Byron Wien of Blackstone, a serious voice listened to on Wall Street, made ten predictions for 2014. The most important to many being a market up 20%. But the most important to savvy investors was his call on commodities, specifically grains. From Blackstone’s press release:
“The rising standard of living and the shift to more consumer-oriented economies in the emerging markets result in a reversal of the decline in agricultural commodity prices. Corn goes to $5.25 a bushel, wheat to $7.50 and soybeans to $16.”
Translation: Prices rise when there is an increase in demand. What Wien is telling us is that demand continues to rise for grains around the world. And increases in demand benefit companies whose business model – and profits and share prices – move over time with demand. What company benefits the most from increases in demand for grains worldwide? Archer Daniels Midland (ADM).
ADM is the most important name in agriculture, a huge middleman between the farmer and the restaurant, grocery store, consumer staples company or export market.
What does ADM do? The company buys grains and stores them, crushes them for oils, processes them into semi-finished food products, packages them for wholesale; the list is endless. The key to its business is the secular increase in demand, worldwide for more food and better food based on increased protein consumption, and that means grains.
Local farming, global industry
Let’s step back a bit. The size of agriculture as a worldwide industry is huge. In the U.S. alone the import/export trade will be more than $200 billion in 2012 and when the final data is tabulated could be larger in 2013, despite the fall in grain prices. Farming may be local but the industry – agriculture, from the prices quoted to local silos to the ports used to export grain– is truly global. Increased pork consumption in China means more corn and bean and wheat production in the U.S. – with ADM processing and shipping more and more of these grains.
The salient points for investors are these:
- Growth in food consumption – more food and better food – is secular. Investors can count on growing demand for a generation with the greatest increases to be found in Asia, led by China.
- ADM has a global presence and is rapidly expanding in Asia. Plans to acquire Australia’s largest agricultural processor and shipper – Graincorp – were put on hold by the Australian government a few weeks back but the company has enough cash and patience to expand organically and through smaller acquisitions. This part of the food complex is relatively primitive in much of Asia and consumer demand for higher quality – safer – food gives ADM a powerful brand advantage when entering or expanding in these markets.
- ADM can fund expansion with a pristine balance sheet. It is cash-rich and has very low debt (the debt-equity ratio is 0.35).
What about the stock? Is it near a good entry point? Agricultural stocks have been trashed of late and offer compelling value, among them ADM. ADM shares, in the past year, have gone from $28 to $44 but have fallen a bit – support is in the $40-$42 range. And the company is very shareholder-friendly, recently announcing a boost in the dividend and new share buybacks.
(For a summary of all of Wien’s comments, read here.)