Will People's Hunger for Food Satisfy Your Hunger for Good Investments?
Paul is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The world's population will grow by about 2 billion people by 2050, according to the UN. Furthermore, as incomes rise, we'll see a rise in demand for food, as more people can afford both adequate nutrition, and more and nicer food than they actually need. With a major secular trend like this, the question automatically becomes: How can you as an investor ride the wave of increasing demand toward higher profits?
In order to meet the world's needs, food production must double. And according to Mosiac, it has to do so using only 1% more land. Furthermore, as reported by John Deere, the world's population is expected to move from 50% to 70% urban over this same time period. In other words, agricultural firms must produce more food with fewer resources.
In order to finance the capital expenditures to make this happen, farms will likely have to increases prices significantly. This should drive profit increases to current firms. because they often have sunk capital expenditures, especially in the form of land, and should drive profit increases for those who sell capital to farmers.
Deere (NYSE: DE) is so iconic that it has a color named after it -- John Deere Green. In addition, its recent financials are solid, with revenue growth of 9% and earnings per share growth of 15% between 2011 and 2012. On top of this, it set an aggressive but realistic mid-term goal of $50 billion in revenue in 2018 versus $25 billion in 2010, i.e. it's a company with a plan.
In order to accomplish this, Deere is investing heavily in manufacturing in growing markets, with the goal of achieving 50% revenue share outside of North America in five years. It's trying to stretch itself to capture a market that should explode as labor costs in those countries increase. Furthermore, it has achieved substantial success so far, with 18% CAGR in Central and South America and 21% in Asia, the Middle East and Africa, as reported in its July investor presentation.
Meanwhile in the United States, as the macroeconomic context improves and confidence increases, many farms will likely choose to make investments they had postponed. We're currently seeing a similar phenomenon with regard to Ford trucks, whose sales have exploded. The agriculture industry isn't as cyclical as many of the industries that buy pickup trucks are, so the effect won't be as large -- but it will still be there.
Mosaic (NYSE: MOS) sells fertilizers and is the world's largest producer of phosphates and potash. Fertilization is perhaps the most important means of increasing yield per acre, so demand for fertilizer will necessarily rise quite rapidly in the years ahead.
Mosaic already has significant global reach with its products reaching countries as diverse as India and Argentina. Its gross margin did fall from 2011 to 2012, but it was still higher than in 2010, and its earnings per share performed similarly. On a positive note, its net sales increased by 12%. It's a longer-term play, and likely won' t be a huge performer in the next few months, but if you're looking for a stock to buy and hold, it's worth considering.
Adecoagro (NYSE: AGRO) provides an opportunity to invest directly in farming, for Adecoagro is a leading farming company in South America owning over 182,000 acres of farmland. Because the amount of farmland is essentially fixed, a significant portion of the returns to increased productivity should accrue to the landowners, like Adecoagro.
Also, it has invested heavily in sugar production, and recently expanded into the sugar processing industry. This is particularly promising, since sugar is a luxury or near-luxury good; it is demanded heavily by those in the middle and upper classes, but very little by the truly destitute. Thus, the demand for it should increase faster than the demand for food as a whole.
Monsanto (NYSE: MON) is at the center of innovation in agriculture. It creates and then sells seed varieties that promise greater yields and other specific advantages.
However, it is a rather controversial company for it sells products that are both dangerous and untested. Thus, it may see a major lawsuit or major reduction in goodwill going forward. However, if you're willing to accept that risk, it should be at the center of the agricultural revolution. As a result, according to its annual report, it expects 25% annual growth in earnings per share going forward. This isn't just idle boasting; Monsanto saw 28% growth in earnings per share last year.
All of these companies provide solid exposure to the growth in agriculture going forward. Demand for food will fluctuate in the short term, but it will inexorably rise over the long haul, making these stocks longer-term plays. Deere likely has the best short-term prospects, for it should also profit from the rise in confidence. Monsanto is the most innovation-centered and growing the fastest. But the other two companies might be worth looking into as well.
Paul Sangrey 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!