Wednesday, October 12, 2011

Barron's Loves the Ag Companies: "Prepare for a Bountiful Harvest" (ADM; BG; MON; DE)

From Barron's:
Seed companies, crop producers and farm-equipment makers are poised to prosper, as food demand increases with population growth.

Following two years of healthy gains, farm-related stocks have yielded a bumper crop of losses. The S&P Global Agribusiness Index, which tracks shares of 24 of the world's largest agribusiness companies, has fallen more than 16% this year, while familiar names such as Archer Daniels Midland and Deere are trading at or near 52-week lows.

Investors down on the farm might want to reconsider. Agribusiness companies have been posting strong revenue and profit gains, and the long-term outlook is even brighter for industries involved in feeding a hungry and growing world. Besides, after a particularly punishing third quarter, the stocks are dirt cheap, and some, like Monsanto (ticker: MON) and Deere (DE), offer tempting dividend yields.

The bullish case for agriculture investments is based largely on demographics. According to the United Nations, the world's population is projected to rise to 9.1 billion by 2050, from 6.8 million in 2009. In addition to their expanding ranks, the planet's residents are becoming wealthier and more urban, two trends that are fueling growing demand for meat and feed crops, such as corn and soybeans.

The U.N.'s Food and Agriculture Organization estimates that agricultural production will need to increase by at least 70% worldwide between now and 2050 to meet the needs of more protein-hungry populations, particularly in the developing world. That means almost a billion more tons of annual cereal production and 200 million more tons of meat. In the emerging markets alone, the FAO sees annual investments of $83 billion in agricultural production and "downstream" services such as processing and storage, not to mention billions of dollars for seeds, fertilizer, farm equipment and irrigation to coax more production from the land. By 2050, the organization forecasts, the world will have only 5% more arable land than it did at the start of this decade.

Such numbers suggest immense long-term opportunities for a wide array of companies in the U.S. and abroad. "Getting better seeds, fertilizers, water pumps and farming equipment to where it's needed is what the private sector is well suited to accomplish," says Roy Steiner, deputy director of agricultural development at the Bill and Melinda Gates Foundation, a $36 billion humanitarian institution. "Smart companies can make a difference, and make a profit."

So, too, can smart investors, whether in agribusiness stocks and exchange-traded funds or commodities and farmland. For individual investors seeking broad exposure to the market, giant commodities processors such as Bunge (BG) and Archer Daniels (ADM) might be a good place to start. A major oilseed processor and commodities trader, Bunge hit a 52-week low of 54.03 last week, and is down 22% from an April high of 76.13. (Like most farm-related shares, the stock peaked at a much higher level in 2008, at 133.) Shares are trading for a discounted 8.3 times next year's expected earnings of $6.93 a share; 0.15 times estimated 2011 sales of $54.8 billion; and 0.7 times book value. Bunge is likely to benefit from rising demand, especially for sugar. Standard & Poor's has a 12-month price target of 81....MORE

...FARMLAND IS THE MOST DIRECT WAY to invest in feeding the world, but it is also the least liquid. And, after surging in value in recent years, it is among the most expensive. Analysts at Rabobank calculate that the value of productive farmland has increased at a rate between 20% and 70% in the past five years, depending on location, with gains driven by higher commodity prices, low interest rates and a scarcity of available land—some of which has been acquired by financial buyers such as pension funds. The bank sees no near-term correction but thinks prices could fall some in three to seven years, as production costs and interest rates rise.
Legendary investor Jim Rogers views farmland as a long-term investment but notes that it's cheaper outside the U.S. "Myanmar is opening up as we speak, and there will be enormous opportunities there," he says. Angola and Cameroon also offer "magnificent opportunities in farmland."
Fortunately, you don't have to go to Cameroon to find compelling agribusiness investments these days. There are plenty ripe for the picking on Wall Street.

...Up on the Farm

Agribusiness stocks and exchange-traded funds have been hammered this year, leaving many at tempting levels. Some, such as ADM and Deere, also pay nice dividends.

Recent YTD Market EPS EPS P/E

Price Change Val (mil) 2011E 2012E 2012E
BRF Brasil Foods /BRFS $18.348.6%$16$1.14$1.2414.8
Potash of Saskatchewan /POT 46.49-9.9403.734.4710.4
Deere /DE  66.57-19.8286.447.219.2
Archer Daniels Midland /ADM 25.91 -13.9183.95 3.10 8.4
Source: Thomson Reuters

Assets YTD  3-Yr.
ETF/Ticker Price Category (mil) Return Return
Market Vectors Agribusiness /MOO $44.94 Equities$4,811 -16.06%19.96%
PowerShares Global Agriculture /PAGG 26.53Equities110-17.0913.69
PowerShares DB Agriculture /DBA 30.10Commodities2,505-6.965.55
Sources: Morningstar; company reports

RICHARD THOMPSON, a Barron's research assistant, provided additional reporting