Food for thought
Bryan Borzykowski | April 11, 2011
Viswanathan knows, perhaps more than most, that when
he goes to the grocery store to buy his fruits and vegetables
over the next few months, his bill will steadily increase.
The associate portfolio manager with Calgary's Mawer
Investment Management has been keeping a close eye on
the agriculture and food production sectors, and has
seen futures for foods such as wheat and corn soar by
64% and 82%, respectively, in the past 12 months. That's
caused Canadian economists to estimate that food prices
in this country will jump between 5% and 7% by the end
of the year. Rising food costs is a scary proposition
for those with a family to feed, especially those already
struggling to make ends meet. Investors face a growing
grocery tab, too, but many plan also to make some cash
on the commodity sector's volatility. "It's never
good when you go to a grocery store and it costs more,"
says Viswanathan, "but investors should benefit
from food inflation."
of the best ways to capitalize on food inflation is
buying fertilizer stocks like Potash Corp. and Agrium,
or seed companies such as Monsanto. "They're the
obvious beneficiary," says Norman Raschkowan, chief
North American investment strategist at Mackenzie Investments.
As demand for food rises, farmers will have to increase
supply by planting more crops, and it's impossible to
yield more without fertilizer and seeds. "There's
no doubt that farmers will have to sell more of whatever
it is they are producing," says Brahm Spilfogel,
an RBC vice-president and senior portfolio manager of
food demand and supply have kept pace with each other,
growing at a compounded rate of about 1% a year. But
Spilfogel says if more people begin to eat the way North
Americans do, it'll likely begin to increase. "Technology
won't be able to keep up with the demand," he says,
and that means it'll become increasingly difficult to
squeeze higher yields from crops.
stock prices from fertilizer companies have benefited.
Calgary-based Agrium has seen its share price climb
by nearly 19% since this time last year, while Illinois-based
CF Industries' price has risen 33% year-over-year. The
reason for the stock's increase is simple: the more
demand for fertilizer, the more money the company will
make. "We could see significant increases in profitability,"
looking for a company to purchase, make sure it's in
an area of a sector that has limited competition and
requires large capital investments. "If anyone
could get into the seed business, everyone would make
them, and prices would go to zero," says Spilfogel.
That's why the portfolio manager stays away from food
processing and farm equipment companies. While these
sectors may also benefit from rising prices, the lower
barriers to entry make them less attractive buys. Also
look for fertilizer companies that have large reserves.
Potash Corp. has decades of resources, so they'll be
able to capitalize on increasing demand for years to
these companies aren't cheap -- valuations are between
15 to 20 times price-to-earnings. But Spilfogel expects
valuations to become more reasonable over the next decade,
as prices and pressure on food production increase.
"They'll have to grow into their earnings,"
he says. "But we think it'll happen."
fertilizer stocks are good for the long term, shorter-term
investors may be able to profit from rising rice prices.
Most food commodities have seen their prices skyrocket
over the past few months. Sugar futures have climbed
81% over the past year; soybeans have increased 41%,
and many others have seen similar spikes. Rice, however,
hasn't seen such drastic movements, increasing only
8%, to $13 per 100 pounds, over the past 12 months.
That could change soon. "Rice is one of the few
opportunities that's been mispriced to the downside,
so it has a lot of upside to go," says Shawn Hackett,
president of Hackett Financial Advisors in Boynton Beach,
other commodities have been damaged by poor weather
and politics -- droughts in Russia and a subsequent
ban on exports pushed wheat prices up -- rice crops
have been fairly unscathed. Asian governments have also
made a concerted effort to keep prices down by dumping
supply on the market. That's kept prices stable -- a
plus for emerging-market populations where rice is a
frequent meal -- but most farmers want to make money
on higher-cost crops, not spend cash producing cheap
grains. Ron Lawson, founder of Logic Advisors in Sonoma,
Calif., explains that farmers have the ability to plant
whatever crops they want in a given season. With corn
and wheat proving to be more lucrative these days, it's
likely many will skip growing rice this year. Hackett
expects American rice production to fall by 30%, and
that could have a devastating affect on supply. "If
you assume demand remains pretty consistent with a 10-year
average, we'll likely run out of U.S. rice," he
predicts prices will reach $20 or more per 100 pounds.
That could lead to riots in emerging markets, where
the grain is so important. Governments have to figure
out a way to keep prices in the $16 to $18 range, which
Hackett thinks is high enough for farmers to make money,
and low enough to keep people fed. Instead of the current
norm of hoarding, selling and depleting reserves when
prices are low, governments should sell into the market
when prices benefit everyone. "They can't let stocks
run thin when the price is cheap, because when it takes
off they won't have anything left," says Hackett.
in rice takes a little more savvy than buying a fertilizer
stock. There are almost no listed rice-producing companies,
so people can't play the equity market. It is possible
to get exposure to rice through agriculture-focused
exchange-traded funds, but there are no pure rice ETFs.
The Elements Agriculture Total Return product, for example,
has 2.1% of its holdings in rice, compared to 13.6%
in corn. The best way to buy the commodity is to sign
up to an online futures brokerage and trade rice futures
contracts. Hackett suggests buying shorter-term futures,
especially if prices increase as significantly as he
expects in the coming months. The longer-term premium
-- about $3 a contract -- isn't worth it, he adds.
should consider putting less than 50% of their portfolio
in fertilizer stocks or rice futures; good weather,
an increase in rice production or political intervention
could make this a bumpy ride in the short term. Ultimately,
though, long-term investments will grow. "The world
needs everything from fertilizers and seeds to chemicals
to meet demand," says Spilfogel. "All investors
will be able to benefit from this trend."
to take advantage of food's volatility? Here are some
investments to consider.
Corp. (TSX: POT)
The Saskatoon-based fertilizer company's stock price
soared after BHP Billiton tried to buy it last year,
but takeover or not, this is a good buy for investors.
Mawer's Vijay Viswanathan says it's one of four players
that control the market, which means it can set prices.
It also has deep reserves, so the company should be
in business for decades. It's trading in the 20-times
price-to-earnings range, but increasing fertilizer demand
makes it a solid long-term buy.
Brahm Spilfogel, an RBC portfolio manager, likes Calgary-based
Agrium for its diversified product line. While it distributes
potash, it also sells nitrogen and phosphate, and distributes
seeds among other products. "It has more exposure
to everything," Spilfogel says. All its offerings
should benefit from higher food prices, while its diversified
lineup makes it less volatile.
As demand for food rises, more seeds will have to be
planted to maintain supply. That's why Spilfogel likes
this St. Louis???based seed manufacturer. He points
out that the company sells seeds for a number of crops,
while its robust R&D division should be able to
produce better-yielding products down the road. It also
has scientific knowledge that would be difficult to
replicate. "I like that in a company," he
says. "I'm looking to add it."
Like fertilizer and seed companies, chemical businesses
stand to benefit from climbing food prices, too. This
Swiss company's main products are herbicides, but it
also sells seeds. Spilfogel points out that farmers
must kill bugs to grow crops, so the company should
benefit as farmers get more aggressive. Chemicals are
relatively cheap, too, so it's a cost farmers won't
have problems affording. The company's multiples are
similar to our other stock picks, but again, a likely
boost in profits will help the stock price long term.
Since there are no pure rice ETFs or rice companies
to invest in, buying rice futures is the best way to
gain access to the market. Investors have to sign up
to a futures brokerage, but once there, buying and selling
contracts is no different than trading equities. People
can access futures that have rollover dates from a month
up to a year. Longer contracts are more expensive --
extra months of storage often add a few dollars to the
price -- but less volatile.