Global Recession Ending Good News for Secular Agri-Food Trends

By: Ned_W_Schmidt

This past weekend while reading Barron’s we were delighted to find that another researcher had discovered Agri-Food investing. However, the recommendations were fairly indicative of someone early in the discovery process. We think that is the case with many investors. They have been waiting to have the story verified by stock prices. That has been done.

The Agri-Food investment story has been unfolding for more than three years, and has another ten or so years to go. For that reason, investors still have plenty of time to uncover the opportunities for profits in a world soon to be far more hungry. Agri-Food cannot be produced in factories with lower marginal costs for new production. Unlike consumer electronics, marginal production will have a higher cost.

For centuries mankind has sought to satisfy hunger. Only in the second half of the 19th century did food become more plentiful with improved availability. Yet even after that period food was not adequate in all countries. The Russian grain purchases of the 1970s were the first time in Russian history when a food shortage was not satisfied by starvation. China has uncovered a far more humane and far more successful approach to hunger. For you see, hunger is not a food problem. Hunger is an income problem. China has discovered the secret to feeding its people. Give them jobs that produce incomes, and they will simply buy the food. As we can observe in the chart below, those in front of that spending have benefitted.

Usually when we visit, the fundamentals are the starting place. After that, we normally turn to what the investments might have been doing. This week we decided to reverse the process. In the first chart above are the estimated returns on a basket of Agri-Food stocks. Note that the one year and two year estimates are from the end of October in the respective years so the time periods are not quite as stated, but the message is the same.

While the stock markets remain well off the early 2007 levels, many of the Agri-Food stocks have moved higher. In particular, those with exposure to China have done exceptionally well. While doubtful that the stocks will repeat such performance in the year ahead, the future for many of these companies remains bright. 1.3 billion Chinese are still going to eat. As their incomes rise, they will spend more on higher value foods. And right behind them in line are 1.1 billion Indian consumers slowly throwing off the political shackles that have held that nation back. As those Indian consumers start to come to the table, further demands will be placed on the global Agri-Food system.

Our second chart, above, shows part of the reason Agri-Food investments have done so well over the years. These companies, despite the massive recession, have either experienced impressive absolute sales per share growth or excellent relative sales per share growth. Some of the Chinese companies have demonstrated continued growth. Even those at the bottom of the chart that have been buffeted by the global recession and the downside of the hedge fund induced commodity price mania and bust of last year have performed on a relative basis better than many companies and industries.

With the global recession now ending, the dominance of the rising secular trend in the global demand for Agri-Foods will reassert itself. Further, the North American harvest, now in process, is unlikely to match the high expectations of traders. Agri-Food prices appear to have put in place another higher low. Our stochastic oscillator recently gave another buy signal for the Agri-Food Price Index.

Few economic sectors or industries have the combination of positive fundamentals as does Agri-Food. Globally, demand has a built in upward bias for the next ten plus years. Second, supply is both price inelastic in the short-term, and constrained by availability of productive farm land and fresh water in the long-term. As India demonstrated again this year with the failure of the monsoons, the combination of water with land is essential to food production. Unlike factory production, crop production lost cannot be replaced till next year’s growing season. Is your portfolio prepared to participate in the potential rewards of Agri-Food in the next decade? To begin your research use this link: http://home.att.net/~nwschmidt/Order_AgriValueRECENT.html

By Ned W Schmidt CFA, CEBS

AGRI-FOOD THOUGHTS is from Ned W. Schmidt,CFA,CEBS, publisher of The Agri-Food Value View , a monthly exploration of the Agri-Food grand cycle being created by China, India, and Eco-energy. To receive the most recent issue of this publication, use this link: http://home.att.net/~nwschmidt/Order_AgriValue.html

Copyright © 2009 Ned W. Schmidt - All Rights Reserved

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