and provides software for integration of various planting and harvesting inputs.
AGCO
* Has purchased Precision Planting LLC, which had been part of a Monsanto subsidiary--The Climate Corporation, and is licensed to retain connectivity with The Climate Corporation’s FieldView Platform.
VALMONT INDUSTRIES
* Has developed the AgSense software app for optimal GPS-managed control of variable center-pivot irrigation systems.
ARCHER-DANIELS-MIDLAND
* Provides daily information and analytic tools essential for precision agriculture planning, augmented by its recent purchase of the Agrible news service.
IBM
* Precision agriculture is increasingly dependent on GPS systems and images of farmland generated by orbiting satellites. Detailed images of quarter sections of farmland are now available, using satellites designed to transmit different types of information with specific uses in farming. Agriculture research has been a specific mission of NASA since 2015. IBM owns “The Weather Channel” and has worked with NOAA since 1996 to improve weather forecasting at a “hyper-local” level. IBM provides most of the hardware and software that makes this possible, and has started applying this to precision agriculture, specifically in Brazil.
RAVEN INDUSTRIES
* Is a pioneer in field navigation equipment and tractor-mounted computers. Its product line has been successful with farmers and is being upgraded almost annually.
Bottom Line: Precision Agriculture is in its early years, but the consolidation phase is well underway. We’ve presented the leading publicly-traded companies above, along with investor information (see Table). These are powerful tools in the hands of the farmer, and will no doubt improve the efficiency and scope of crop production worldwide.
Risk Rating: 8 (where 10-Yr US Treasury Notes = 1, S&P 500 Index = 5, gold = 10)
Full Disclosure: I dollar-average into MON and IBM, and also own shares of CAT and RAVN.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
To integrate weather information with soil characteristics on a given farm, we now have professional agronomists who provide specific advice on the use of seeds, fertilizer, water, insecticides, herbicides and fungicides. Agronomists are sometimes employed by equipment or seed vendors, who offer Wi-Fi connections that link information collected on tractors to agronomists. More often, Agronomists are employed on retainer by farmers. Many have university degrees, and others with less training work under supervision for an agronomy service, such as Servi-Tech, Inc.
The application of Global Positioning Systems to agriculture began with patent approval in 1998. Increasingly, agronomists encourage farmers to adopt GPS-based services addressing their entire set of specific needs, a tactic called “Precision Agriculture.” For example, satellite imagery and soil sampling can be used for variable rate seeding and watering. Results at harvest time are analyzed using Wi-Fi linked to a crop-yield computer program on GPS equipped combines. Trimble, Inc. (TRMB) is a leader in this technology, and new combines are increasingly equipped with Trimble receivers.
Mission: Present a table of publicly-traded companies that provide precision agriculture equipment, and explain in the Administration section the specific offerings of each company in the Table.
Execution: see Table.
Administration:
SYNGENTA AG
* Provides a variety of digital tools through strategic collaborations with 1) Lindsay Corporation (manufacturer of center-pivot irrigation systems) to match soil and seed characteristics with water needs; 2) Ag Connections to present a complete range of farm management software in a digital platform.
DEERE
* Recently purchased Blue River Technology, because it makes “tractor-towed robots that can analyze crops and apply fertilizer and pesticides plant-by-plant.”
MONSANTO
* Has started using its experience with thousands of corn seed varieties in various soil conditions in “self-teaching algorithm” to predict how a particular seed variety will perform after a farmer plants it. But the key to Monsanto’s emerging dominance of precision farming is due to a subsidiary: The Climate Corporation. It’s FieldView Platform is mounted on tractors and provides software for integration of various planting and harvesting inputs.
AGCO
* Has purchased Precision Planting LLC, which had been part of a Monsanto subsidiary--The Climate Corporation, and is licensed to retain connectivity with The Climate Corporation’s FieldView Platform.
VALMONT INDUSTRIES
* Has developed the AgSense software app for optimal GPS-managed control of variable center-pivot irrigation systems.
ARCHER-DANIELS-MIDLAND
* Provides daily information and analytic tools essential for precision agriculture planning, augmented by its recent purchase of the Agrible news service.
IBM
* Precision agriculture is increasingly dependent on GPS systems and images of farmland generated by orbiting satellites. Detailed images of quarter sections of farmland are now available, using satellites designed to transmit different types of information with specific uses in farming. Agriculture research has been a specific mission of NASA since 2015. IBM owns “The Weather Channel” and has worked with NOAA since 1996 to improve weather forecasting at a “hyper-local” level. IBM provides most of the hardware and software that makes this possible, and has started applying this to precision agriculture, specifically in Brazil.
RAVEN INDUSTRIES
* Is a pioneer in field navigation equipment and tractor-mounted computers. Its product line has been successful with farmers and is being upgraded almost annually.
Bottom Line: Precision Agriculture is in its early years, but the consolidation phase is well underway. We’ve presented the leading publicly-traded companies above, along with investor information (see Table). These are powerful tools in the hands of the farmer, and will no doubt improve the efficiency and scope of crop production worldwide.
Risk Rating: 8 (where 10-Yr US Treasury Notes = 1, S&P 500 Index = 5, gold = 10)
Full Disclosure: I dollar-average into MON and IBM, and also own shares of CAT and RAVN.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, September 17
Week 324 - Farmland REITs; Contract Farming
Situation: Farmland prices have come down over the past 3 years, reflecting the drop in prices paid for farm commodities and the resulting loss of farm income. This year’s harvest may be a record-breaker, further aggravating the problem. In central Nebraska, cropland prices have fallen from almost $11,000/acre to less than $8000/acre, and rents have fallen from almost $500/acre to less than $250/acre. Now is not a good time to speculate in farmland, unless you’re knowledgeable about local agriculture. Even then, you’d need to employ two experts: a farmland broker and a farm management company.
Why not simply buy shares in a farmland Real Estate Investment Trust (REIT)? Until 2013, those didn’t exist. Now there are two small ones: Farmland Partners (FPI) and Gladstone Capital (GLAD). “These REITs generate income by leasing land to tenant farmers. But rents can slump when crop prices are soft.”
The problem for investors is that there is a lot of marketing hype about the enduring and recession-resistant benefits of owning a working farm through several market cycles. But derivative ownership shares, that is, in REITs and companies having large holdings of cropland rented to tenant farmers, tend to track spot prices for the crops being harvested. Those prices vary remarkably, depending on weather, logistical bottlenecks elsewhere on the planet, and technological innovation. Trends in farmland value are closely tracked by the US Department of Agriculture, confirming that cropland rents vary more than farmland prices.
Moving on to ranch land valuations, we again see that rents are driven by commodity prices but to a larger degree. This is because meat processing companies closely control their supplier’s use of land and inputs, so as not to be driven out of business by unpredictable oversupply or undersupply events. For example, drought or disease can cause a collapse in herds or flocks.
Over the past 50 yrs, farmland has not been a significantly more rewarding asset than stocks. For example, farmland in southwest Iowa (Audubon County) that sold for $379/acre in 1967 is now worth ~$7200/acre, giving a price return of 6.1%/yr. Compare that to the 6.7%/yr price return for the S&P 500 Index. Both asset classes produce income (rents or dividends), with farmland rents being higher than dividends on the S&P 500 Index. Total return for each asset class has been impacted by inflation, which has averaged 4.1%/yr since 1967. Cropland rents have been little better than 3%, bringing total return to 5.6%/yr after inflation. Reinvesting dividends on the S&P 500 Index over the past 50 yrs also brings total return to 5.6%/yr after inflation.
Missions:
A: Explain the 4 ways to invest in farmland (other than buying parcels of good cropland and renting those out): Those are to buy shares in 1) a farmland REIT; 2) a land trust that rents cropland to tenant farmers; 3) a seed producer that contracts for using part of a farmer’s land for research on different genetic strains; 4) a meat packer that contracts for conditions under which a farmer will produce broiler chickens, hogs, or beef cattle.
B: Generate a spreadsheet with valuation metrics that illustrate the benefits and risks of owning shares in each publicly-traded companies in those 4 categories.
Execution: see Table.
Administration:
Farmland REITs: Farmland Partners (FPI); Gladstone Land (LAND).
Land Trusts: Texas Pacific Land Trust (TPL); Alexander & Baldwin (ALEX).
Seed Producers: Monsanto (MON); Pioneer Hybrid (a subsidiary of duPont, DD); Syngenta AG (SYT).
Meat Packers: Hormel Foods (HRL); Tyson Foods (TSN); Sanderson Farms (SAFM); Pilgrim’s Pride (PPC); Seaboard (SEB); Leucadia National (LUK).
Bottom Line: Farm operations are high risk endeavors. An investor can only ameliorate those risks by learning to farm, and having the good fortune to have a significant equity position in several hundred acres of irrigated cropland. That will offer the scale (and financial underpinning) needed to efficiently deploy the equipment and agronomy tools needed for precision agriculture. For those who only want “a piece of the action,” there are 10 publicly-traded stocks issued by companies that either own farmland or control the way it is used (see Table). Aside from Hormel Foods (HRL), those are high-risk stocks.
Risk Rating: 8 (where 10-Yr US Treasury Notes = 1; S&P 500 Index = 5; gold = 10)
Full Disclosure: I dollar-average into MON, and also own shares of HRL.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Why not simply buy shares in a farmland Real Estate Investment Trust (REIT)? Until 2013, those didn’t exist. Now there are two small ones: Farmland Partners (FPI) and Gladstone Capital (GLAD). “These REITs generate income by leasing land to tenant farmers. But rents can slump when crop prices are soft.”
The problem for investors is that there is a lot of marketing hype about the enduring and recession-resistant benefits of owning a working farm through several market cycles. But derivative ownership shares, that is, in REITs and companies having large holdings of cropland rented to tenant farmers, tend to track spot prices for the crops being harvested. Those prices vary remarkably, depending on weather, logistical bottlenecks elsewhere on the planet, and technological innovation. Trends in farmland value are closely tracked by the US Department of Agriculture, confirming that cropland rents vary more than farmland prices.
Moving on to ranch land valuations, we again see that rents are driven by commodity prices but to a larger degree. This is because meat processing companies closely control their supplier’s use of land and inputs, so as not to be driven out of business by unpredictable oversupply or undersupply events. For example, drought or disease can cause a collapse in herds or flocks.
Over the past 50 yrs, farmland has not been a significantly more rewarding asset than stocks. For example, farmland in southwest Iowa (Audubon County) that sold for $379/acre in 1967 is now worth ~$7200/acre, giving a price return of 6.1%/yr. Compare that to the 6.7%/yr price return for the S&P 500 Index. Both asset classes produce income (rents or dividends), with farmland rents being higher than dividends on the S&P 500 Index. Total return for each asset class has been impacted by inflation, which has averaged 4.1%/yr since 1967. Cropland rents have been little better than 3%, bringing total return to 5.6%/yr after inflation. Reinvesting dividends on the S&P 500 Index over the past 50 yrs also brings total return to 5.6%/yr after inflation.
Missions:
A: Explain the 4 ways to invest in farmland (other than buying parcels of good cropland and renting those out): Those are to buy shares in 1) a farmland REIT; 2) a land trust that rents cropland to tenant farmers; 3) a seed producer that contracts for using part of a farmer’s land for research on different genetic strains; 4) a meat packer that contracts for conditions under which a farmer will produce broiler chickens, hogs, or beef cattle.
B: Generate a spreadsheet with valuation metrics that illustrate the benefits and risks of owning shares in each publicly-traded companies in those 4 categories.
Execution: see Table.
Administration:
Farmland REITs: Farmland Partners (FPI); Gladstone Land (LAND).
Land Trusts: Texas Pacific Land Trust (TPL); Alexander & Baldwin (ALEX).
Seed Producers: Monsanto (MON); Pioneer Hybrid (a subsidiary of duPont, DD); Syngenta AG (SYT).
Meat Packers: Hormel Foods (HRL); Tyson Foods (TSN); Sanderson Farms (SAFM); Pilgrim’s Pride (PPC); Seaboard (SEB); Leucadia National (LUK).
Bottom Line: Farm operations are high risk endeavors. An investor can only ameliorate those risks by learning to farm, and having the good fortune to have a significant equity position in several hundred acres of irrigated cropland. That will offer the scale (and financial underpinning) needed to efficiently deploy the equipment and agronomy tools needed for precision agriculture. For those who only want “a piece of the action,” there are 10 publicly-traded stocks issued by companies that either own farmland or control the way it is used (see Table). Aside from Hormel Foods (HRL), those are high-risk stocks.
Risk Rating: 8 (where 10-Yr US Treasury Notes = 1; S&P 500 Index = 5; gold = 10)
Full Disclosure: I dollar-average into MON, and also own shares of HRL.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, April 9
Week 301 - Fertilizer
Situation: Want to bet on agriculture? Then pay attention to fertilizer stocks. That’s where returns outweigh risk (whereas, risk outweighs returns from commodity futures in grain and soybeans because futures incorporate borrowed money). But realize that net farm income has fallen 46% over the past 3 yrs here in the US. A decline that large and lasting that long hasn’t happened since the Great Depression. The reasons for that decline relate to improvements worldwide in technology (e.g. GMO seeds), infrastructure (e.g. paved roads), and logistics (e.g. free trade agreements), resulting in an overproduction of crops. The USDA Foreign Agricultural Service website is a good starting place, if you want to learn more about how this happened.
US farmland has grown 7%/yr in value since 2002, going from an average price of $1,590/acre to $4,090/acre, partly because 8% of the acreage disappeared due to urbanization and the conversion of farmland to parks and pasture. Farmers increasingly overuse their land to justify its cost, which leads to a greater dependence on improvements in technology, infrastructure and logistics. But at the most basic level, “overuse” means that more fertilizer will be applied to counteract the depletion of nitrogen, potassium and phosphate from the soil.
Mission: Apply our standard spreadsheet analysis to large fertilizer companies in the US and Canada, namely those that have appeared on the annual Barron’s 500 List in recent years. Exclude companies that haven’t had their stock traded long enough to appear on the 16-yr BMW Method List. Include 5-yr returns on key commodity contracts (corn, soybeans, wheat, cattle and copper). In making this analysis, we find that only 5 companies meet our requirements, and none are Dividend Achievers.
Execution: see Table.
Administration: Commodity-related investments are speculative. With farming, there are additional variables to consider, namely, dependence on soil, sunshine and water. Soil has to supply 5 of the 7 elements essential for life: nitrogen, phosphorus, and potassium being the most important. In addition, soil provides sodium and chlorine ions that come from the life cycle of small organisms living within the soil. Finally, sunshine and water allow healthy plants to synthesize the other two essential elements by combining carbon dioxide in the atmosphere with water: oxygen, and useful forms of carbon -- sugar and cellulose.
Farmers have traditionally tried to reverse soil depletion by 1) rotating crops, 2) leaving fields fallow every 3 yrs, and 3) pasturing cows on the field in the off-season, to distribute natural fertilizer (manure). But the costs for farm implements and land have risen so much that farmers reach for the maximum yield of whatever crop will give them the greatest return on investment. Therefore, they will over-plant every field every year. This over-planting leads to the purchase of more fertilizer, which is distributed using bigger sprayers. As millions of farmers around the world are adopting this approach, the supply of grain and soybeans has come to exceed demand. The result has been that the prices farmers receive for their grain and soybeans collapsed 3 yrs ago, and has yet to recover. Farmers have tried to stop buying new machinery and the most expensive seeds, i.e., the seeds that have been genetically engineered to carry yield-maximizing traits. And, farmers have tried to spend less on fertilizer, water, insecticides, fungicides and herbicides. In other words, the vendors that serve farmers are merging operations in a desperate attempt to stave off bankruptcy.
Bottom Line: You can make a lot of money on volatile commodity investments like fertilizer stocks but if you don’t know when to sell, you’ll incur large losses. To allay that risk, it is necessary to study the trends in a) crop prices, b) weather cycles (El Nino and La Nina), and c) inventories of foodstuffs and agronomy chemicals, particularly fertilizer. Or, you can follow a Warren Buffett recommendation: dollar-cost average your investment, and continue spending a fixed-dollar amount each quarter on that (now) cheapened stock. You’ll have bought many shares at absurdly low prices, so you’ll be ahead nicely on your investment when prices recover. But beware: Shares in Potash Corporation of Saskatchewan (the largest fertilizer company) went for $61.60 in 2/1/11 and $18.55 on 2/1/17. That’s a 70% loss over 6 yrs. When it comes to commodity-related stocks, dollar-averaging is a fool’s errand. You have to sell quickly whenever you conclude that earnings are likely to stop growing.
Which fertilizer stock of the five in the Table looks the most promising? Not surprisingly, the two largest players (by market capitalization) are merging with one another: Agrium (AGU) and Potash Corporation of Saskatchewan (POT). Why? Because the multi-year collapse in grain and soybean prices has pulled the rug out from under fertilizer sales (see Column F in the Table under “commodity futures”). If you buy stock in either POT or AGU you’ll eventually be rewarded because 1) population growth increases the demand for food, and 2) urban sprawl (combined with droughts due to global warming) reduces the availability of arable land.
Risk level: 9 (where 10-Yr Treasury Notes = 1, S&P 500 Index = 5, and Gold Bullion = 10)
Full disclosure: I own shares of AGU.
NOTE: Metrics are current for the Sunday of publication. Red highlights denote underperformance vs. VBINX at Line 16 in the Table. Purple highlights denote Balance Sheet issues and shortfalls. Net Present Value (NPV) inputs are described and justified in the Appendix to Week 256: Briefly, Discount Rate = 9%, Holding Period = 10 years (no dividends accrue in 10th year), Initial Cost = average stock price over the past 50 days (corrected for transaction costs of 2.5% when buying ~$5000 worth of shares). Dividend Growth Rate is the 3-5 Yr CAGR found at Column H. Price Growth Rate is the 20-Yr CAGR found at Column K (http://invest.kleinnet.com/bmw1/). Price Return (from selling all shares in the 10th year) is corrected for transaction costs of 2.5%. The Discount Rate of 9% approximates Total Returns/Yr from a stock index of similar risk to owning a small number of large-cap stocks, where risk is mainly due to “selection bias.” That stock index is the S&P MidCap 400 Index at Line 31 in the Table. The ETF for that index is MDY at Line 14.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
US farmland has grown 7%/yr in value since 2002, going from an average price of $1,590/acre to $4,090/acre, partly because 8% of the acreage disappeared due to urbanization and the conversion of farmland to parks and pasture. Farmers increasingly overuse their land to justify its cost, which leads to a greater dependence on improvements in technology, infrastructure and logistics. But at the most basic level, “overuse” means that more fertilizer will be applied to counteract the depletion of nitrogen, potassium and phosphate from the soil.
Mission: Apply our standard spreadsheet analysis to large fertilizer companies in the US and Canada, namely those that have appeared on the annual Barron’s 500 List in recent years. Exclude companies that haven’t had their stock traded long enough to appear on the 16-yr BMW Method List. Include 5-yr returns on key commodity contracts (corn, soybeans, wheat, cattle and copper). In making this analysis, we find that only 5 companies meet our requirements, and none are Dividend Achievers.
Execution: see Table.
Administration: Commodity-related investments are speculative. With farming, there are additional variables to consider, namely, dependence on soil, sunshine and water. Soil has to supply 5 of the 7 elements essential for life: nitrogen, phosphorus, and potassium being the most important. In addition, soil provides sodium and chlorine ions that come from the life cycle of small organisms living within the soil. Finally, sunshine and water allow healthy plants to synthesize the other two essential elements by combining carbon dioxide in the atmosphere with water: oxygen, and useful forms of carbon -- sugar and cellulose.
Farmers have traditionally tried to reverse soil depletion by 1) rotating crops, 2) leaving fields fallow every 3 yrs, and 3) pasturing cows on the field in the off-season, to distribute natural fertilizer (manure). But the costs for farm implements and land have risen so much that farmers reach for the maximum yield of whatever crop will give them the greatest return on investment. Therefore, they will over-plant every field every year. This over-planting leads to the purchase of more fertilizer, which is distributed using bigger sprayers. As millions of farmers around the world are adopting this approach, the supply of grain and soybeans has come to exceed demand. The result has been that the prices farmers receive for their grain and soybeans collapsed 3 yrs ago, and has yet to recover. Farmers have tried to stop buying new machinery and the most expensive seeds, i.e., the seeds that have been genetically engineered to carry yield-maximizing traits. And, farmers have tried to spend less on fertilizer, water, insecticides, fungicides and herbicides. In other words, the vendors that serve farmers are merging operations in a desperate attempt to stave off bankruptcy.
Bottom Line: You can make a lot of money on volatile commodity investments like fertilizer stocks but if you don’t know when to sell, you’ll incur large losses. To allay that risk, it is necessary to study the trends in a) crop prices, b) weather cycles (El Nino and La Nina), and c) inventories of foodstuffs and agronomy chemicals, particularly fertilizer. Or, you can follow a Warren Buffett recommendation: dollar-cost average your investment, and continue spending a fixed-dollar amount each quarter on that (now) cheapened stock. You’ll have bought many shares at absurdly low prices, so you’ll be ahead nicely on your investment when prices recover. But beware: Shares in Potash Corporation of Saskatchewan (the largest fertilizer company) went for $61.60 in 2/1/11 and $18.55 on 2/1/17. That’s a 70% loss over 6 yrs. When it comes to commodity-related stocks, dollar-averaging is a fool’s errand. You have to sell quickly whenever you conclude that earnings are likely to stop growing.
Which fertilizer stock of the five in the Table looks the most promising? Not surprisingly, the two largest players (by market capitalization) are merging with one another: Agrium (AGU) and Potash Corporation of Saskatchewan (POT). Why? Because the multi-year collapse in grain and soybean prices has pulled the rug out from under fertilizer sales (see Column F in the Table under “commodity futures”). If you buy stock in either POT or AGU you’ll eventually be rewarded because 1) population growth increases the demand for food, and 2) urban sprawl (combined with droughts due to global warming) reduces the availability of arable land.
Risk level: 9 (where 10-Yr Treasury Notes = 1, S&P 500 Index = 5, and Gold Bullion = 10)
Full disclosure: I own shares of AGU.
NOTE: Metrics are current for the Sunday of publication. Red highlights denote underperformance vs. VBINX at Line 16 in the Table. Purple highlights denote Balance Sheet issues and shortfalls. Net Present Value (NPV) inputs are described and justified in the Appendix to Week 256: Briefly, Discount Rate = 9%, Holding Period = 10 years (no dividends accrue in 10th year), Initial Cost = average stock price over the past 50 days (corrected for transaction costs of 2.5% when buying ~$5000 worth of shares). Dividend Growth Rate is the 3-5 Yr CAGR found at Column H. Price Growth Rate is the 20-Yr CAGR found at Column K (http://invest.kleinnet.com/bmw1/). Price Return (from selling all shares in the 10th year) is corrected for transaction costs of 2.5%. The Discount Rate of 9% approximates Total Returns/Yr from a stock index of similar risk to owning a small number of large-cap stocks, where risk is mainly due to “selection bias.” That stock index is the S&P MidCap 400 Index at Line 31 in the Table. The ETF for that index is MDY at Line 14.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, January 22
Week 290 - Farm Tractors
Situation: The “green revolution” started in the 1920s with the introduction of mechanization to agriculture. Tractors replaced mules, along with large cadres of farm workers. After 100 years of improvements, tractors have evolved into internet laboratories designed to optimize crop yields, and fitted-out like a home-office. Competition is fierce, with tricked-out models costing 10 times more than basic tractor models. Dealerships for those basic models, like the Mahindra Tractor made in India, are starting to pop up in the US. Remember that manufacturer’s name because it’s the top-selling tractor worldwide. However, there will soon be an even more stripped-down model coming to market, one built in Cuba by an American company (Cleber), named the Oggun 1.0, to be priced at $10,000.
Mission: Standard spreadsheet to lay out important metrics to consider before buying stock in one of the main tractor companies. Detail performance of commodity futures and the Dow Jones Commodity Index, and combine that with earnings projections for tractor and combine producers.
Execution: see Table.
Administration: Deere’s most recent quarterly results: year-over-year (y-o-y) declines in both profit and revenues but both beat projection and both are projected to be down less in 2017.
Caterpillar’s most recent quarterly results: y-o-y declines for both revenues and profit; missed projections for both; downgraded revenue and profit projections for FY16.
CNH Industrial’s most recent quarterly results: y-o-y decline in revenues but y-o-y increase in profit; full year guidance “reaffirmed.” Interestingly, I live near a CNH Industrial plant at Grand Island, NE, that produces New Holland combines. The plant has been idled for the past 2 yrs but recently started running one shift. New Holland combines are going onto flatbed trucks at the rate of several a day.
AGCO’s most recent quarterly results: showed slight improvement y-o-y in revenues but a 90% fall in profits: “Lower global demand for farm equipment is expected to continue to negatively impact AGCO’s sales and earnings in 2016.”
Kubota’s most recent results: revenue fell 5.9% in the first 9 months of 2016 vs. 2015.
Commodity futures (see Lines 19-22 in the Table) document a strong negative trend in pricing for corn, soybean, wheat, and beef contracts over the past 5 yrs, likely due to overproduction that has resulted from favorable weather and the buildout of “precision agriculture” technology.
Bottom Line: Incomes for both farmers and ranchers have been falling worldwide because of an increase in the efficiency of production (“precision agriculture”), and favorable weather from “El Nino." El Nino will soon be replaced by La Nina, which will likely result in drier conditions. Farmers may then have the resources to buy up-to-date machinery. Actually, they’ve already started. And, the Dow Jones Commodity Index has resumed its upward trend after recently bouncing off the low set in 1999. But you should read the fine print!
caveat emptor: Five sectors support agricultural production: a) farm machinery (e.g. tractors and combines); b) fertilizers that replenish nitrogen, phosphorus, and potash in the soil; c) chemicals that insure a good crop yield, in terms of bushels per acre (herbicides, fungicides, and insecticides); d) transportation assets (trucks, highways, and railroads); e) financial services (short-term loans, mortgages, and commodity markets based on brokerages, which are regulated in the U.S. by the Commodity Futures Trading Commission). Worldwide weather patterns introduce an element of uncertainty that affects companies in all 5 sectors. When investors buy stocks issued by those companies, they have to allow for an extra dose volatility. So, which sectors are least impacted by weather? Probably the transportation sector, railroads in particular: Those monopolies are sanctioned and regulated by the government to be certain that their profits will be large enough to ensure adequate and safe maintenance of tracks and yards. Railroads also have clients other than commodity producers, which dilutes risk of loss from weather-related events.
Risk Rating: 7 (where 10-Yr Treasury Notes = 1, the S&P 500 Index = 5, and gold bullion = 10)
Full Disclosure: I own shares of Caterpillar (CAT at Line 3 in the Table) and offset that risk by owning shares of Union Pacific (UNP at Line 9 in the Table).
NOTE: Metrics are current for the Sunday of publication. Red highlights denote underperformance vs. VBINX at Line 13 in the Table. Purple highlights denote Balance Sheet issues and shortfalls. Net Present Value (NPV) inputs are described and justified in the Appendix to Week 256: Briefly, Discount Rate = 9%, Holding Period = 10 years, Initial Cost = average stock price over the past 50 days (corrected for transaction costs of 2.5% when buying ~$5000 worth of shares). Dividend Growth Rate is the 3-Yr CAGR found at Column H. Price Growth Rate is the 16-Yr CAGR found at Column K (http://invest.kleinnet.com/bmw1/). Price Return (from selling all shares in the 10th year) is corrected for transaction costs of 2.5%. The Discount Rate of 9% approximates Total Returns/yr from a stock index of similar risk to owning shares in a small number of large-cap stocks, where risk due to “selection bias” is paramount. That stock index is the S&P MidCap 400 Index at Line 26 in the Table. The ETF for that index is MDY at Line 12.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Mission: Standard spreadsheet to lay out important metrics to consider before buying stock in one of the main tractor companies. Detail performance of commodity futures and the Dow Jones Commodity Index, and combine that with earnings projections for tractor and combine producers.
Execution: see Table.
Administration: Deere’s most recent quarterly results: year-over-year (y-o-y) declines in both profit and revenues but both beat projection and both are projected to be down less in 2017.
Caterpillar’s most recent quarterly results: y-o-y declines for both revenues and profit; missed projections for both; downgraded revenue and profit projections for FY16.
CNH Industrial’s most recent quarterly results: y-o-y decline in revenues but y-o-y increase in profit; full year guidance “reaffirmed.” Interestingly, I live near a CNH Industrial plant at Grand Island, NE, that produces New Holland combines. The plant has been idled for the past 2 yrs but recently started running one shift. New Holland combines are going onto flatbed trucks at the rate of several a day.
AGCO’s most recent quarterly results: showed slight improvement y-o-y in revenues but a 90% fall in profits: “Lower global demand for farm equipment is expected to continue to negatively impact AGCO’s sales and earnings in 2016.”
Kubota’s most recent results: revenue fell 5.9% in the first 9 months of 2016 vs. 2015.
Commodity futures (see Lines 19-22 in the Table) document a strong negative trend in pricing for corn, soybean, wheat, and beef contracts over the past 5 yrs, likely due to overproduction that has resulted from favorable weather and the buildout of “precision agriculture” technology.
Bottom Line: Incomes for both farmers and ranchers have been falling worldwide because of an increase in the efficiency of production (“precision agriculture”), and favorable weather from “El Nino." El Nino will soon be replaced by La Nina, which will likely result in drier conditions. Farmers may then have the resources to buy up-to-date machinery. Actually, they’ve already started. And, the Dow Jones Commodity Index has resumed its upward trend after recently bouncing off the low set in 1999. But you should read the fine print!
caveat emptor: Five sectors support agricultural production: a) farm machinery (e.g. tractors and combines); b) fertilizers that replenish nitrogen, phosphorus, and potash in the soil; c) chemicals that insure a good crop yield, in terms of bushels per acre (herbicides, fungicides, and insecticides); d) transportation assets (trucks, highways, and railroads); e) financial services (short-term loans, mortgages, and commodity markets based on brokerages, which are regulated in the U.S. by the Commodity Futures Trading Commission). Worldwide weather patterns introduce an element of uncertainty that affects companies in all 5 sectors. When investors buy stocks issued by those companies, they have to allow for an extra dose volatility. So, which sectors are least impacted by weather? Probably the transportation sector, railroads in particular: Those monopolies are sanctioned and regulated by the government to be certain that their profits will be large enough to ensure adequate and safe maintenance of tracks and yards. Railroads also have clients other than commodity producers, which dilutes risk of loss from weather-related events.
Risk Rating: 7 (where 10-Yr Treasury Notes = 1, the S&P 500 Index = 5, and gold bullion = 10)
Full Disclosure: I own shares of Caterpillar (CAT at Line 3 in the Table) and offset that risk by owning shares of Union Pacific (UNP at Line 9 in the Table).
NOTE: Metrics are current for the Sunday of publication. Red highlights denote underperformance vs. VBINX at Line 13 in the Table. Purple highlights denote Balance Sheet issues and shortfalls. Net Present Value (NPV) inputs are described and justified in the Appendix to Week 256: Briefly, Discount Rate = 9%, Holding Period = 10 years, Initial Cost = average stock price over the past 50 days (corrected for transaction costs of 2.5% when buying ~$5000 worth of shares). Dividend Growth Rate is the 3-Yr CAGR found at Column H. Price Growth Rate is the 16-Yr CAGR found at Column K (http://invest.kleinnet.com/bmw1/). Price Return (from selling all shares in the 10th year) is corrected for transaction costs of 2.5%. The Discount Rate of 9% approximates Total Returns/yr from a stock index of similar risk to owning shares in a small number of large-cap stocks, where risk due to “selection bias” is paramount. That stock index is the S&P MidCap 400 Index at Line 26 in the Table. The ETF for that index is MDY at Line 12.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, November 13
Week 280 - A-rated Commodity-related Dividend Aristocrats
Situation: The S&P 500 Index is increasingly overvalued, and now has a P/E that is 25 times trailing earnings. Investors have withdrawn almost $100 Billion in the past 12 months but the S&P 500 Index keeps rising because companies have bought back even more of their own stock. Earnings of ~$150 Billion barely cover dividend payments. Unless demand picks up, companies will continue returning profits to investors instead of using those for expansion. If planet-wide demand does pick up, stocks will return to reasonable valuations. If it doesn’t, we’ll have a correction or Bear Market.
One slice of the market already appears to have started an upswing, i.e., commodity-related companies. We have documented this from various points of view in several recent blogs. To be very cautious, you might consider investing small amounts of money regularly in one or two of the best companies. Look at the few Dividend Aristocrats in that sector having A-rated stocks and bonds. Dividend Aristocrats are rarely in the spotlight because so few companies have the earnings consistency to generate 25+ consecutive years of dividend increases.
Mission: We’ve checked, and there are only 11 such commodity-related companies. So let’s drill down on those (see Table).
Execution: I know what you’re thinking, that 9 of those 11 companies have P/Es over 20. If the market does drop 10-20%, those 9 will drop at least that much. True enough (quality goods attract money). Either you buy the idea of putting a similar amount of money into the stock market each and every quarter, or you don’t. When the market is down, that money buys more shares of stock. If you have a 401(k) plan at work, dollar-cost averaging is already on automatic pilot.
The main point is to be a disciplined buyer. Never put a big slug of dollars into the market at once, and avoid “one-off” purchases. Pick a theme and build on it over time. Eventually you’ll settle on a plan and fund it with automatic monthly withdrawals from your checking account. Then, sit back and do the math: See how your stock picks perform in comparison to your benchmark mutual fund, e.g. MDY, which is the S&P 400 MidCap Index ETF. If your stocks perform poorly or erratically, invest in the benchmark instead of trying to pick stocks.
Bottom Line: You want safe and effective investments. You have to be careful about investing in companies that draw their feedstocks from the ground. Stocks issued by those companies are vulnerable to boom-and-bust commodity cycles. But the A-rated ones can be safe and effective bets over a 10-year holding period, IF they’ve increased their dividend each year for at least the past 25 years.
Risk Rating: 6
Full Disclosure: I dollar-average into XOM, and also own shares of HRL, MKC, KO, and WMT.
NOTE: Metrics are current for the Sunday of publication. Red highlights denote underperformance vs. VBINX at Line 21 in the Table. Purple highlights denote Balance Sheet issues and shortfalls. Net Present Value (NPV) inputs are described and justified in the Appendix to Week 256. Briefly, Discount Rate = 9%, Holding Period = 10 years, Initial Cost = moving average for stock price over the past 50 days (corrected for transaction costs of 2.5% when buying ~$5000 worth of shares). Dividend Growth Rate is the 10-Yr CAGR found at Column H. Price Growth Rate is the 16-Yr CAGR found at Column L (http://invest.kleinnet.com/bmw1/). Price Return (from selling all shares in the 10th year) is corrected for transaction costs of 2.5%. The Discount Rate of 9% is designed to approximate Total Returns/yr from a stock index of similar risk to owning a small number of large-cap stocks, where risk due to “selection bias” is paramount. That stock index is the S&P MidCap 400 Index (at Line 26 in the Table). MDY (at Line 20 in the Table) is the ETF for that index.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
One slice of the market already appears to have started an upswing, i.e., commodity-related companies. We have documented this from various points of view in several recent blogs. To be very cautious, you might consider investing small amounts of money regularly in one or two of the best companies. Look at the few Dividend Aristocrats in that sector having A-rated stocks and bonds. Dividend Aristocrats are rarely in the spotlight because so few companies have the earnings consistency to generate 25+ consecutive years of dividend increases.
Mission: We’ve checked, and there are only 11 such commodity-related companies. So let’s drill down on those (see Table).
Execution: I know what you’re thinking, that 9 of those 11 companies have P/Es over 20. If the market does drop 10-20%, those 9 will drop at least that much. True enough (quality goods attract money). Either you buy the idea of putting a similar amount of money into the stock market each and every quarter, or you don’t. When the market is down, that money buys more shares of stock. If you have a 401(k) plan at work, dollar-cost averaging is already on automatic pilot.
The main point is to be a disciplined buyer. Never put a big slug of dollars into the market at once, and avoid “one-off” purchases. Pick a theme and build on it over time. Eventually you’ll settle on a plan and fund it with automatic monthly withdrawals from your checking account. Then, sit back and do the math: See how your stock picks perform in comparison to your benchmark mutual fund, e.g. MDY, which is the S&P 400 MidCap Index ETF. If your stocks perform poorly or erratically, invest in the benchmark instead of trying to pick stocks.
Bottom Line: You want safe and effective investments. You have to be careful about investing in companies that draw their feedstocks from the ground. Stocks issued by those companies are vulnerable to boom-and-bust commodity cycles. But the A-rated ones can be safe and effective bets over a 10-year holding period, IF they’ve increased their dividend each year for at least the past 25 years.
Risk Rating: 6
Full Disclosure: I dollar-average into XOM, and also own shares of HRL, MKC, KO, and WMT.
NOTE: Metrics are current for the Sunday of publication. Red highlights denote underperformance vs. VBINX at Line 21 in the Table. Purple highlights denote Balance Sheet issues and shortfalls. Net Present Value (NPV) inputs are described and justified in the Appendix to Week 256. Briefly, Discount Rate = 9%, Holding Period = 10 years, Initial Cost = moving average for stock price over the past 50 days (corrected for transaction costs of 2.5% when buying ~$5000 worth of shares). Dividend Growth Rate is the 10-Yr CAGR found at Column H. Price Growth Rate is the 16-Yr CAGR found at Column L (http://invest.kleinnet.com/bmw1/). Price Return (from selling all shares in the 10th year) is corrected for transaction costs of 2.5%. The Discount Rate of 9% is designed to approximate Total Returns/yr from a stock index of similar risk to owning a small number of large-cap stocks, where risk due to “selection bias” is paramount. That stock index is the S&P MidCap 400 Index (at Line 26 in the Table). MDY (at Line 20 in the Table) is the ETF for that index.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, November 6
Week 279 - Barron’s 500 Agricultural Producers
Situation: This week’s blog looks at how the 12 largest Ag Producers have been doing since 2012. They had been in a slump but have appeared to turn the corner. It seems hard to believe. Agricultural commodity prices remain in a slump and the Dow Jones Commodity Index (^DCI) has shown trendline growth of only 2.0%/yr after completing a 25 yr Commodity Supercycle. But that Index recently bounced off its 1999 low, likely heralding a new Commodity Supercycle . Our regular readers know we think food commodities should be able to buck that trend for two reasons: 1) food is an essential good; 2) the global middle class is projected to grow 10%/yr through 2030.
Mission: Prove that Ag Producers “have turned the corner”.
Execution: First, we’ll look at the negative side of the argument. Farm production has exceeded demand for 3 years. That has resulted in low crop prices, which have a) reduced farm incomes, b) limited the ability of farmers to buy farm equipment , and c) depressed farmland prices: “The amount of rent farmers pay to landowners also dropped precipitously in the St. Louis area. Farmland rent slid 10% and ranchland rent by 20% in the quarter."
Now we’ll look on the positive side. The 12 Barron’s 500 companies that produce equipment, fertilizer, seeds, and agronomy chemicals appear to be doing better. Year-over-year rankings comparing 2013 rankings with 2012 rankings show that only one (Monsanto) did better in terms of cash flow and revenues. However, 8 of the 12 did better when comparing 2015 to 2014. Sequential year-over-year results are shown for all 12 in Columns N-Q of the Table, with green highlights denoting year-over-year improvement.
Administration: Drill down on those largest Ag Producers and try to figure out why they turned the corner in 2015. It shouldn’t have happened, since crop inventories were rising and crop prices were falling, partly because Food Stamp usage in the US fell by 15%. The increased Federal spending to expand Food Stamp participation (after the 2008-2009 Recession) ended when The Recovery Act expired on 11/1/2013.
Bottom Line: Ag Producers are recovering. Briefly, we explain why by noting that the S&P 500 Index went through 10% corrections in October of 2014 and February of 2016. That last correction was associated with a 25% Bear Market for the Basic Materials Industry (XLB at Line 22 in the Table), and coincided with a bottoming of stock prices for 11 of our 12 Ag Producers. For 2015 vs. 2014, 10 of those 12 companies are highlighted in green, indicating improved sales and ROIC (see Columns O and P in the Table), and the aggregate Barron’s 500 Rank for all 12 companies improved to 369 from 398.
Risk Ranking: 7
Full Disclosure: I dollar-average into MON and also own shares of CAT and ADM.
NOTE: Metrics are current for the Sunday of publication. Red highlights denote underperformance vs. VBINX at Line 21 in the Table. Purple highlights denote Balance Sheet issues and shortfalls. Net Present Value (NPV) inputs are described and justified in the Appendix to Week 256. Briefly, Discount Rate = 9%, Holding Period = 10 years, Initial Cost = moving average for stock price over the past 50 days (corrected for transaction costs of 2.5% when buying ~$5000 worth of shares). Dividend Growth Rate is the 10-Yr CAGR found at Column H. Price Growth Rate is the 16-Yr CAGR found at Column K (http://invest.kleinnet.com/bmw1/). Price Return (from selling all shares in the 10th year) is corrected for transaction costs of 2.5%. The Discount Rate of 9% is designed to approximate Total Returns/yr from a stock index of similar risk to owning a small number of large-cap stocks, where risk due to “selection bias” is paramount. That stock index is the S&P MidCap 400 Index (at Line 27 in the Table), and MDY (at Line 20 in the Table) is the ETF for that index.
Mission: Prove that Ag Producers “have turned the corner”.
Execution: First, we’ll look at the negative side of the argument. Farm production has exceeded demand for 3 years. That has resulted in low crop prices, which have a) reduced farm incomes, b) limited the ability of farmers to buy farm equipment , and c) depressed farmland prices: “The amount of rent farmers pay to landowners also dropped precipitously in the St. Louis area. Farmland rent slid 10% and ranchland rent by 20% in the quarter."
Now we’ll look on the positive side. The 12 Barron’s 500 companies that produce equipment, fertilizer, seeds, and agronomy chemicals appear to be doing better. Year-over-year rankings comparing 2013 rankings with 2012 rankings show that only one (Monsanto) did better in terms of cash flow and revenues. However, 8 of the 12 did better when comparing 2015 to 2014. Sequential year-over-year results are shown for all 12 in Columns N-Q of the Table, with green highlights denoting year-over-year improvement.
Administration: Drill down on those largest Ag Producers and try to figure out why they turned the corner in 2015. It shouldn’t have happened, since crop inventories were rising and crop prices were falling, partly because Food Stamp usage in the US fell by 15%. The increased Federal spending to expand Food Stamp participation (after the 2008-2009 Recession) ended when The Recovery Act expired on 11/1/2013.
Bottom Line: Ag Producers are recovering. Briefly, we explain why by noting that the S&P 500 Index went through 10% corrections in October of 2014 and February of 2016. That last correction was associated with a 25% Bear Market for the Basic Materials Industry (XLB at Line 22 in the Table), and coincided with a bottoming of stock prices for 11 of our 12 Ag Producers. For 2015 vs. 2014, 10 of those 12 companies are highlighted in green, indicating improved sales and ROIC (see Columns O and P in the Table), and the aggregate Barron’s 500 Rank for all 12 companies improved to 369 from 398.
Risk Ranking: 7
Full Disclosure: I dollar-average into MON and also own shares of CAT and ADM.
NOTE: Metrics are current for the Sunday of publication. Red highlights denote underperformance vs. VBINX at Line 21 in the Table. Purple highlights denote Balance Sheet issues and shortfalls. Net Present Value (NPV) inputs are described and justified in the Appendix to Week 256. Briefly, Discount Rate = 9%, Holding Period = 10 years, Initial Cost = moving average for stock price over the past 50 days (corrected for transaction costs of 2.5% when buying ~$5000 worth of shares). Dividend Growth Rate is the 10-Yr CAGR found at Column H. Price Growth Rate is the 16-Yr CAGR found at Column K (http://invest.kleinnet.com/bmw1/). Price Return (from selling all shares in the 10th year) is corrected for transaction costs of 2.5%. The Discount Rate of 9% is designed to approximate Total Returns/yr from a stock index of similar risk to owning a small number of large-cap stocks, where risk due to “selection bias” is paramount. That stock index is the S&P MidCap 400 Index (at Line 27 in the Table), and MDY (at Line 20 in the Table) is the ETF for that index.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
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