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
Sunday, November 30
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.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
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