Hint -- another question - what group of businesses will have 1 billion new customers in the next five to seven years?”
Answer: farmers, and by default, agricultural suppliers.
Worldwide, 1 billion people will enter the middle class by the end of the decade and the defining attribute of this group is its markedly increased consumption of protein. That would be mostly chicken and pork, fed with grain. Much of it American grain.
When a few million people want to buy more and better food, it is a nice little trade. When a billion do so, it is time, and I am now stealing a line from Jim Rogers, “to trade that Mercedes for a tractor.”
Here are five great agriculture-related stocks that will thrive amid this boom.
Archer Daniels Midland (ADM): Earnings came out yesterday, ignore costs related to legal issues and a temporary lull in revenue growth due to the US drought -- business is quite good. ADM is the most important grain and food processor in the U.S., the middleman between the farmer and the restaurant, grocery store or consumer staples company. ADM is heading towards that new middle class with a cash-based acquisition of GrainCorp of Australia. GrainCorp is not small -- ADM is paying $3.4 billion for the company -- so rapid expansion is possible due to the size of the infrastructure already in place. This is a great move. Once ADM digests GrainCorp, the acquisition enables it to expand rapidly into Asian and Middle East markets without having to build infrastructure from scratch, a process that can take a while when dealing with agricultural products and foodstuffs.
Terra Nitrogen (TNH): Terra Nitrogen does one thing: it makes nitrogen fertilizer based on one feedstock, natural gas. It is already enjoying the tremendous benefit of at least a generation of cheap natural gas -- cheaper than anywhere in the world -- giving it a structural cost advantage over competitors. And that means exports, serious exports, are in its future.
These exports could quickly match the growth we see in the sale of agricultural equipment. Terra Nitrogen will have cheap natural gas; the rest of the world outside of North America will have more expensive gas and oil as feed stocks. This will play itself out in the coming quarters and I expect Terra Nitrogen's margin and operating profit growth to increase faster than revenues. TNH yields more than 7% and will not necessarily grow its top line in double digits, but margins should increase and that means the yield could go up.
John Deere (DE): Farmers around the world are also growing more grain. The American Equipment Manufacturers Association thinks the big driver in the sales of construction and agricultural equipment is exports, and they are booming. Construction equipment exports were up 13% in 2012, agricultural equipment exports were up 16%. And the biggest beneficiary of continuing growth is Deere. John Deere produces the world’s best large tractors and combines -- the small ones ain’t bad either -- and is exceptionally well managed, as seen in its manufacturing operations. Wall Street is paying for growth; Deere continues to grow, here and in China and around the world. The stock should be viewed as a core holding: a company for the long haul that is also doing quite well right now.
Monsanto (MON): Monsanto is the world leader in seed technology, which in turn has prompted European companies to scream “genetic bloody murder” and put in place various bans of genetically modified crops. This sets up a potential catalyst for the company and stock. There is a reasonable possibility that U.S. and EU trade talks will lead to a modification or end to the current restrictions on genetically engineered seeds. After these talks are over, I suspect more Monsanto-grown crops in the U.S. and more Monsanto seeds will make their way to Europe. Monsanto is doing well without Europe. Its Q1 2013 numbers were great – its seeds work well in drought and it is pounding it in emerging markets. Profits were up 20% last year, consensus estimates are for 12% revenue growth in 2013, 25% profit growth and continuing double-digit growth in 2014, despite concerns about falling grain prices.
Mosaic (MOS): Mosaic makes the kind of fertilizer Terra Nitrogen does not: phosphate and potash-based products. The company and stock are a perfect complement to TNH. Interestingly, the valuation is the same as TNH on a P/E basis but the yield is less than 2%. That being said, Mosaic’s business has been growing in serous double digits, climbing from $6.7 billion in 2010 to $11.1 billion last year. Mosaic is a “go to” stock when Wall Street gets hot on agriculture.
Michael Shulman is the author of and writes several investment advisory services.