And Wall Street has yet to see it.
The folks on Wall Street – geniuses one and all, just ask them, they will tell you so –are still worried about the ethanol program. Go talk to farmers, look at the land, the plantings; go to buy or try to buy some farm land. You will see ethanol is no longer what makes farmers paranoid, after the weather.
Why? In China, and India, and other emerging markets, new consumers want high-quality pork and chicken breasts, not simple sausage or chicken gizzards.
Emerging markets help drive demand for corn
The economic boom in emerging nations has liberated many consumers from lousy food and moved them up to decent food – pork and chicken in particular in China – and that means corn (and some soybeans). From the good old U. S. of A.
Am I too optimistic?
- China has doubled meat consumption in the past two decades. Gotta feed those piggies. Corn exports to China in 2012 could be double what they were in 2010.
- According to Bloomberg, farmers in the U.S. will plant 227 million acres – the biggest planting since 1984. And this is being led by the largest planting ever for corn, presaging the largest-ever corn crop.
- Net farm income is off the charts, up 28% in 2012 to $101 billion.
- The value of an average acre is $2,350.
- Global supply of soybeans and corn is actually falling due to severe drought in Argentina and Brazil.
- In 2011, the price of corn averaged $6.79 (in the Chicago trading pits, not at Whole Foods) the highest average price ever and just about twice the average price of the previous ten years. Soybeans averaged a record $13.21 a bushel, more than 70% higher than the average of the previous decade. And just to beat a point to death, wheat prices were 57% above their previous decade’s average.
- You don’t put soybeans and wheat in your gas tank, although I bet some farmers are working on the idea with money from Uncle Sam right now. This boom in plantings is all about fundamental demand from the world’s rapidly growing dinner table.
Wall Street – those geniuses who visit farms every five years when the kids get restless – looks to falling commodity prices, such as corn down 17% from the summer, and they lose whatever mind they have left to lose. They are missing the point. I drove through the Midwest in late summer and I was stunned by how few acres were being set aside as part of normal crop rotation. I worked in agricultural marketing for several years in that part of the country and the landscape was vastly different, even though the years I was there saw the last great boom. Farmers are planting everywhere and that is what should matter to investors. The issue is not the unit price per bushel, Wall Street’s concern, it is the overall gross margin and income to the farmer. And net income, with all those new acres on line, will be higher in 2012.
More planting means more supplies – fertilizer, pesticide, and so on. More income and more inherent value in the land means more capital purchases such as tractors and other equipment.
Go for stocks and ETFs in agriculture
There are two easy to play this – ETFs and individual names.
The two ETFs are Market Vectors Agribusiness ETF (MOO) (love that symbol) and Powerhares DB Agrigulture (DBA). MOO mirrors the DAX Agribusiness index, which in turn is mostly about companies involved in agribusiness, from seed corn to tractors to whatever a farmer needs to plant, harvest and sell. The DBA mirrors moves in commodity prices. You know where my heart lies – real business, not commodity prices in Chicago or Frankfurt. If you pick an ETF, go with MOO.
If you want names, think market leaders. That means Deere (DE) in tractors. Did you know that Deere makes a tractor that is guided by satellite data to go the best part of the farm to plant or harvest, without a driver? For fertilizers and such, Potash Corp. Of Saskatchewan (POT) is the big gorilla here, it does often move with oil and the dollar but long term is a great business. Seed corn belongs to Monsanto (MON), a bumpy stock, a solid company even as Europeans and some other countries make up excuses to keep Monsanto’s genetically modified – and far more productive seed – out of their markets.
This entire “agriculture thing” – a precise term often heard on Wall Street – is part of what I see as New Normal in the world economy and investing. People in the U.S., people in Europe, people in emerging nations are spending their money in different manner than they did five years ago and this is a secular change. Keep an eye out; I will be writing about food changes in developed markets in a couple of days and I will give you a sneak preview. What do Whole Foods Market (WFM), Panera Bread (PNRA) and Chipotle Mexican Grill (CMG) have in common?