Author Topic: "How to Play the Coming Spike in Food Demand" (Web Article)  (Read 1695 times)

Offline Morgan96

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"How to Play the Coming Spike in Food Demand" (Web Article)
« on: March 26, 2010, 08:03:01 PM »

I found this story  in Yahoo today.  My comments below the story.

How to Play the Coming Spike in Food Demand

Companies:Archer Daniels Midland CompanyFresh Del Monte Produce Inc.Mosaic Co.
Topics:Investing Ideas & Strategies
ByTim Melvin, Contributor , On Thursday March 25, 2010, 8:00 am EDT
Agriculture is one of those "it has to happen and everybody knows it" sectors. I view it as a lot like the infrastructure sector. The money will be spent here. It has to be. The world's population is continuing to grow. World population is growing at more than 1% a year. Advances in health care are extending the average life span, and birth and survival rates are rising globally. It is pretty simple math. More people need more food.

The other driver of food demand is the developing middle class in the emerging markets. We are seeing this develop now in the BRIC nations - Brazil, Russia, India and China. As lifestyles improve, people want more than just the basics of survival. They begin to desire and demand higher-quality products, and this is true of food as well. This is going to create demand for more than just the basic grains and proteins needed to sustain life. They want food that is healthier and tastes better. The development of a global middle class has slowed in the recent recession, but it will resume in the next decade. This bodes well for agriculture and food-processing companies.

The problem with the obvious is trade is that it is obvious. As Warren Buffett once famously pointed out, you pay a high price for a cheery consensus in the stock market. Look at one obvious group of beneficiaries of the agricultural demand. Fertilizer stocks are clearly going to benefit from the trend. Potash  NYSE" PRIMARY="NO"/> trades at 37 times earnings, and the stock has quadrupled in the past five years. Mosaic NYSE" PRIMARY="NO"/> trades at 64 times earnings and has risen in price more than fourfold in the past half decade. As a long-term value investor, I see nothing enticing about paying that valuation. I doubt I can even match the market by buying even the most promising companies at these levels.

It might be better to look at indirect plays on the global rise in demand for agriculture products. Keep in mind that during the gold rush, only some miners got rich. Everyone who sold the picks, shovels and supplies to the prospectors made a fortune. In the agriculture trade, the pick and shovel picks are probably the food processors. We all know the food has to be grown. That's why the direct beneficiaries such as fertilizer and seed companies trade at high valuation. However, once the grain is grown and the animals are raised, the raw material has to be processed.

The obvious pick here is Archers Daniel Midland NYSE" PRIMARY="NO"/>. The company is one of the largest grain processors in the world today. In addition to getting a boost from rising food demand, the company is going to benefit from the continuing and growing government mandates for the use of ethanol. The shares have been dampened by weak demand during the global recession, so the stock is not overvalued like the raw-materials companies.

However, the recession is showing signs of nearing in an end, especially in the emerging markets, and Archer Daniels Midland will benefit. The shares trade at 15 times earnings and about 1.5 times tangible book value, so it is not egregiously priced. However, this might be a stock where patience pays. In five of the past 10 years, the stock has traded at least temporarily below tangible book value, offering a better entry point for deep-value types. This occurred most recently in the steep selloff in 2008.

One food processor that is a lot closer to being cheap and safe enough to own is Fresh Del Monte  NYSE" PRIMARY="NO"/>. It produces and markets a variety of fresh and packaged fruit products globally. The company makes 54% of its sales outside the U.S., and it has exposure to the faster-growing markets in Asia and Latin America. Fresh Del Monte was one of the few companies to show revenue growth in the fourth quarter of 2009 as global demand increased. Earnings were up 23% on a year-over-year basis.

Fresh Del Monte is also taking steps to improve its balance sheet; it paid off $187 million of debt in the quarter. At just 9 times earnings and right around tangible book value, this stock is much more attractively priced than most of the agriculture-related companies I have researched.

During my career, I have seen that what is obvious to all is rarely a path to long-term profits in the stock market. It can perhaps provide short-term trading profits for the adept and astute trader, but that is not what I do. However, as with the infrastructure companies, I track stocks for selloffs due to market conditions, earnings misses or company-specific news. When the opportunity appears to get in front of potential boom sector at deep value prices, I will rush to take advantage of it.

Independent market research, commentary, analysis and news. Learn more.

Right then...
Setting aside this writer's superficial treatment of the causes of future food shortages (he manages to ignore soil fertility, water shortages, loss of topsoil, monoculture, etc.), looking at his astute picks for profitable investing, I'm reminded of the frequent disparaging (and deserved) comments made by Jack on the Podcast about financial advisors being shallow relationship salesmen.  It takes no skill at all to recommend Mosaic and Potash. None. They are standard blue-chips recommended by every full service broker in an off-the-rack Men's Warehouse suit.  ADM is not exactly an unknown company.  And a quick search on Google Finance of Fresh Del Monte shows that the stock is  62% owned by institutional investors (mutual funds, pension funds, etc.). A look at its five year stock price history shows that Fresh Del Monte positively cratered right along with the broader market in 2008 and 2009, and hasn't fully recovered since, much like the NYSE and the S&P.  Click on the link at the botom of the story ("learn more") and you'll be rewarded by the sight of Jim Cramer's  smiling oily mug.  The sad part is that some folks will actually follow these fools right off the cliff on the next market cratering. Bah!

Offline Steaker

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Re: "How to Play the Coming Spike in Food Demand" (Web Article)
« Reply #1 on: March 28, 2010, 12:02:48 AM »
Good analysis.  However I think the smart investor can still make money on food stocks.  But your right, these companies growth plans and their stock prices are unsustainable.  The truly rich man 10 years out will be the one who is self sufficent.  Worked in my back yard all day on my path to feeding myself without a grocery store.  Its a good feeling.

Offline chris

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Re: "How to Play the Coming Spike in Food Demand" (Web Article)
« Reply #2 on: March 28, 2010, 12:13:59 AM »
During my career, I have seen that what is obvious to all is rarely a path to long-term profits in the stock market.

What a tool.