“The power of population is indefinitely greater than the power in the earth to produce subsistence for man”. – Thomas Malthus
By 2050 the world’s population will hit 9 billion. This statistic has been floating around for a while but it’s just as powerful as ever. Think of the Arab Spring where rising food prices was a driver. The agricultural sector is still scrambling to catch up with demand.
Randy Bateman recently wrote about the biggest bottleneck in food production: the availability of land. Even in America, a country that prides itself on great expanses of land, agricultural productivity has a ceiling. This means there are (and have been) great gains in agribusiness. While it’s going to be difficult for an investor to put money directly into land unless you’re George Soros, there are other ways to hit ‘pay dirt’.
Words From the Pros
In a commentary by Randy Bateman, President of Huntington Fund, he writes: “With only 14 percent of the world’s landmass considered fertile, and that shrinking at a significant pace, there’s a realization that increased farm production is essential to satisfy the increasing demand for food products.”
In reference to the rapidly growing global population, it’s estimated that at the current level of productivity 1.2 acres of farmland per person is required for a minimum level of nutrition. The planet currently has a ratio 1.5 acres per person. This is good, but consider that only 50 years ago, the 3 billion population constituted a ratio of 12 acres of farmland per capita.
To that end, simply supply and demand has benefited farmland immensely. “In the U.S., farm income increased 28% in each of 2010 and 2011. This was in a period where general consumer income rose 4.3% in 2011 (per capita personal income), and 2.8% in 2010… This income flow is further enhanced by the rapid growth of shale oil production through fracking procedures in many of the rural farmland regions. Therefore, it’s expected that farmers can continue to expand farm acreage and equipment purchases as in the past.”
How to invest: It’s difficult for the average investor to directly invest in diversified farmland, but there are other avenues. According to Bateman, “Farm and timber land parcels are now being packaged like Real Estate Investment Trusts (REIT’s) and Exchange-Traded Funds (ETF’s), to be delivered to smaller investors. Furthermore, in addition to land, investments in companies that produce agricultural equipment, fertilizers, irrigation equipment, water flow controls, bulk transportation, pesticides, seeds, and managed feedlots are finding increasing investor interest.”
Business Section: Investing Ideas
Demand for agriculture-related products continues to rise globally. Fertilizers (Nitrogen, Phosphorous, and Potassium) are a short-term solution. I’ve picked out Terra Nitrogen (TNH), Potash (POT), and RenTech (RTK) as those who seek to gain from the corn belt though they rely heavily on natural gas prices. Monsanto (MON), a business founded on agricultural productivity, has a lot of skeptics but continues to perform well in the markets.
Other peripherals involved with rising food production may see continued upside. Equipment manufacturer Arts-Way Manufacturing Co. Inc (ARTW) has grown it’s backlog over 40%. Low-cost retailers like Dollar General Corp. (DG) seek to benefit from rural demand, where most branches are located. It boasts strong same store sales and expects 2012 sales to increase 8 to 9 percent over 2011. Family Dollar Stores, Inc. (FDO) and Dollar Tree, Inc. (DLTR), with cash flows exceeding debt, are also in the mix. Dollar Tree popped 4.52% yesterday.
Companies that fill the “yield gap” to push productivity are already highly valued. Nevertheless social and environmental concerns may put pressure on some of the stocks below.
1. Terra Nitrogen Company, L.P. (TNH, Earnings, Analysts, Financials): Produces and distributes nitrogen fertilizer products to agricultural and industrial customers. Market cap at $3.99B, most recent closing price at $215.50.
2. Potash Corp. of Saskatchewan, Inc. (POT, Earnings, Analysts, Financials): Produces and sells fertilizers and related industrial and feed products primarily in the United States and Canada. Market cap at $37.88B, most recent closing price at $44.08.
3. Rentech, Inc. (RTK, Earnings, Analysts, Financials): Provides alternative and clean energy solutions; and manufactures and sells nitrogen fertilizer products. Market cap at $580.46M, most recent closing price at $2.64.
6. Dollar General Corporation (DG, Earnings, Analysts, Financials): Operates as a discount retailer of general merchandise in the southern, southwestern, midwestern, and eastern United States. Market cap at $17.5B, most recent closing price at $52.45.
7. Family Dollar Stores Inc. (FDO, Earnings, Analysts, Financials): Operates a chain of self-service retail discount stores primarily for low and middle income consumers in the United States. Market cap at $7.52B, most recent closing price at $64.35.
Written by Freda Ding. Huntington Fund commentary sourced from here.
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- Terra Nitrogen Company, L.P. (TNH, Chart, Download SEC Filings)
- Potash Corp. of Saskatchewan, Inc. (POT, Chart, Download SEC Filings)
- Rentech, Inc. (RTK, Chart, Download SEC Filings)
- Art’s-Way Manufacturing Co., Inc. (ARTW, Chart, Download SEC Filings)
- Dollar Tree, Inc. (DLTR, Chart, Download SEC Filings)
- Dollar General Corporation (DG, Chart, Download SEC Filings)
- Family Dollar Stores Inc. (FDO, Chart, Download SEC Filings)
- Monsanto Co. (MON, Chart, Download SEC Filings)
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