So you Want to be Rich? Buy a Tractor!
Pierre is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Investment legend Jim Rogers is right on the money: the future is in farming. I agree. Not that I plan to go into farming myself (you have to get up at 5am every day, not my cup of tea). But I've looked into Jim Rogers' views -after all, anybody who has made a $300 million fortune in the stock market the way Rogers has, if he says anything I'm all ears- and the more I look, the more I like what I'm looking at.
Claiming that agriculture is the road to future riches seems at first a strange prediction. After all, farmer revenues have been at their historic low in the last 30 years. But while this commodities bull market that started in the early 2000s is still going strong, demand for agricultural products have been going through the roof and they will continue to rise this decade. Agricultural supply has hit rock bottom and the world desperately needs more farmers because we are running out of them worldwide. Until the supply comes on stream, the agricultural commodities bull market will not be over.
Listen to these numbers: the average farmer's age in the US is 58 years old, in Japan it's 66, in Australia it's 68, in Canada it's 54, the oldest in its recorded history. The same is true in Europe. For example in France, Europe's greatest farming country, the average age for a farmer is 55, also the oldest in France's recorded history. There are more young people studying literature in Europe and the US than agriculture. Not that literature isn't useful, but I mean, come on... On top of that, in 2013 economic conditions in the world will probably get worse, which means that there will not be much supply. Our politicians will therefore do what they do best: print more money to artificially raise demand, thereby fueling even more boom in the commodity sector.
Where to Invest?
Farmers are going to have a lot of money in their pockets in the years to come, therefore now would be a good time to buy tractor companies like Tractor Supply Company (NASDAQ: TSCO) whose stock is up 48.4% in the past 12 months (from $62 per share in october 2011 to $97 today). Tractor Supply Company is the largest retail farm and ranch store in the US, operating 1150 retail stores in 45 states. It is primary located in rural areas and and supplies the everyday products necessary to support its customers rural lifestyle: from welders to generators, animal care products, tractor parts, home maintenance, men and women clothing and footwear, and, yes, even gun safes. Even though the majority of customers are hobby farmers and ranchers, 10% of the company's customers classify themselves as full-time farmers and that percentage has been growing in the past couple of years, which reflects a new trend in the making. The company's book value has been constantly rising too on a yearly and quarterly basis since 2009. It is a company with solid fundamentals that is tapping into a promising future market.
The same goes for seed companies like S&W Seed Company (NASDAQ: SANW), whose stock has increased 84.9% in the past year (from $4.50 per share in Oct. 2011 to $8.32 today). S&W Seed Company is a leader in non-dormant alfalfa seed varieties focused on maximizing profit per acre, regardless of soil and water salinity. With the population expanding and arable land decreasing, the market for certified high yielding alfalfa seed varieties is poised for growth. The company expanded in 2011 and its total assets went from $15 million in 2011 to $22 million in 2012, without adding any new debt. Actually, its total liabilities reported in the last available 10Q show a significant and steady decrease in total liabilities from $5.1 million in Q3 2011, to $3.5 million in Q4 2011, to $2.1 million in Q1 2012, to $1.9 million in Q2 2012. Those improving numbers in the company's balance sheet allowed the stock to be added as a member of the Russell Microcap Index, starting from June 22 of this year and until July 2013. Since its inclusion, the stock rallied from $5.25 to $8.32 per share in less than 4 months. S&W Seed Company has built a solid reputation in its sector as a reliable company. It's an important competitive advantage.
Another great place to look are index funds, especially if you're the conservative type. Don't knock out index investing, remember that it outperforms active managers 75% of the time year after year! Of course, the Rogers International Commodity Index (NYSEMKT: RJI) and its twin brother the Rogers International Commodity Agriculture (NYSEMKT: RJA) are very good places to start. The former gained 23% while the latter appreciated 36.5% since june 2010, when QE2 was launched. Most of us are familiar with those two indexes, but a good idea doesn't turn bad just because many people know about it: it actually ages better. Like fine wine.
During the First World War there was a popular american folk song called « How ya gonna keep 'em on the farm after they've seen Paree ». The 20th century has seen a massive collapse of vocations in the agricultural and farming sectors all around the world. Generation after generation, in the last 50 years, young people were no longer rushing and lining up to become farmers and learn how to drive a tractor but rather to find a job in the financial sector instead and hopefully become the next Gordon Gekko (preferably without the jail episode at the end...) and drive Porsches and Lamborghinis. Those days are about to change, so you'd better get prepared and adjust yourself for what the world needs. Agricultural inventories are at an historic low, which has severely limited supply. There are more people and more needs for agricultural products, but less farmers: it's very unlikely that the commodities bull market will be over any time soon. Think about that.
Lamborghini and Porsche already have by the way, they are now focusing a lot more of their attention on building tractors than ever before since the 1950s. Let's not forget that Lamborghini actually started out as a tractor company in the forties before it switched to making luxury cars. They understand that the economy moves in cycles and that what was « unhip » yesterday will become « hip » tomorrow.
So now you know. Forget Hollywood, stay out of Wall Street and go study agriculture. Or if you're like me and have trouble with early morning wake up calls, start owning more agricultural commodity stocks. Ironically enough, your odds of driving a Ferrari will be higher by becoming a farmer or by investing on the promising future of the agricultural sector than by going to Business School or to the Actors Studio. The world changes very quickly, yesterday's certainties are today's doubts. Maybe in 30 years from now we will all be singing the new tune: « How ya gonna keep 'em in Paree after they've seen how much cash they can raise at the farm? »
PierreDV has no positions in the stocks mentioned above. The Motley Fool owns shares of Tractor Supply Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.