Profit From Long-Term Trends in Farming
Rupert is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Jim Rogers has been banging on about farmland investment recently and he has a point. Depressed crop prices and monetary outflows from emerging markets have depressed the values of both farmland and farm stocks, so where do the opportunities lie?
Relatively low-risk Brazil
Adecoagro (NYSE: AGRO) buys, develops, farms/operates, and occasionally sells farmland. Currently, the company owns 145,000 hectares spread across multiple farms in Argentina, Brazil, and Uruguay, yielding corn, soybeans, rice, wheat, sunflowers, and sugarcane. It also raises cattle for meat and dairy. However, a substantial proportion of this land is located in politically unstable Argentina.
That said, about 70% of Adecoagro's earnings for 2013 are likely to be generated in the more stable country of Brazil, where almost all of the company's crop is sugarcane, which is turned into Ethanol. Indeed, this could be a highly lucrative market for the company, as ethanol has 41% share of the Brazilian fuel market and its use is advocated by the government.
In addition, Adecoagro is ramping-up it ethanol production, recently opening its third crushing mill in Brazil and adding about 40% to the company's annual crush capacity. Management has stated that they want to add a further 4.3 million tons to crushing capacity by 2017, up from the current 7.2 million tons. Moreover, as the company farms sugar, it has some flexibility in what it can produce and sell based on the most profitable product. Still, much or Adecoagro's value lies in its land, which is worth around $8.40 per share, and this value is only going to rise as demand for farmland rises.
Of course there are risks in Adecoagro, the biggest of which is its convoluted management structure and operations in Argentina. Adecoagro, is a Luxembourg- based company that owns a Delaware company, which owns local companies in Brazil, Argentina and Uruguay. This means that any attacks on foreign companies within the highly volatile South American countries will hurt Adecoagro significantly.
The company is also exposed to risks from crop prices, although the price of sugar is currently at a multi-year low and the company has been able to offset some price declines by switching to ethanol production. I should note that George Soros' Soros Fund Management owns more than 20% of the shares of the company.
High risk South American play
Cresud (NASDAQ: CRESY) is somewhat of a farming conglomerate. The company has a productive portfolio of farmland in four South American countries, a holding in a Argentinian real estate developer and a major stake in BrasilAgro, a Brazilian farming company.
Cresud's farmland assets total 1 million hectares, 66% in Argentina, 19% in Brazil, 13% in Paraguay, and 2% in Bolivia. The company farms soy, with soy and corn combining to make up about three-quarters of use. Sugarcane takes up about 5%, with sunflowers and wheat playing more minor roles.
However, one of Cresud's main risk is its holding in Argentinian real estate developer Inversiones y Representaciones. That said, the company supports a 90% occupancy rate across several high-end shopping malls and affluent office properties and hotels. However, given the recent instability in Argentina, it is possible that Cresud could lose it stake in the company.
Still, the real estate investment gives Cresud some diversification, and unless the situation in Argentina seriously deteriorates, this investment should continue to provide an additional revenue stream for the company.
Anyway, on a valuation basis, according to this author at Seeking Alpha, he reckons the value of Cresud's land stands at $5.25, while the investment in Inversiones y Representaciones is worth $7 and the stake in BrazilAgro is worth $3.50 per share; overall giving a total net asset value per share of $13.75 excluding debt and other expenses.
Low-risk global play
Of course, both Cresud and Adecoagro are very specific plays on the farming trend and come with lots of risk. Bunge (NYSE: BG), on the other hand, is not exposed to such country-specific risk and is more diversified. Additionally, Bunge is B, in the A.B.C.D of companies that dominate the flow of agricultural commodities around the world.
Bunge did report lower-than-expected Q2 results recently, but the company is well placed to take advantage of a series of favorable opportunities in the near term. Indeed, the company predicts that tight crop supplies and massive U.S harvests will boost trading and processing volumes during the second half of the year. In addition, after a historic drought slashed production last year, the company is expecting record global harvests of soy and corn, which should boost export demand as prices have dropped and Bunge is set to benefit.
However, like all agricultural companies, Bunge is subject to environmental factors as well as planting cycles and supply/demand issues. Still, management is taking action reducing 2013 capital expenditures by $200 million to $1 billion, postponing certain 'growth projects' to boost results. In particular, management has stated that they will focus on "projects that more immediately improve efficiencies and competitiveness…that generate faster payback."
All in all, there are many opportunities to benefit from the rising demand for food around the world. Unfortunately the more direct companies, such as Cresud and Adecoagro, come with a high level of risk. If you are a risk tolerant, then Cresud appears to be the better play due to its large holdings of land and current low valuation.
On the other hand, Bunge looks to be the best play for the risk-off investor.
The Motley Fool's chief investment officer has selected his No. 1 stock for this year. Find out which stock it is in the special free report: "The Motley Fool's Top Stock for 2013." Just click here to access the report and find out the name of this under-the-radar company.
Fool contributor Rupert Hargreaves has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!