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
Showing posts with label farmers cooperatives. Show all posts
Showing posts with label farmers cooperatives. Show all posts
Sunday, October 15
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
Sunday, October 9
Week 275 - Food Processors With Improving Fundamentals
Situation: Grain prices are low, which means equipment and seed vendors find that few farmers are eager to buy. But grain processors benefit when prices are low.
Mission: Look for improvements in cash flow and revenue among the largest food processors, and assess the benefits and risks of investing in those companies. Look for Brand Value and clean Balance Sheets in addition to calculating Net Present Value.
Execution: see Table.
Administration: We’ve found 12 food processing companies that rank higher on the 2016 Barron’s 500 List than they did on the 2015 List. Those companies had a better overall score based on 3 criteria: A) Cash flow-based ROIC, B) 2015 ROIC vs. the 3-yr median, and C) sales growth in 2015 vs. 2014. All 12 companies have a 16+ year trading history that has been analyzed quantitatively by using the BMW Method; see Columns K-M in the Table.
With respect to broad indications of quality (i.e., S&P bond and stock ratings at Columns P and Q in the Table), only 6 companies meet our standards. Our measures include a bond rating of BBB+ or better and a stock rating of B+/M or better. The 6 stocks are: Hershey (HSY), General Mills (GIS), Hormel Foods (HRL), Coca-Cola (KO), Campbell Soup (CPB), Archer Daniels Midland (ADM). Only 4 of those stocks are Dividend Achievers (annual dividend increases for 10+ yrs): GIS, HRL, KO, ADM.
With respect to Net Present Value (see Column V in the Table), the top 4 companies are Ingredion (INGR), Hormel Foods (HRL), JM Smucker (SJM), Tyson Foods (TSN).
Hormel Foods (HRL) is the only company with a clean Balance Sheet. We have a problem when evaluating Balance Sheets for food processors (see Columns Y-AB). Those companies are able to be somewhat unconcerned about bankruptcy, since food prices tend to be inelastic (i.e., food is an “essential good”). This allows company managers to spend more on advertising than on growing Tangible Book Value. In the aggregate, these 12 companies carry too much debt. Their total debt is 160% of equity whereas 100% is the upper limit for a clean Balance Sheet. Long-term debt is 29% of total assets, which is barely acceptable. Tangible Book Value is 1% of each share’s price, which is barely acceptable. In the first half of 2016, two of the Dividend Achievers, Coca-Cola (KO) and Archer Daniels Midland (ADM), had insufficient free cash flow (FCF) to pay dividends. That means they either had to borrow the necessary funds or sell a non-strategic asset.
With respect to brand value, Best Global Brands ranks the top 500 brand names annually. Three of the companies in our Table are among the top 500 for 2016. Those 3 are: Coca-Cola (KO), Kellogg (K), Tyson Foods (TSN). Two additional Coca-Cola brands appear on the list, Sprite and Fanta. Coca-Cola ranks #17 (down from #12), Kellogg ranks #183 (down from #181), Tyson ranks #307 (up from #353), Sprite ranks #411 (down from #391), and Fanta ranks #488 (unchanged). Interestingly, Hershey (HSY) is not a top 500 global brand.
Bottom Line: The “take-home message” is that stocks whose prices vary with the weather and global crop yields are speculative. The investment that farmers make in equipment, software, irrigation systems, seeds and chemicals will determine their crop yields, given favorable weather. Over the past 3 yrs of good weather (El Nino), those investments have paid off in all the countries of the Northern Hemisphere that have a strong agriculture sector. That means the prices that food processors pay for wheat, soybeans, rice, corn and meat have fallen. The other key fact that drives those growing profits is the addition of some 20 million people a year to the middle class, meaning they can finally afford to eat a 60 gm protein diet every day.
Risk Rating: 7 (where 10-Yr US Treasury Notes = 1 and gold = 10).
Full Disclosure: I own shares of HRL, KO and ADM but recently sold shares of GIS. I thought GIS shares had become overpriced but the current NPV calculation suggests that GIS shares continue to have considerable value (see Line 3 in the Table, at Column V).
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 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. Price Return (from selling all shares in the 10th year) is corrected for transaction costs of 2.5%. The Discount Rate of 9% is based on returns from a stock index of similar risk to owning a small portfolio of large-cap stocks, i.e., the S&P MidCap 400 Index at Line 26. The investment vehicle for that index is the SPDR S&P MidCap 400 ETF: MDY at Line 20. The NPV calculation for MDY (at Column V and Line 20) includes transaction costs of 2.5% on purchase and 2.5% on sale.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Mission: Look for improvements in cash flow and revenue among the largest food processors, and assess the benefits and risks of investing in those companies. Look for Brand Value and clean Balance Sheets in addition to calculating Net Present Value.
Execution: see Table.
Administration: We’ve found 12 food processing companies that rank higher on the 2016 Barron’s 500 List than they did on the 2015 List. Those companies had a better overall score based on 3 criteria: A) Cash flow-based ROIC, B) 2015 ROIC vs. the 3-yr median, and C) sales growth in 2015 vs. 2014. All 12 companies have a 16+ year trading history that has been analyzed quantitatively by using the BMW Method; see Columns K-M in the Table.
With respect to broad indications of quality (i.e., S&P bond and stock ratings at Columns P and Q in the Table), only 6 companies meet our standards. Our measures include a bond rating of BBB+ or better and a stock rating of B+/M or better. The 6 stocks are: Hershey (HSY), General Mills (GIS), Hormel Foods (HRL), Coca-Cola (KO), Campbell Soup (CPB), Archer Daniels Midland (ADM). Only 4 of those stocks are Dividend Achievers (annual dividend increases for 10+ yrs): GIS, HRL, KO, ADM.
With respect to Net Present Value (see Column V in the Table), the top 4 companies are Ingredion (INGR), Hormel Foods (HRL), JM Smucker (SJM), Tyson Foods (TSN).
Hormel Foods (HRL) is the only company with a clean Balance Sheet. We have a problem when evaluating Balance Sheets for food processors (see Columns Y-AB). Those companies are able to be somewhat unconcerned about bankruptcy, since food prices tend to be inelastic (i.e., food is an “essential good”). This allows company managers to spend more on advertising than on growing Tangible Book Value. In the aggregate, these 12 companies carry too much debt. Their total debt is 160% of equity whereas 100% is the upper limit for a clean Balance Sheet. Long-term debt is 29% of total assets, which is barely acceptable. Tangible Book Value is 1% of each share’s price, which is barely acceptable. In the first half of 2016, two of the Dividend Achievers, Coca-Cola (KO) and Archer Daniels Midland (ADM), had insufficient free cash flow (FCF) to pay dividends. That means they either had to borrow the necessary funds or sell a non-strategic asset.
With respect to brand value, Best Global Brands ranks the top 500 brand names annually. Three of the companies in our Table are among the top 500 for 2016. Those 3 are: Coca-Cola (KO), Kellogg (K), Tyson Foods (TSN). Two additional Coca-Cola brands appear on the list, Sprite and Fanta. Coca-Cola ranks #17 (down from #12), Kellogg ranks #183 (down from #181), Tyson ranks #307 (up from #353), Sprite ranks #411 (down from #391), and Fanta ranks #488 (unchanged). Interestingly, Hershey (HSY) is not a top 500 global brand.
Bottom Line: The “take-home message” is that stocks whose prices vary with the weather and global crop yields are speculative. The investment that farmers make in equipment, software, irrigation systems, seeds and chemicals will determine their crop yields, given favorable weather. Over the past 3 yrs of good weather (El Nino), those investments have paid off in all the countries of the Northern Hemisphere that have a strong agriculture sector. That means the prices that food processors pay for wheat, soybeans, rice, corn and meat have fallen. The other key fact that drives those growing profits is the addition of some 20 million people a year to the middle class, meaning they can finally afford to eat a 60 gm protein diet every day.
Risk Rating: 7 (where 10-Yr US Treasury Notes = 1 and gold = 10).
Full Disclosure: I own shares of HRL, KO and ADM but recently sold shares of GIS. I thought GIS shares had become overpriced but the current NPV calculation suggests that GIS shares continue to have considerable value (see Line 3 in the Table, at Column V).
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 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. Price Return (from selling all shares in the 10th year) is corrected for transaction costs of 2.5%. The Discount Rate of 9% is based on returns from a stock index of similar risk to owning a small portfolio of large-cap stocks, i.e., the S&P MidCap 400 Index at Line 26. The investment vehicle for that index is the SPDR S&P MidCap 400 ETF: MDY at Line 20. The NPV calculation for MDY (at Column V and Line 20) includes transaction costs of 2.5% on purchase and 2.5% on sale.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, February 21
Week 242 - Dairy Products
Situation: Now that almost 20 million people a year move out of poverty worldwide, the demand for protein is much greater than it was 10 yrs ago when that trend got rolling. Why? Because it is expensive to have 60 grams of protein in the daily adult male diet, as recommended by nutritionists. For example, a standard source for meeting daily protein needs is an 8 oz cup of whole milk. It contains 8 grams of protein. You’d have to drink 1.875 quarts a day if that were your only source, which would cost you $2.10/day if you lived in Mumbai, India. (The standard definition of “extreme poverty” is to be living on an income of less than $1.25/day.) Even in the affluent United States, people are demanding more protein in their diets because of new attention being given to the quality of foodstuffs. (It turns out that most of us haven’t been consuming our 60 grams of protein a day.) The most convenient source of protein is milk but demand for milk has been falling for decades. For example, here in the US we drank 19.9 million pounds of conventional whole milk in 2000 but only 11.4 million pounds in 2015. This falloff in demand has led to more creative ways of processing milk (to interest consumers in buying it), Greek yogurt being the most recent “crowd pleaser.” But there is still more milk being produced from our dairy herds than is being processed, which results in a trend toward smaller herds and lower prices. Since 1995, the price of conventional whole milk has risen 1.4% (vs. 2.1%/yr for the Consumer Price Index), but in recent years has tracked inflation.
Mission: Find out how publicly-traded companies and farmers cooperatives make money by processing less milk each year and selling it at prices that barely keep up with inflation.
Execution: The short answer is that they don’t. Less processing = less income. Dean Foods (DF) is the only nationwide company that relies on revenue from selling conventional milk, having recently spun off its division for producing organic milk and soy milk (to Whitewave Foods Company) and its division for producing yogurt (to Schreiber Foods). Line 11 in the Table makes clear that Dean Foods has been struggling, even though its stock price has managed to ride along with the stock market bubble. The other 7 companies in the Table also process milk but their milk-related sales generally represent less than 10% of their income.
Administration: Let’s look at how these 8 companies make money from milk.
General Mills (GIS) sells Yoplait yogurt.
Unilever plc (UL) sells Ben and Jerry’s ice cream and frozen yogurt.
Nestle S.A. (NSRGY) sells Carnation milk, Nestle chocolate milk, Nesquik chocolate milk, Coffee-Mate, Dreyers ice cream, Haagen-Dazs ice cream, and a variety of yogurt brands.
Coca-Cola (KO) has partnered since 2012 with Select Milk Producers (a nationwide farmers cooperative) to create a company called Fairlife LLC that filters milk into its separate components (water, butterfat, protein, vitamins & minerals, lactose). Those are recombined into a product (Fairlife) that has less than half the sugar (zero lactose) and twice the protein of conventional milk.
Kroger (KR) has opened a new plant in Denver (Mountain View Foods) to process conventional and organic fresh milk for its King Soopers label, giving it a total of 17 plants in the US for processing “non-GMO milk.”
Danone (DANOY) sells Dannon yogurt and Dannon Oikos Greek-style yogurt.
Hain Celestial (HAIN) sells Greek Gods yogurt (my favorite).
Dean Foods (DF) has co-marketing arrangements with 30 dairy cooperatives, including the largest (Land O’Lakes Dairy), for distributing milk products nationwide including butter and cheese.
Bottom Line: Milk is a commodity, meaning there are high fixed costs for ramping up production in response to a shortage--to have an efficient and robust supply chain. Then a global recession occurs and people rethink their need for that now-expensive commodity; substitution occurs and the supply chain has to be truncated. “Rinse and repeat.” The 4 companies at the top of our Table take the smart route, depending little on milk products to support a sustainable earnings trend. The 4 companies at the bottom have made a greater commitment (total in the case of Dean Foods), so their earnings are at the mercy of the milk production cycle.
Risk Rating: 7
Full Disclosure: I own shares of KO and GIS.
Note: Metrics are current for the Sunday of publication; metrics highlighted in red denote underperformance vs. VBINX, our key benchmark at Line 14 in the Table. Total Returns in Column C of the Table date to 9/1/2000 because that turning point marks the peak of the S&P 500 Index before the “dot.com” recession. There have been two peaks since then, in 2007 and 2015, so we are now entering the third market cycle since 2000.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Mission: Find out how publicly-traded companies and farmers cooperatives make money by processing less milk each year and selling it at prices that barely keep up with inflation.
Execution: The short answer is that they don’t. Less processing = less income. Dean Foods (DF) is the only nationwide company that relies on revenue from selling conventional milk, having recently spun off its division for producing organic milk and soy milk (to Whitewave Foods Company) and its division for producing yogurt (to Schreiber Foods). Line 11 in the Table makes clear that Dean Foods has been struggling, even though its stock price has managed to ride along with the stock market bubble. The other 7 companies in the Table also process milk but their milk-related sales generally represent less than 10% of their income.
Administration: Let’s look at how these 8 companies make money from milk.
General Mills (GIS) sells Yoplait yogurt.
Unilever plc (UL) sells Ben and Jerry’s ice cream and frozen yogurt.
Nestle S.A. (NSRGY) sells Carnation milk, Nestle chocolate milk, Nesquik chocolate milk, Coffee-Mate, Dreyers ice cream, Haagen-Dazs ice cream, and a variety of yogurt brands.
Coca-Cola (KO) has partnered since 2012 with Select Milk Producers (a nationwide farmers cooperative) to create a company called Fairlife LLC that filters milk into its separate components (water, butterfat, protein, vitamins & minerals, lactose). Those are recombined into a product (Fairlife) that has less than half the sugar (zero lactose) and twice the protein of conventional milk.
Kroger (KR) has opened a new plant in Denver (Mountain View Foods) to process conventional and organic fresh milk for its King Soopers label, giving it a total of 17 plants in the US for processing “non-GMO milk.”
Danone (DANOY) sells Dannon yogurt and Dannon Oikos Greek-style yogurt.
Hain Celestial (HAIN) sells Greek Gods yogurt (my favorite).
Dean Foods (DF) has co-marketing arrangements with 30 dairy cooperatives, including the largest (Land O’Lakes Dairy), for distributing milk products nationwide including butter and cheese.
Bottom Line: Milk is a commodity, meaning there are high fixed costs for ramping up production in response to a shortage--to have an efficient and robust supply chain. Then a global recession occurs and people rethink their need for that now-expensive commodity; substitution occurs and the supply chain has to be truncated. “Rinse and repeat.” The 4 companies at the top of our Table take the smart route, depending little on milk products to support a sustainable earnings trend. The 4 companies at the bottom have made a greater commitment (total in the case of Dean Foods), so their earnings are at the mercy of the milk production cycle.
Risk Rating: 7
Full Disclosure: I own shares of KO and GIS.
Note: Metrics are current for the Sunday of publication; metrics highlighted in red denote underperformance vs. VBINX, our key benchmark at Line 14 in the Table. Total Returns in Column C of the Table date to 9/1/2000 because that turning point marks the peak of the S&P 500 Index before the “dot.com” recession. There have been two peaks since then, in 2007 and 2015, so we are now entering the third market cycle since 2000.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, January 31
Week 239 - The “Big 6” Agronomy Companies Are Starting To Merge
Situation: For the past 10 years, companies in the “Basic Materials and Energy” industries have made massive investments to support China’s infrastructure buildout. More than 10 million people a year in China moved from rural poverty to cities during that time. But now China’s government sees little need for more construction projects and manufacturing capacity. Labor costs have increased and more emphasis is being placed on satisfying the need for consumer goods. China is no longer an emerging market. Other countries in Southeast Asia are able to produce goods more cheaply and compete with China for market share. The problem now is that the worldwide supply chain for energy, basic materials, and food commodities is twice the size it was 10 yrs ago but the market for all those goods is only a little larger. Production can’t suddenly be cut in half which means that excess goods have to go into storage. There has never been a commodity crash as big as this. To make matters worse, the world has yet to shake off lingering effects of the Lehman Panic. People got by with less for so long that they’ve unlearned the habit of casual shopping. But food? Who guessed that consumers would even cut back on that? Many families in North America are losing interest in foods that aren’t healthy, farm goods that aren’t produced in an environmentally sensitive manner, and meat that isn’t produced with due consideration to every farm animal’s well being. That means the grocery store bill is larger every week for those families but they’re seeking out grocery stores that offer those products. “Factory Farming” is going out of style.
Mission: Assemble growth-related metrics for the 6 largest companies that produce seeds, insecticides, herbicides and fungicides.
Execution: Dow Chemical (DOW) and duPont (DD) have decided to merge operations then spin off 3 companies. There will be one new company formed for agriculture, one for specialty chemicals, and and one for commodity chemicals. Syngenta (SYT) and Monsanto (MON) tried to merge, then broke off talks, and are now talking again. Bayer (BAYRY) and BASF (BASFY) have also held preliminary talks with potential partners. Let’s see what makes some of these 6 companies a target for purchase by other agronomy firms.
Administration: All of these companies are struggling. None of the US companies that S&P analyzes (MON, DD, DOW) has been able to grow Tangible Book Value (TBV) over the past 10 yrs, and stock prices average more than 20 times TBV (see Columns P-R in the Table). The main factor keeping these companies away from insolvency is the value of their strong brands. Risk metrics shown in the Table are very concerning, such as total return during the 2011 stock market correction (Column D), 5-yr Beta (Column I), and the BMW Method’s projection of price loss in a bear market compared to the 16-yr price trendline (Column O). On the other hand, the rewards to investors who bought any of these stocks at the market peak on September 1, 2000, have been quite satisfactory (see Columns C and M in the Table). Average dividend yield is ~3.4% and average dividend growth is 10.5% (see Columns G and H in the Table). The two weakest companies are duPont and Dow Chemical, so it is not surprising that those are the first to combine operations.
Bottom Line: Agronomy stocks aren’t for the faint of heart. You’d have to be a speculator who is able to weather volatility over at least two market cycles before reaping your reward. Now these stocks are on the bargain shelf, being forced to merge operations--which is just what an investor like Warren Buffett loves to see happening. Monsanto (MON) is the only one that might be a suitable stock to own for someone who is not a financial services professional.
Risk Rating: 7
Full Disclosure: I dollar-average into MON and also own shares of DD.
Note: Metrics are current for the Sunday of publication; metrics in red denote underperformance vs. our key benchmark, the Vanguard Balanced Index Fund (VBINX).
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Mission: Assemble growth-related metrics for the 6 largest companies that produce seeds, insecticides, herbicides and fungicides.
Execution: Dow Chemical (DOW) and duPont (DD) have decided to merge operations then spin off 3 companies. There will be one new company formed for agriculture, one for specialty chemicals, and and one for commodity chemicals. Syngenta (SYT) and Monsanto (MON) tried to merge, then broke off talks, and are now talking again. Bayer (BAYRY) and BASF (BASFY) have also held preliminary talks with potential partners. Let’s see what makes some of these 6 companies a target for purchase by other agronomy firms.
Administration: All of these companies are struggling. None of the US companies that S&P analyzes (MON, DD, DOW) has been able to grow Tangible Book Value (TBV) over the past 10 yrs, and stock prices average more than 20 times TBV (see Columns P-R in the Table). The main factor keeping these companies away from insolvency is the value of their strong brands. Risk metrics shown in the Table are very concerning, such as total return during the 2011 stock market correction (Column D), 5-yr Beta (Column I), and the BMW Method’s projection of price loss in a bear market compared to the 16-yr price trendline (Column O). On the other hand, the rewards to investors who bought any of these stocks at the market peak on September 1, 2000, have been quite satisfactory (see Columns C and M in the Table). Average dividend yield is ~3.4% and average dividend growth is 10.5% (see Columns G and H in the Table). The two weakest companies are duPont and Dow Chemical, so it is not surprising that those are the first to combine operations.
Bottom Line: Agronomy stocks aren’t for the faint of heart. You’d have to be a speculator who is able to weather volatility over at least two market cycles before reaping your reward. Now these stocks are on the bargain shelf, being forced to merge operations--which is just what an investor like Warren Buffett loves to see happening. Monsanto (MON) is the only one that might be a suitable stock to own for someone who is not a financial services professional.
Risk Rating: 7
Full Disclosure: I dollar-average into MON and also own shares of DD.
Note: Metrics are current for the Sunday of publication; metrics in red denote underperformance vs. our key benchmark, the Vanguard Balanced Index Fund (VBINX).
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, April 19
Week 198 - Food Processors
Situation: Food and agriculture stocks should be good investments. Food is an “essential good” and its availability is tied as closely to weather trends as to macroeconomic trends. (Farmland is the most rewarding asset to own on a risk-adjusted basis.) But the companies that actually process grain and meat for sale in grocery stores don’t do so well. Why? Because food processing, to be efficient, has to be done at large regional plants. That means packaged food has to be transported over long distances, often in refrigerated vehicles, which is expensive. Locally-owned companies and farmer’s cooperatives have the competitive advantage (see Week 177 and Week 178). But some publicly-traded companies have been able to centralize food processing by purchasing raw food commodities in large volumes, then using refrigerated railcars and ships to distribute the packaged food over long distances. Another strategy has been to produce organic foods, coffee, chocolate, specialty beverages and other upscale food offerings that have high pricing power in combination with low price elasticity. People will pay top dollar for their favorite treat, even if it comes from a country they’ve never heard of and couldn’t find on a map. Ivory Coast for example, where cocoa for half the world’s chocolate is grown.
There are 17 Food Processors in the Barron’s 500 List but two are missing from the Table because their company’s bonds are “junk-rated” (S&P bond rating below BBB-). Six of the 15 are Dividend Achievers (see Column P in the Table), and 3 more Dividend Achievers have been added that don’t have revenues high enough to be included in the Barron’s 500 List. We’ve also included the biggest Food Processor on the planet: Nestle (NSRGY), based in Switzerland. We’ve also included two additional international companies: Unilever plc (UL) and Danone (DANOY). You’ll note that 9 of these 21 companies were highlighted in Week 191’s list of 14 “Key Food and Agriculture Companies.” That list focused on the most valued players along the entire food chain. This week’s list drills down on the food processing sector, i.e., companies take over after crops and meat animals leave the farm.
To evaluate the risk of owning stocks in any of the 21 companies listed in the Table, look at 4 metrics: losses during the 18-month Lehman Panic (Column D in the Table); 5-yr Beta (Column I); S&P bond rating (Column N); and the S&P stock rating (Column O), where the lower letter indicates risk, and H is high, M is medium, L is low. Be aware that stocks of defensive companies like Food Processors are ~10% overpriced (see Column J in the Table). However, operating earnings relative to enterprise value (Column K in the Table) are still within the normal range. Valuation shouldn’t pose a problem for the long-term investor who picks stocks of quality companies and practices dollar-cost averaging.
This week’s blog refreshes our previous blog on the same subject (see Week 161), removing two companies that carry a poor credit rating and one that was bought out by another company on the list. Those 3 losses have been replaced by 4 new companies to the list: Archer-Daniels-Midland (ADM), which is involved in food production and the distribution of food commodities but also does some food processing; Seaboard (SEB), which is involved in hog production and pork processing; Ingredion (INGR), formerly known as Corn Products International; and Unilever plc (UL).
Bottom Line: You need to pay attention to Food Processors when planning for retirement. Foods are “essential goods” that have inelastic prices. In other words, if raw commodities (wheat, rice, soybeans, corn, pork bellies, chicken wings, packaged beef, etc.) rise in cost, the company passes those costs on to the consumer without fear that sales will drop. The market for food is not saturated, as many investors think. Instead, it grows reliably: Every year, ~10 million people in East Asia move up from poverty and can finally afford an adequate protein intake (60+ grams a day). Another benefit is that the value chain for food depends on the weather cycle as much as the economic cycle. By owning stock in food companies, you are holding, in part, a non-correlated asset-, i.e., one that is not tied closely to the economic cycle. Such assets tend to be relatively unaffected by recessions.
Risk Rating: 4
Full Disclosure: I own shares of HRL, GIS, MKC, PEP, and KO.
NOTE: red highlights in the Table denote underperformance relative to our key benchmark, the Vanguard Balanced Index Fund (VBINX); metrics in the Table are current as of the Sunday of publication.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
There are 17 Food Processors in the Barron’s 500 List but two are missing from the Table because their company’s bonds are “junk-rated” (S&P bond rating below BBB-). Six of the 15 are Dividend Achievers (see Column P in the Table), and 3 more Dividend Achievers have been added that don’t have revenues high enough to be included in the Barron’s 500 List. We’ve also included the biggest Food Processor on the planet: Nestle (NSRGY), based in Switzerland. We’ve also included two additional international companies: Unilever plc (UL) and Danone (DANOY). You’ll note that 9 of these 21 companies were highlighted in Week 191’s list of 14 “Key Food and Agriculture Companies.” That list focused on the most valued players along the entire food chain. This week’s list drills down on the food processing sector, i.e., companies take over after crops and meat animals leave the farm.
To evaluate the risk of owning stocks in any of the 21 companies listed in the Table, look at 4 metrics: losses during the 18-month Lehman Panic (Column D in the Table); 5-yr Beta (Column I); S&P bond rating (Column N); and the S&P stock rating (Column O), where the lower letter indicates risk, and H is high, M is medium, L is low. Be aware that stocks of defensive companies like Food Processors are ~10% overpriced (see Column J in the Table). However, operating earnings relative to enterprise value (Column K in the Table) are still within the normal range. Valuation shouldn’t pose a problem for the long-term investor who picks stocks of quality companies and practices dollar-cost averaging.
This week’s blog refreshes our previous blog on the same subject (see Week 161), removing two companies that carry a poor credit rating and one that was bought out by another company on the list. Those 3 losses have been replaced by 4 new companies to the list: Archer-Daniels-Midland (ADM), which is involved in food production and the distribution of food commodities but also does some food processing; Seaboard (SEB), which is involved in hog production and pork processing; Ingredion (INGR), formerly known as Corn Products International; and Unilever plc (UL).
Bottom Line: You need to pay attention to Food Processors when planning for retirement. Foods are “essential goods” that have inelastic prices. In other words, if raw commodities (wheat, rice, soybeans, corn, pork bellies, chicken wings, packaged beef, etc.) rise in cost, the company passes those costs on to the consumer without fear that sales will drop. The market for food is not saturated, as many investors think. Instead, it grows reliably: Every year, ~10 million people in East Asia move up from poverty and can finally afford an adequate protein intake (60+ grams a day). Another benefit is that the value chain for food depends on the weather cycle as much as the economic cycle. By owning stock in food companies, you are holding, in part, a non-correlated asset-, i.e., one that is not tied closely to the economic cycle. Such assets tend to be relatively unaffected by recessions.
Risk Rating: 4
Full Disclosure: I own shares of HRL, GIS, MKC, PEP, and KO.
NOTE: red highlights in the Table denote underperformance relative to our key benchmark, the Vanguard Balanced Index Fund (VBINX); metrics in the Table are current as of the Sunday of publication.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, November 30
Week 178 - Agricultural Cooperatives, Part B
Situation: (This is the second blog in a two-part series.) Agricultural Cooperatives represent a tried and-true-method for maximizing farm productivity. But they don’t do much for the bottom line of anyone other than their farmer-owners, and the companies the co-ops do business with (the focus of our blog for this week). Production Agriculture is at the mercy of the weather. When it’s good, crop prices fall; when its bad, crop prices rise. That’s a roller-coaster ride for farmers but investors seek out asset classes that don’t track GDP, and for the obvious reason (which is to reduce the volatility of their portfolios). The companies that supply farmers (and buy their grain & cattle) are certainly in that category.
For last week’s and this week’s blogs, we are studying a 14-county section of Central Nebraska to see which public companies co-locate with farmer’s cooperatives. In last week’s blog (Week 177), we analyzed the 7 largest Agricultural Cooperatives in that reference area. For this “pure-Ag” region of the country, we’re not surprised to find that the operations of public companies are clustered around 6 cities, which are all situated near the main source of water for the region, the Platte River. Those cities are: Columbus, Grand Island, Hastings, Kearney, Lexington, and North Platte. We found 21 public companies that service farmers and ranchers in that reference area. Table A shows the juxtapositions of 7 cooperatives and 21 public companies, county by county. In last week’s Table A, those companies were denoted only by their stock tickers because we wanted to wait until this week to focus on financial activities and investment metrics (see this week’s featured Table B). For reference, we’ve included Table A from last week’s blog. You’ll need to work back and forth between these two Tables, since there’s a lot of material to consider.
All 3 major seed producers are represented: Monsanto (MON), Syngenta AG (SYT), and DuPont-Pioneer (DD), as are the 3 largest farm-equipment manufacturers: Case-International Harvester (CNHI) which manufactures combines in Grand Island; John Deere (DE) which has sales & service outlets in all 14 counties, and Caterpillar (CAT) which has sales & service outlets in Grand Island and North Platte. The Andersons (ANDE) has a large grain storage and marketing facility in Kearney. Other agri-business companies include CF Industries (CF) which produces fertilizers, and Flowserve (FLS) which manufactures irrigation pumps. Archer-Daniels-Midland (ADM) is the largest company in the farm products industry and it operates an ethanol plant in Columbus. Green Plains (GPRE) operates ethanol plants in Hall and Merrick counties. Fastenal (FAST) has sites for manufacturing building components throughout the area. Cummins (CMI) manufactures and services the diesel engines that are the typical power source for center-pivot irrigation systems. Raven (RAVN) manufactures GPS guidance and assisted steering systems for tractors. Tractor Supply (TSCO) has outlets throughout the area. Both of the major center-pivot irrigation companies have plants there as well: Valmont Industries (VMI) and Lindsay (LNN). Tyson Foods (TSN) and JBS South America each have a large meat-packing plant here. NOTE: In 2007, JBS S.A. (JBSAY) acquired Swift & Company (based in Greeley, CO). The US subsidiary of JBS S.A. is Pilgrim’s Pride (PPC), based at the former Swift & Company headquarters in Greeley.
For the most part, farmers in the area buy their building materials, hardware and other construction supplies from local privately-owned companies, so Big-Box discount stores are underrepresented. Home Depot has one store (in Grand Island) but there isn’t a Lowe’s in our reference area (there’s one in Lincoln, NE). Ace Hardware has 5 stores, with one in Kearney, one in Hastings, and 3 around Grand Island. Wal-Mart Stores (WMT) are found in each of the 6 major cities, and Grand Island has two. Looking again at Table A to see where cooperatives and public companies congregate (Column AK), activity focuses on 3 cities that are within 40 miles of each other, those being Kearney, Hastings and Grand Island, also known as the “Tri-City Area” (Est. population 150,000).
To the uninitiated, it can seem that the production of agricultural commodities would differ little from the production of other commodities, like oil or iron ore. Our first guess would be that facilities can only be expanded slowly and at great cost. Following the laws of supply and demand, one would estimate that technological advances will occur and expansion costs will be met only when supplies are insufficient to meet demand. The resulting bounty is initially profitable but then overproduction turns that bounty into a glut. Prices for those now (too) abundant commodities will fall, and fall far enough to match demand. Agricultural commodities, however, have two advantages over other commodities: 1) Governments cannot remain in power if food is scarce; 2) food production doesn’t depend on the economic cycle (it depends on the weather). Those two facts give investors an advantage. They know that famines won’t be tolerated, and they can hedge their bets on the economic cycle by investing in the companies that sustain Production Agriculture. And, it won’t be long before they’ll also be able to invest in the agricultural cooperatives that are at the heart of Production Agriculture.
Bottom Line: As shown in Table B, your options for investing in Production Agriculture (as practiced in Central Nebraska) come down to 21 publicly-traded common stocks and one preferred stock (CHSCP) which is issued by CHS Inc., the largest agricultural cooperative in the US. For the most part, these companies are not in the business of processing food for sale in grocery stores, although there are two meat-packing plants in our 14-county reference area. Approximately 40% of grain produced there is destined for one of 9 plants in the area that make motor fuels (soydiesel or ethanol), with animal feed being a major byproduct of those plants.
Risk Rating: 7
Full Disclosure: I dollar-average into WMT and MON, and also own shares of CF, CMI, FLS, DE, and DD.
Note: All of the metrics in our Tables are current as of the Sunday of publication.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
For last week’s and this week’s blogs, we are studying a 14-county section of Central Nebraska to see which public companies co-locate with farmer’s cooperatives. In last week’s blog (Week 177), we analyzed the 7 largest Agricultural Cooperatives in that reference area. For this “pure-Ag” region of the country, we’re not surprised to find that the operations of public companies are clustered around 6 cities, which are all situated near the main source of water for the region, the Platte River. Those cities are: Columbus, Grand Island, Hastings, Kearney, Lexington, and North Platte. We found 21 public companies that service farmers and ranchers in that reference area. Table A shows the juxtapositions of 7 cooperatives and 21 public companies, county by county. In last week’s Table A, those companies were denoted only by their stock tickers because we wanted to wait until this week to focus on financial activities and investment metrics (see this week’s featured Table B). For reference, we’ve included Table A from last week’s blog. You’ll need to work back and forth between these two Tables, since there’s a lot of material to consider.
All 3 major seed producers are represented: Monsanto (MON), Syngenta AG (SYT), and DuPont-Pioneer (DD), as are the 3 largest farm-equipment manufacturers: Case-International Harvester (CNHI) which manufactures combines in Grand Island; John Deere (DE) which has sales & service outlets in all 14 counties, and Caterpillar (CAT) which has sales & service outlets in Grand Island and North Platte. The Andersons (ANDE) has a large grain storage and marketing facility in Kearney. Other agri-business companies include CF Industries (CF) which produces fertilizers, and Flowserve (FLS) which manufactures irrigation pumps. Archer-Daniels-Midland (ADM) is the largest company in the farm products industry and it operates an ethanol plant in Columbus. Green Plains (GPRE) operates ethanol plants in Hall and Merrick counties. Fastenal (FAST) has sites for manufacturing building components throughout the area. Cummins (CMI) manufactures and services the diesel engines that are the typical power source for center-pivot irrigation systems. Raven (RAVN) manufactures GPS guidance and assisted steering systems for tractors. Tractor Supply (TSCO) has outlets throughout the area. Both of the major center-pivot irrigation companies have plants there as well: Valmont Industries (VMI) and Lindsay (LNN). Tyson Foods (TSN) and JBS South America each have a large meat-packing plant here. NOTE: In 2007, JBS S.A. (JBSAY) acquired Swift & Company (based in Greeley, CO). The US subsidiary of JBS S.A. is Pilgrim’s Pride (PPC), based at the former Swift & Company headquarters in Greeley.
For the most part, farmers in the area buy their building materials, hardware and other construction supplies from local privately-owned companies, so Big-Box discount stores are underrepresented. Home Depot has one store (in Grand Island) but there isn’t a Lowe’s in our reference area (there’s one in Lincoln, NE). Ace Hardware has 5 stores, with one in Kearney, one in Hastings, and 3 around Grand Island. Wal-Mart Stores (WMT) are found in each of the 6 major cities, and Grand Island has two. Looking again at Table A to see where cooperatives and public companies congregate (Column AK), activity focuses on 3 cities that are within 40 miles of each other, those being Kearney, Hastings and Grand Island, also known as the “Tri-City Area” (Est. population 150,000).
To the uninitiated, it can seem that the production of agricultural commodities would differ little from the production of other commodities, like oil or iron ore. Our first guess would be that facilities can only be expanded slowly and at great cost. Following the laws of supply and demand, one would estimate that technological advances will occur and expansion costs will be met only when supplies are insufficient to meet demand. The resulting bounty is initially profitable but then overproduction turns that bounty into a glut. Prices for those now (too) abundant commodities will fall, and fall far enough to match demand. Agricultural commodities, however, have two advantages over other commodities: 1) Governments cannot remain in power if food is scarce; 2) food production doesn’t depend on the economic cycle (it depends on the weather). Those two facts give investors an advantage. They know that famines won’t be tolerated, and they can hedge their bets on the economic cycle by investing in the companies that sustain Production Agriculture. And, it won’t be long before they’ll also be able to invest in the agricultural cooperatives that are at the heart of Production Agriculture.
Bottom Line: As shown in Table B, your options for investing in Production Agriculture (as practiced in Central Nebraska) come down to 21 publicly-traded common stocks and one preferred stock (CHSCP) which is issued by CHS Inc., the largest agricultural cooperative in the US. For the most part, these companies are not in the business of processing food for sale in grocery stores, although there are two meat-packing plants in our 14-county reference area. Approximately 40% of grain produced there is destined for one of 9 plants in the area that make motor fuels (soydiesel or ethanol), with animal feed being a major byproduct of those plants.
Risk Rating: 7
Full Disclosure: I dollar-average into WMT and MON, and also own shares of CF, CMI, FLS, DE, and DD.
Note: All of the metrics in our Tables are current as of the Sunday of publication.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, November 23
Week 177 - Agricultural Cooperatives, Part A
Situation: Agriculture has become big business in the US, and investing in it requires an understanding of a collection of businesses that support AgriBusiness. These businesses are collectively grouped under the title of “Production Agriculture.” They supply the farmer and market his crops. To really understand Production Agriculture you need to understand farmer’s cooperatives. Most farmers band together in local or regional cooperatives, designed to meet their need for supplies (fuel, tires, feed, seed, crop protectants, fertilizer and equipment) and provide a place to deliver their crops. Nationwide, this $3 Trillion cooperative industry is almost entirely funded by member-owners. However, some of the larger regional cooperatives are finding that they need to issue stocks or bonds to finance opportunities for growth.
What this means for investors is that investing in Production Agriculture requires paying attention to companies that sell to farmer’s cooperatives. You’ll need to know which companies do business in close association with the farmer’s cooperatives. For example, seed companies pursue a dual path. One group of salesmen will market to “seed advisors” who work with individual farmers but a larger group will market to farmer’s cooperatives. It is obviously important to place seed production plants near cooperatives.
According to the US Department of Agriculture, there are ~2300 agricultural cooperatives in the US. In 2013, those had record sales of $246B and record net income (before taxes) of $6.2B. A third of those cooperatives had sales under $5M but 33 had sales over a billion dollars. Earnings are either retained by the Cooperative for reinvestment or returned to member-owners.
The largest agricultural cooperative is CHS, in St. Paul, MN. CHS issued a convertible preferred stock (CHSCP) on March 24, 2003, and a second series (CHSCM) on September 16, 2014. While that route to capitalization brings CHS under regulation by the Securities and Exchange Commission (SEC), it allows CHS to expand into international markets. The growing need for capital simply could not be met by a partnership-style corporation. Over time, most of the largest regional cooperatives will have to go to Wall Street for capital, if they want to grow their brands globally. Those stocks and bonds will be attractive to investors for the simple reason that weather patterns (and growth of the middle class in Asia), govern the profit of farmers cooperatives, not economic patterns. Every investor has to take an interest in such non-correlated assets. Why? Because over time those types of assets will reduce the volatility of her portfolio (Beta). Think of it as insurance against stock market crashes.
This week’s blog will introduce you to farmers' cooperatives here in the Platte River valley of Central Nebraska where I live. We’ll take a close look at AgriBusiness in 14 counties (see Table A). Those counties had a population of 285,282 in 2011, which translates into 26 people per square mile. Ah, yup, that’s right--when you do the math, it means that there are 25 acres per person. And for readers who live in cities, that probably sounds like there are a lot of lonely places. There are also 6 cities with enough people in the urban core (10 to 50 thousand) to be classified as a micropolitan statistical area (microSA): Columbus, Grand Island, Hastings, Kearney, Lexington, and North Platte. The largest microSA is Grand Island, with a population of 73,551, and the smallest is Lexington microSA. There is scheduled airline service at Kearney, Grand Island, and North Platte. The largest college is the University of Nebraska at Kearney, with 7100 students. The 14-county area straddles US highway 30 for 276 miles along the Platte River in the east-west direction, with the halfway point east of Lexington. US highway 281 spans the greatest north-south dimension for 72 miles, with the halfway point at Grand Island.
Seven of “The 100 Largest Agriculture Cooperatives” have operations in that 14 county area (see Table A):
1. CHS Inc., based in St. Paul, MN, with revenues of $37B in 2011 (including branded fuels). CHS is a Fortune 100 Company with almost ~$90B in assets. It owns and operates two oil refineries. Those support more than 1400 CENEX service stations in 19 states, including stations in all 14 of our reference counties (see Column N in Table A). CENEX co-brands with Cabela’s to offer a VISA card with a rewards program. For every $100 spent at a CENEX station (or Cabela’s) the cardholder is entitled to $2 off on a her next purchase of outdoor equipment at Cabela’s. CHS mainly produces food ingredients from US soybeans for sale worldwide. CHS food brands are marketed by Ventura Foods and include Dean’s Dips, Marie’s salad dressings and dips, and LouAna peanut oil.
2. Land O’Lakes Inc., based in St. Paul, MN, with revenues of $13B in 2011. Dairy foods are marketed under the Land O Lakes, Alpine Lace, and Kozy Shack brands. Animal feeds are marketed under the Purina Animal Nutrition (formerly Ralston Purina) and Land O’ Lakes Feed brands. Seeds, and crop protection products, are marketed under the WinField brand. NOTE: CHS is partnering with WinField to operate 6 “CHS, WinField Seed and Agronomy Centers” in Nebraska; the first store opened this summer in Minden.
3. Ag Processing Inc. (AGP), the world’s largest soybean processing cooperative, is based in Omaha, NE, and had revenues of $4.4B in 2011. Branded products include SoyGold (biodiesel) and AminoPlus (a “bypass protein” that cannot be degraded in a cow’s rumen). AGP’s Nebraska plant is located in Hastings. AGP also partners with Masterfeeds, the second-largest animal feed company in Canada.
4. The recently merged Central Valley Ag and United Farmers cooperatives (together they’re now called CVA) is based in York, NE, and had consolidated revenues of $1.0B in 2011.
5. Aurora Cooperative Elevator Company Inc., based in Aurora, NE, had revenues of $0.9B in 2011. It is the dominant cooperative in our reference area (see Column I in Table A).
6. Cooperative Producers Inc. (CPI), based in Hastings, NE, with revenues of $0.7B in 2011.
7. Ag Valley Co-op, based in North Platte, NE, with revenues of $0.4B in 2011.
This week’s Table, called Table A, lists activities by county. Cooperatives are ranked left to right by revenues. Then there is a gap (at Column L) followed by 22 columns arrayed under the ticker symbols for 22 companies (including CHS) that have operations in our 14-county reference area. Those companies will be the focus of next week’s blog, where Table B (which will accompany next week’s blog) will list those companies in descending order of their Finance Value. That order is the same as the left-to-right order of their appearance in this week’s Table A. Looking again at Table A, you’ll see another gap (at Column AI) followed by locations of the 6 ethanol plants that aren’t operated by either Archer-Daniels-Midland (ADM in Column T of Table A) or Green Plains (GPRE in Column AF of Table A), and locations of the 5 Cargill railheads (see Column AK in Table A). Cargill is a large private company based in Minneapolis, MN, with worldwide food logistics and meat-packing operations.
Bottom Line: This 14-county area in the center of Nebraska is a hot zone of agricultural activity. More than half the profits go to farmer’s cooperatives. Wall Street banks have no interest in those, aside from the largest one, CHS, which issues preferred stocks listed on public exchanges (CHSCP, CHSCM). More cooperatives will offer stocks and bonds if they want to have the capital needed to market their products throughout Asia. People saving for retirement need to pay attention to these developments because the fate of production agriculture stocks and bonds will depend on weather and growth of the middle class in Asia, not global economic patterns. In the meantime, investors can pick stocks from companies that work hand-in-glove with farmer’s cooperatives. You’ll find 20 of those in Table B, which accompanies our blog for next week: Agricultural Cooperatives, Part B. That blog will also include Table A, for ready reference.
Risk Rating: 7
Full Disclosure: I dollar-average into WMT and MON, and also own shares of CF, FLS, CMI, DE, and DD.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
What this means for investors is that investing in Production Agriculture requires paying attention to companies that sell to farmer’s cooperatives. You’ll need to know which companies do business in close association with the farmer’s cooperatives. For example, seed companies pursue a dual path. One group of salesmen will market to “seed advisors” who work with individual farmers but a larger group will market to farmer’s cooperatives. It is obviously important to place seed production plants near cooperatives.
According to the US Department of Agriculture, there are ~2300 agricultural cooperatives in the US. In 2013, those had record sales of $246B and record net income (before taxes) of $6.2B. A third of those cooperatives had sales under $5M but 33 had sales over a billion dollars. Earnings are either retained by the Cooperative for reinvestment or returned to member-owners.
The largest agricultural cooperative is CHS, in St. Paul, MN. CHS issued a convertible preferred stock (CHSCP) on March 24, 2003, and a second series (CHSCM) on September 16, 2014. While that route to capitalization brings CHS under regulation by the Securities and Exchange Commission (SEC), it allows CHS to expand into international markets. The growing need for capital simply could not be met by a partnership-style corporation. Over time, most of the largest regional cooperatives will have to go to Wall Street for capital, if they want to grow their brands globally. Those stocks and bonds will be attractive to investors for the simple reason that weather patterns (and growth of the middle class in Asia), govern the profit of farmers cooperatives, not economic patterns. Every investor has to take an interest in such non-correlated assets. Why? Because over time those types of assets will reduce the volatility of her portfolio (Beta). Think of it as insurance against stock market crashes.
This week’s blog will introduce you to farmers' cooperatives here in the Platte River valley of Central Nebraska where I live. We’ll take a close look at AgriBusiness in 14 counties (see Table A). Those counties had a population of 285,282 in 2011, which translates into 26 people per square mile. Ah, yup, that’s right--when you do the math, it means that there are 25 acres per person. And for readers who live in cities, that probably sounds like there are a lot of lonely places. There are also 6 cities with enough people in the urban core (10 to 50 thousand) to be classified as a micropolitan statistical area (microSA): Columbus, Grand Island, Hastings, Kearney, Lexington, and North Platte. The largest microSA is Grand Island, with a population of 73,551, and the smallest is Lexington microSA. There is scheduled airline service at Kearney, Grand Island, and North Platte. The largest college is the University of Nebraska at Kearney, with 7100 students. The 14-county area straddles US highway 30 for 276 miles along the Platte River in the east-west direction, with the halfway point east of Lexington. US highway 281 spans the greatest north-south dimension for 72 miles, with the halfway point at Grand Island.
Seven of “The 100 Largest Agriculture Cooperatives” have operations in that 14 county area (see Table A):
1. CHS Inc., based in St. Paul, MN, with revenues of $37B in 2011 (including branded fuels). CHS is a Fortune 100 Company with almost ~$90B in assets. It owns and operates two oil refineries. Those support more than 1400 CENEX service stations in 19 states, including stations in all 14 of our reference counties (see Column N in Table A). CENEX co-brands with Cabela’s to offer a VISA card with a rewards program. For every $100 spent at a CENEX station (or Cabela’s) the cardholder is entitled to $2 off on a her next purchase of outdoor equipment at Cabela’s. CHS mainly produces food ingredients from US soybeans for sale worldwide. CHS food brands are marketed by Ventura Foods and include Dean’s Dips, Marie’s salad dressings and dips, and LouAna peanut oil.
2. Land O’Lakes Inc., based in St. Paul, MN, with revenues of $13B in 2011. Dairy foods are marketed under the Land O Lakes, Alpine Lace, and Kozy Shack brands. Animal feeds are marketed under the Purina Animal Nutrition (formerly Ralston Purina) and Land O’ Lakes Feed brands. Seeds, and crop protection products, are marketed under the WinField brand. NOTE: CHS is partnering with WinField to operate 6 “CHS, WinField Seed and Agronomy Centers” in Nebraska; the first store opened this summer in Minden.
3. Ag Processing Inc. (AGP), the world’s largest soybean processing cooperative, is based in Omaha, NE, and had revenues of $4.4B in 2011. Branded products include SoyGold (biodiesel) and AminoPlus (a “bypass protein” that cannot be degraded in a cow’s rumen). AGP’s Nebraska plant is located in Hastings. AGP also partners with Masterfeeds, the second-largest animal feed company in Canada.
4. The recently merged Central Valley Ag and United Farmers cooperatives (together they’re now called CVA) is based in York, NE, and had consolidated revenues of $1.0B in 2011.
5. Aurora Cooperative Elevator Company Inc., based in Aurora, NE, had revenues of $0.9B in 2011. It is the dominant cooperative in our reference area (see Column I in Table A).
6. Cooperative Producers Inc. (CPI), based in Hastings, NE, with revenues of $0.7B in 2011.
7. Ag Valley Co-op, based in North Platte, NE, with revenues of $0.4B in 2011.
This week’s Table, called Table A, lists activities by county. Cooperatives are ranked left to right by revenues. Then there is a gap (at Column L) followed by 22 columns arrayed under the ticker symbols for 22 companies (including CHS) that have operations in our 14-county reference area. Those companies will be the focus of next week’s blog, where Table B (which will accompany next week’s blog) will list those companies in descending order of their Finance Value. That order is the same as the left-to-right order of their appearance in this week’s Table A. Looking again at Table A, you’ll see another gap (at Column AI) followed by locations of the 6 ethanol plants that aren’t operated by either Archer-Daniels-Midland (ADM in Column T of Table A) or Green Plains (GPRE in Column AF of Table A), and locations of the 5 Cargill railheads (see Column AK in Table A). Cargill is a large private company based in Minneapolis, MN, with worldwide food logistics and meat-packing operations.
Bottom Line: This 14-county area in the center of Nebraska is a hot zone of agricultural activity. More than half the profits go to farmer’s cooperatives. Wall Street banks have no interest in those, aside from the largest one, CHS, which issues preferred stocks listed on public exchanges (CHSCP, CHSCM). More cooperatives will offer stocks and bonds if they want to have the capital needed to market their products throughout Asia. People saving for retirement need to pay attention to these developments because the fate of production agriculture stocks and bonds will depend on weather and growth of the middle class in Asia, not global economic patterns. In the meantime, investors can pick stocks from companies that work hand-in-glove with farmer’s cooperatives. You’ll find 20 of those in Table B, which accompanies our blog for next week: Agricultural Cooperatives, Part B. That blog will also include Table A, for ready reference.
Risk Rating: 7
Full Disclosure: I dollar-average into WMT and MON, and also own shares of CF, FLS, CMI, DE, and DD.
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