I’m sure you’ve heard in the news about the continuing increase in the price of corn, wheat and soybeans as the extreme heat and summer drought plagues Midwest farmers and their crops. Commodities in general are a theme I’ve been behind for some time now and I don’t think it’s going to end anytime soon. My latest research was to put together a group of companies to invest in to capture rising food prices and the growth of the agricultural industry.
Let’s take a look at why exactly we’re having this streak of blistering hot days this summer. Believe it or not, there is a scientific answer – sunspots! What is a sunspot, you ask? Find out here.
There’s data going back to the 1700’s that shows sunspot occurrences rise and fall in 11 year cycles. These sunspots lead to a decrease in cosmic rays from the sun, which leads to less cloud formation, and thus less rain and higher temperatures. You can read about this research from Prof. Henrik Svensmark here.
The chart below shows the number of monthly sunspots along with the price of wheat. The peaks and valleys of the 11 year cycles tend to precede the tops and bottoms in the price of grains by about 2 years so I moved the number of sunspots forward 2 years to better align the graphs. The data shows we’re only about half way to the typical number of sunspots that occur. This means we’re likely to experience hot summers and higher grain prices for the next 2 years!
Now to my list of companies that I think will benefit from higher grain prices.
Farmland
Adecoagro (AGRO) – Adecoagro is a holding company based in Luxembourg that owns farms in Argentina, Brazil and Uruguay. They just went public in early 2011 and the stock is down from its IPO. Their farms consist of grains, cattle, dairy and sugar/ethanol production. I think their greatest asset is actually the farmland itself, which was valued at approximately $900 million in September, 2011. The company’s Market Cap is only $1.2 billion! I’ve done quite a bit of research on the company, its operations and growth plans and I think this is a great value buy. I’m also attracted to this company for two other reasons: 1) South American’s are serious about their naturally grown food and Brazil’s growth of the middle class has been driving big time growth, and 2) The destroyed crops in the US are hurting supplies and lifting prices. But, without any crops to harvest in the US, it’s the farmers in other nations that will benefit the most from higher crop prices.
Machinery
Titan Industries (TWI) – Titan primarily makes tires – big tires! They make tires for machinery and business from agricultural sales (tractors) is booming right now. They missed on earnings this past quarter and sales growth was only 13.6% (that was sarcastic). With a trailing P/E under 9, I’ll take double digit sales growth any day. There was also an interesting article in the WSJ last week talking about their Kevlar reinforced tires which are in high demand from farmers as the new genetically enhanced corn stalks are puncturing the standard tires.
If you’re looking for a high quality company, you can’t go wrong with John Deere (DE) and its 2.4% yield.
Irrigation
If hot, dry summers do persist over the next few years, I would think farmers would need a way to water their crops. Lindsay Corp (LNN), maker of irrigation and infrastructure systems, is the most direct way to invest for this. Valmont Industries (VMI) and Flowserve (FLS) are also related companies. 39% of Valmont’s 2011 operating income came from irrigation equipment and Flowserve is one the biggest makers of valves and pumps.
Fertilizer
The fertilizer makers have been one of the best ways to invest in agriculture the past few years. My favorite is Agrium (AGU). I think they’re well positioned and doing all the right things for growth. Other companies include Potash (POT) – one of the largest, most diversified fertilizer producers; CF Industries (CF) – a smaller, US based company with a focus on nitrogen based products; and Monsanto (MON) who makes bio-genetically engineered seeds and other related products.
As always, I think it’s best to make investments in pieces, rather than all at once. I’ve picked up a few of these companies and will most likely be adding more on major pullbacks. My favorite part about investing in agriculture is that even in a tough economy, people have to eat!