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Put Politics Aside, Invest In This South American Agriculture Stock
By GARRETT BALDWIN , Economist, Money Morning July 16, 2013 Three weeks ago we mentioned that Morgan Stanley announced that it will close the agriculture segment of its commodities business. The move was just another sign of hedge funds and banks electing to shift away from soft commodities, and place greater emphasis on the oil and gas markets. Over the last two years, a number of banks have struggled in the agricultural sector. As they continue to show impatience for the long-term, many on Wall Street have picked up the ball and gone home. Still, from our research and conversations with investors like Jim Rogers, the agricultural sector provides one of the best investment opportunities over the long term. With demand outpacing supply and global food stocks hovering near record lows, the fundamentals are clear. It’s is why Rogers told Money Morning this year “the price of agriculture has to go up a lot, or we’re not going to have any food at any price.” But there’s another important investor out there who is long South American agriculture. And he’s using an entirely different strategy than the big banks in New York. The investor is George Soros, Jim Rogers’ former co-founder of the Quantum Fund. Even though many Money Morning readers might not agree with Soros’ politics, there’s one thing you can’t deny: Like Rogers, he too is a legendary investor. And sometimes you have to put politics aside and find the right investment. And sure enough, he’s long one stock that is ripe given the need for more food development in South America. More than One Way to Invest Wall Street banks are pulling out of the agricultural sector for two reasons: One, the short-term focus on profitability clouds their ability to see the long-term value of agricultural holdings. Second, soft commodities are a very difficult to master. There are many different ways to invest in agriculture, but most are subject to short-term volatility given the global supply and demand picture, and the factors impacting prices such as planting cycles, weather variations, energy and shipping costs, and political uncertainty. While animal technology continues to be our favorite way to invest in the sector, the Soros strategy has centered on a valuable investment vehicle that remains popular with hedge funds around the world: farmland. Farmland continues to rise in price as investors attempt to cash in on the growing need for food in a world that will have nine billion mouths to feed in 2050. And it’s a solid hedge against rising prices. Over the past 70 years, farmland real estate appreciation has easily outpaced the annual inflation rate. But farmland isn’t just spiking in price here in the United States. It’s also becoming a very hot commodity down in South America and portions of Africa. And one stock provides an opportunity to get in on the development and ownership of farmland south of the equator. Land Opportunities Abound in South America Adecoagro SA (NYSE:AGRO) is a Luxembourg-based company with approximately 725,000 acres in Brazil, Argentina and Uruguay. Soros Fund Management controls more than a $200 million stake in the company. The company is engaged in the purchase, development, operations and sales of farmland in these three nations. In addition, Adecoagro produces corn, soybeans, wheat, rice, and sugarcane (to provide to Brazil’s booming ethanol sector). The company also engages in the highly competitive meat and dairy sectors. Given that arable land is one of the safest long-term investments out there, AGRO provides a much sought-after way to invest in three of the world’s most important agricultural nations. Investors simply need to be willing to park capital into farmland over the long-term and let the global fundamentals catch up over time. Of course, there are risks to investing in a company like Adecoagro, given its exposure to foreign markets. The stock has been deemed undervalued by multiple analysts given the location of most of its holdings. The principle location of its land is in Argentina, a country rife with economic uncertainty, political turbulence, and rampant inflation. As we’ve discussed several times here at Money Morning, Argentina is one of the worst economies in the world when it comes to economic freedom and property rights. The reality, however, is that Argentina really has nowhere to go but up, as the general business population, and particularly the agricultural sector, has grown tired of progressive politics and unfavorable business environments. But concerns have also centered on the company’s holdings in Brazil, where foreign property ownership is currently a topic of national outrage, and its ethanol development is subject to heavy volatility. Perhaps the biggest threat that few tend to consider is the quality of the farmland in South America. Not all farmland is like rural Indiana. In fact, certain areas of Brazil require as much as six times the amount of water as a Midwestern farm would need in order to grow crops. Adecoagro can counter the latter threat by avoiding land holdings in the lower-quality regions in the southern portion of Brazil where erosion levels are high in the soil and water retention is very low. Currently, Adecoagro uses nearly 70% of its land for agricultural operations, while the balance is currently under development or being held given its long-term appreciation opportunity. For investors looking to get into the global farmland boom, Adecroagro is a stock sitting below $10 that provides plenty of upside, particularly given the confidence shown by hedge funds like Soros Fund Management. Continue reading
Farm Subsidies: A Welfare Program For Agribusiness
t’s one of the most widely reviled federal programs. So why is Congress fighting to save farm subsidies? By The Week Staff | August 10, 2013 Most farmers are wealthier than the average American, with a household income of $87,289 in 2011 — 29 percent higher than the $67,677 average for all U.S. households Why is the farm bill so controversial? Critics contend that the subsidies it hands out are wasteful, illogical, and counterproductive — a welfare program for millionaires and giant agribusinesses. Over the last decade, the farm bill has cost taxpayers more than $168 billion. In theory, the program uses loans, price supports, and payments to protect family farmers from the fickle fluctuations of weather, price, and economic conditions, so that their businesses remain stable and Americans are ensured a steady supply of affordable food. In practice, the program keeps food prices high, costing consumers billions, while funneling most of its aid to giant agribusinesses and wealthy farmers. About 75 percent of total subsidies go to the biggest 10 percent of farming companies, including Riceland Foods Inc., Pilgrims Pride Corp., and Archer Daniels Midland. Among the “farmers” who get federal subsidies are Bruce Springsteen (who leases land to an organic farmer), Jon Bon Jovi (who owns bee colonies), former President Jimmy Carter, and billionaire media mogul Ted Turner. “The typical farmer has literally millions of dollars of wealth,” said Dan Sumner, an agricultural economist at the University of California, Davis. What about the average farmer? He’s doing pretty well too. Despite droughts and high temperatures, farmers have enjoyed record crop-production levels and prices, as well as double-digit increases to the value of their land for the third year in a row in 2013. In fact, most farmers are wealthier than the average American, with a household income of $87,289 in 2011 — 29 percent higher than the $67,677 average for all U.S. households. And yet many still get taxpayer dollars to protect their incomes. In fact, the farm bill pays some farmers not to grow crops — in order to avoid oversupply that would drive food prices down for the rest of us. “Only an evil genius could have dreamed this up,” said Scott Faber, vice president for governmental affairs at the Environmental Working Group. How did the program start? Subsidies originated during the Great Depression and the Dust Bowl catastrophe of the 1930s, when there was a genuine fear that the nation’s agricultural sector was on the brink of collapse. At that time, about a quarter of the country’s population lived in rural areas, and tens of thousands of American families found themselves literally in danger of “losing the farm.” So President Roosevelt pushed through the Agricultural Adjustment Act, which pegged crop prices to their historic highs and introduced the policy of paying farmers not to produce. It was supposed to be a “temporary solution to deal with an emergency,” as Secretary of Agriculture Henry Wallace put it. But in 1949 the Agricultural Act was made permanent, and — more than six decades later — a version of that same legislation still exists today. Why not reform the program? Congress tried that in 1996, with the Freedom to Farm Act, which removed price supports and grain management in an attempt to let the free market dictate prices. That reform didn’t last long. As commodity prices fell and farmers began to complain, lawmakers caved in and introduced several new programs that continue today. They include the much-criticized “direct payments” to farmers — checks written regardless of market conditions or the farmer’s crop yields — and the controversial crop insurance program, which critics say has encouraged widespread fraud. In that program, taxpayers pick up 62 percent of any farmer’s insurance premiums and help fund payouts if a claim for crop damage is made. Why not kill subsidies altogether? Politics. The farm lobby has immense power in Washington, thanks to its generous contributions to congressional campaigns and political parties, and to the large number of legislators from farm states — most of them Republican. Democrats have also traditionally supported the farm bill because it contains food stamp funding. This year, that partnership broke down, when House Republicans passed a version of the farm bill that strips the legislation of its food stamp provisions for the first time since 1973. President Obama responded by threatening to veto any legislation that doesn’t include food stamp funding. At the moment, the situation is at a stalemate. What’s likely to happen? A deal will probably get cut that will keep farm subsidies fairly intact. The House version of the bill, in fact, contains some of the most generous farm spending in history: While ending direct payments, the legislation channels $8.9 billion into an expanded crop insurance program, which already ballooned from $1.5 billion in 2002 to $7.4 billion by 2011. In the House bill, moreover, the farm subsidies that used to expire every five years are made permanent. “It’s hard to understand how anyone in the House who calls himself a conservative could support this, but many did,” said Chris Chocola, president of the free-market-oriented Club for Growth. “They’re locking in historically high commodity prices at taxpayer expense.” New York City’s ‘farmers’ New Yorkers wouldn’t know it, but they live in a city of farmers. Over the last decade, the farm bill has paid out millions of dollars in subsidies to more than 1,500 city residents — 374 on the plush Upper East Side alone. They aren’t receiving payments for farms in the city, but for property they own elsewhere. Recipients include Mark F. Rockefeller, a fourth-generation heir of the famous family who was paid $342,634 to not farm from 2001 to 2011, so that his land in Idaho could return to its natural state. Other top New York farmers include a managing director at Wells Fargo bank, and a neurologist in Queens. “Payments are going to people in Manhattan who simply have invested in farmland and are about as far away from farmers as one could imagine,” said Craig Cox, senior vice president for agriculture and natural resources at the Environmental Working Group. “That should really make people wonder what on earth has happened to the farm program.” Continue reading
A Corn Boom Starts to Wilt
MARK PETERS And JESSE NEWMAN OAKLEY, Ill.—The boom in corn prices that helped propel the U.S. farm economy is fading amid expectations for a record-high harvest. Jesse Newman/The Wall Street Journal Farmer David Brown says producers will start bargaining for lower rent. Prices are down more than 40% from last year’s all-time highs, to their lowest point in nearly three years. The decline is bringing relief to meat producers and other food companies hurt by steep costs for animal feed and other ingredients made from corn. Lower corn prices also could curb supermarket prices for beef. But the slide is bad news for farmers who saw their incomes surge to the highest levels since the early 1970s, adjusted for inflation, while farmland values ballooned so much that some analysts worried about a bubble. Lower corn prices will squeeze profit margins, farmers who rent land for their crops might struggle to make money, and sales of tractors and other farm supplies likely will suffer. Corn is the largest U.S. crop, grown on more than 400,000 farms. The total area harvested for the grain is as big as New Mexico. On Friday, corn traded in the futures market for slightly more than $4.65 a bushel, down from $8.31 a bushel last August. Prices for soybeans, the U.S.’s second-biggest crop, are down more than 20% from a year ago. Many analysts predict even sharper declines. Goldman Sachs Group Inc. last week lowered its 12-month price forecast to $4.25 a bushel. If prices stumble that far and stay there, it would “put a serious crunch in the margins,” says T.J. Shambaugh, whose family has grown corn here for more than 150 years. The 53-year-old Mr. Shambaugh expects his 2,000-acre farm to yield about 200 bushels an acre this year, up from 85 bushels last year. He sold half of his expected crop for more than $5 a bushel earlier this year. “For 2013, we’re gonna be OK. 2014 and 2015 might be a different story,” he says. Corn prices hovered at less than $2.50 a bushel for most of the past decade. Prices surged in 2008 because of flooding and growing demand by the ethanol industry. The recession knocked prices back down, but they rebounded even more strongly, fueled by foreign markets such as China and a drought that crimped supplies. Prices largely have stayed above $6 a bushel in the past two years. The Department of Agriculture has projected this year’s U.S. corn harvest, which starts next month, to haul in about 14 billion bushels, up from 10.8 billion bushels last year and 12.4 billion bushels in 2011. Officials are expected to increase the estimate slightly in a monthly crop report due Monday. Some of the bumper crop might be threatened by frost damage before it can be harvested. And farmers could decide to plant less corn in the future if profit margins shrink too far. That would reduce the corn supply and help prop up prices. For now, farmers need a boost in demand, which has been weak. U.S. corn exports have fallen to levels not seen in decades as competition from South America and elsewhere increases. And runaway growth in U.S. ethanol production is easing as the corn-based fuel supplement hits limits on how much can be blended into gasoline. “We’re returning to a more normal scenario following a period of really abnormally high prices,” says Darrel Good, an agricultural economist at the University of Illinois. “Everyone kind of acknowledged on the way up these prices were not sustainable, but for producers they were pretty easy to get used to.” Tyson Foods Inc. earlier this month said it expects feed costs in its chicken business to decline by $500 million in the coming fiscal year. Milk producer Dean Foods Co. also expects lower feed costs. Archer Daniels Midland Co., the grain-handling giant, said it expects to benefit from having more corn and soybeans to store and process. “This is a recharge that is just essential for ADM,” Craig Huss, the Decatur, Ill., company’s chief risk officer, told investors Tuesday. It isn’t clear how much consumers will benefit from lower corn prices. Burrito chain Chipotle Mexican Grill Inc. said it was no longer considering a price increase that it had said might be needed to compensate for pricier ingredients. A closely watched index of world food prices dropped for the third straight month in July, helped by declining corn prices. Still, USDA economist Richard Volpe said supermarkets use lower prices as leverage to rebuild margins battered in recent years by higher costs and tougher competition. Cropland values in the Midwest already are losing steam after a surge of nearly 80% in the past four years to an average of $6,980 an acre. The latest appraisals done by farm lender Farm Credit Services of America show that land-value gains slowed in the first six months of the year. Purdue University forecasts a decline in land values in parts of Indiana in the second half of 2013. Farm-debt levels remain low on average, so few lenders or analysts are worried that further declines in corn prices could spark a devastating collapse in cropland values like the one that hit the U.S. housing market. Still, farmers who rely heavily on rented land, and borrowed to start or expand operations during the corn-boom years, could struggle. “Will landlords be willing to retrace their rents as corn prices go down?” asked David Brown, standing beneath a canopy of towering corn stalks on his 4,000 acre farm near Decatur, Ill. The 60-year-old farmer, who rents 60% of his land, says producers will start bargaining with landowners for lower rent if commodity costs keep falling. “It used to be that marketing corn was your toughest job. Now negotiating rent is as demanding as selling your product.” Lower corn prices will help beef producers who suffered as last year’s drought dried up pastures and drove feed prices higher. The yearlong corn-price slide and recent rains already have brought relief to many cattle farmers. “Going from $7 or $8 corn to $5 corn, that’s going to help quite a bit,” says Brian Price, manager of Brookover Feed Yard in Garden City, Kan., where cattle are fattened before slaughter. A steady corn supply “should keep the price at a level we can live with.” Continue reading
