Growing Opportunity in Agriculture

Saturday, February 12th, 2011

Growing Opportunity in Agriculture

By Frank Holmes, CEO and Chief Investment Officer, U.S. Global Investors

Bushels of corn reached their highest prices in nearly three years this week after the U.S. Department of Agriculture (USDA) reported that corn inventories will fall to levels not seen since 1996.

We’ve witnessed nearly a 100 percent surge in the price of corn over the past year as increased demand has been met with diminishing supply. Dry weather conditions due to La Niña in Argentina and other disruptions have shriveled supply despite a near record amount of acreage being planted. Globally, corn consumption has increased 10 percent over the past five years to reach record levels and stock-to-use ratios for corn suggest we’re currently experiencing the tightest global corn market since the late 1970s, according to Macquarie.

This jump is due to increased corn consumption for ethanol and greater demand for feed grain. The USDA estimates that just under 40 percent of U.S. corn production will be consumed for ethanol, up from 31 percent in 2008-2009. China will likely need to import 5 million tons of corn in 2011 in order to meet the country’s booming need for feed grain. In the U.S., an additional 60 million bushels will be used for feed despite a reduction in livestock, according to the Des Moines Register.

Corn is just one part of the food pyramid that is rising. Around the world, prices for wheat, soybeans, cocoa and other grains have jumped in the last 18 months in conjunction with the global recovery. Prices have jumped because demand outstripped supply.

This chart from Potash Corp. shows that grain production has failed to meet consumption in seven of the past 11 years. This is despite producing a significantly larger amount of grain in 2009 than in 2000. Potash Corp. estimates world grain production declined more than 4 percent in 2010. An extreme drought in Russia chopped grain production in the country by 38 percent and 13 percent in neighboring Ukraine.

These tight supply/demand fundamentals reflect the impact of a growing global population and increasing economic strength in emerging markets, Potash says.

As per capita wealth has grown in other countries, there has been a huge jump in demand for grains. This chart shows the amount of bushels consumed as GDP per capita rises.

Much of the rise is due to people consuming more meat as their fortunes rise. To meet this higher protein diet, more chickens, cows and hogs are fed grains and demand skyrockets. You can see that China and India are still in the very early stages of increased consumption.

We think the agricultural space is ripe with opportunity. With global grain inventories relative to demand at multi-year lows and the rising emerging market middle class showing a healthy appetite for more meat and dairy products, demand for increased crop yields should remain strong.

Tags: 60 Million, Bushels, Chief Investment Officer, China, Corn Market, Corn Production, Department Of Agriculture, Des Moines Register, Disruptions, Dry Weather Conditions, Emerging Markets, Ethanol, Extreme Drought, Feed Grain, Food Pyramid, Frank Holmes, Global Recovery, India, Potash Corp, Russia, U S Department, U S Global Investors, Usda Estimates, World Grain Production
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Soros Backed IPO Adecoagro (AGRO) Provides Hard to Find Access to Farmland

Wednesday, January 26th, 2011

by Trader Mark, Fund My Mutual Fund

No matter what you think of George Soros’ politics, he has his nose in all the right places in the investment world.  I’ve long bemoaned the lack of avenues to invest in farmland for the regular investors – indeed aside from Argentina based Cresud (CRESY), I don’t think there is another option – but this week’s slate of IPOs brings us Adecoagro (AGRO).  This sort of thing won’t be hot money, but if you give me a 40 year horizon, I say arable land (or water) will be the best investments on earth.   And I’m not the only one:

• [Jun 5, 2008: NYTimes: Food is Gold, So Billions Invested in Farming]
• [Jun 14, 2008: Bloomberg: Farmland Reaps Bonanza for TIAA]
• [Jun 2, 2009: The Economist - Outsourcing's 3rd Wave - Buying Farmland Abroad]
• [Dec 31, 2009: Bloomberg - Ethopian Farmers Lure Investor Funds as Workers Live in Poverty]

Meanwhile I am sure all the attention in the short term will go to the hype machine that is the IPO of Digital Media.

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The English website can be found here

Adecoagro is currently one of the leading companies in the production of food and renewable energy in South America. Present in Argentina, Brazil and Uruguay, our main activities include the production of grains, rice, oilseed, dairy products, sugar, ethanol, coffee, cotton and cattle meat.

Since its creation in 2002, the company´s growth was based on the implementation of a sustainable efficient production model, working on its own land and managing risk through diversification.

Unfortunately, there is a lot of exposure to the politically unstable country of Argentina, but that has not stopped investors from giving Cresud a rich valuation.

Bloomberg gives us a closer look at the company

• Adecoagro SA, a farmland venture in South America that’s backed by billionaire George Soros, plans to raise as much as $429 million in an initial public offering in the U.S. as food prices surge. As much as 21.4 million new and 7.14 million existing shares will be offered for $13 to $15 each, the Luxembourg-based company said today in a U.S. Securities and Exchange Commission filing.
• The company’s main shareholders include Pampas Humedas LLC, an affiliate of Soros’s Soros Fund Management LLC, which owns about 34 percent and will reduce its stake to about 21 percent after the offering.
• As part of the offering, a subsidiary of Qatar’s Doha-based sovereign fund, which already owns 6.5 percent of Adecoagro, may buy as much as $100 million of the stock. The IPO is scheduled to price on Jan. 27, according to data compiled by Bloomberg.
• The company said in the filing it plans to use $230 million of the proceeds to build a sugar-cane processing plant in Brazil and may spend about $145 million on “the acquisition of farmland and capital expenditures required in the expansion of our farming business.”
• The new sugar mill in Ivinhema city, Brazil, will process 6.3 million tons of cane by 2017, more than doubling Adecoagro’s capacity to 11.5 million tons a year. The company said it may also use cash and more debt to fund the construction of the Ivinhema mill.
• Adecoagro grows rice, coffee, soybeans, wheat and corn in about 288,000 hectares (712,000 acres) of farmland, an area that’s bigger than Jacksonville, Florida. It owns 38 farms in Brazil, Argentina, and Uruguay that’s valued at a combined $784 million, the filing said.
• Adecoagro said it owns 21 farms in Argentina, 15 in Brazil and two in Uruguay. It operates rice processing facilities, has a dairy operation with 4,500 cows, owns two coffee processing plants, seven grain and rice conditioning and store plants and two sugar and ethanol mills.

IPOFinancial per TheStreet.com has more data:

• The company has seen its sales explode, with a CAGR of 48% from 2007 to 2009 and +38% improvement in the first three quarters of the year. Among the key factors for growth has been sales in corn and soybean, which are up +112% and +77%, respectively, in the first nine months of 2010 from the comparable period in 2009. That being said, the largest segments by total revenue remain rice and ethanol, the latter of which will expand production following the allocation of IPO proceeds.
• At first glance, it may be puzzling as to why a company growing so fast, with a reasonable debt structure, is still not recording an accounting profit. In reality, AGRO has had to incur non-cash expenses that have skewed its earnings. Even though higher food and cattle prices have increased sales, the accounting benefit is somewhat offset because the markup in total inventory value has made depreciation expenses much higher.
• In the first nine months of 2010, it incurred more than $100 million in charges as a result of faster depreciation and amortization. It also ran into a problem in its sugar market last year, as sugar prices fell by 50% from their early 2010 high of $30 before making a late-year recovery to a 30-year high.

No position

Copyright (c) Trader Mark, Fund My Mutual Fund

Tags: Arable Land, Argentina Brazil, Billionaire, Bloomberg, Brazil, Cresud Cresy, Dairy Products, Emerging Markets, energy, Ethanol, Farmland, George Soros, Gold, Hot Money, Hype Machine, Initial Public Offering, Investment World, Investor Funds, Leading Companies, Managing Risk, Oilseed, Production Model, Tiaa, Unstable Country
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