by takeprofits | April 2, 2014 9:30 am
[Ed Note: Here is Myron Martin’s follow-up to his agriculture article. He has agreed to our trading restrictions, and we have not reviewed, approved or screened his stocks or ideas, and the opinions he expresses are solely his own. Many of the stocks Myron covers are microcap “penny stocks” that can move dramatically with or without fundamental reasons, so please be cautious. Myron’s past commentaries can be seen here.]
In the few days that have elapsed since the potash-focussed column, a takeover offer of another potash company has been announced (Western Potash), and has been quickly bid up close to the takeover offer. Verde Potash (NPK.TO AMHPF), my personal favourite, has also appeared on my CIBC Alerts list along with Allana Potash (AAA.TO ALLRF) and Intrepid Potash (IPI), so it is definitely a sector in play. Even with this second column I will not be able to cover all the investable segments of agriculture, as I also want to cover phosphate, which is equally as important as potash for certain crops. There are also some innovative new growing methods and equipment designed to cut costs for farmers that offer good investment opportunities. Potash is only one small segment of the booming agricultural sector and one we will be focussing a lot of attention on, as the need for more food to feed a growing population manifests itself in higher prices and higher yields, with decreasing arable land available to feed growing populations as cities and urban expansion cut into available crop land in many countries. An easy way to play the broader sector is with agricultural sector ETF / DBA.
As incomes rise in what were third-world countries, there is a corresponding rising demand for higher protein diets, which in turn requires more grain production, to feed more animals: pigs, cattle, chickens and more. In many countries there is also an increased need for irrigation, so the investment possibilities are quite broad. With the market for food products now based on specialties available primarily from specific countries, one that came to my attention recently was New Zealand, which is famous for its dairy and lamb production among other things. In fact, agriculture represents a major source of the country’s income, and 80% of sales for Agria Corporation (GRO), which is the only New Zealand agricultural stock with an American ADR (American Depository Receipt) for ease of investment. They send a lot of butter, baby formula and other dairy products to China, where they also have a seed division that provides the bulk of their remaining income. Interestingly enough, New Zealand/China two-way trade has now reached an impressive $18.2 billion but possibly even more important, the two nations have signed a “currency swap agreement” that bypasses the U.S. dollar altogether, the 24th such agreement China has signed with other nations. You can read about the implications of that here.
Consequently, I recently purchased a few hundred shares of Agria. I paid $1.58 a share and was pleasantly surprised that it has already surged over $2.00. I do not know what the price will be by the time this gets published, but even as high as $2.50 it will probably still prove to be a bargain a few years down the road. Safety rating: 3% of portfolio.
New Zealand, like Canada, has a booming agricultural economy with Agria (the only U.S.-listed New Zealand agricultural stock) reporting a 147% y/y income increase. The New Zealand Central Bank raised interest rates March 13th because of the country’s booming agriculture-focussed economy, the first Central Bank to take that step. In the course of this extended research, with numerous well-known analysts, including Bill Bonner among other newsletter moguls and George Soros and Bill Gates among others, citing farmland as a key safe haven investment if the economy collapses, as is being predicted by many pundits interviewed on King World News (KWN) almost daily. Nothing is more basic than access to clean drinking water and food, so it may become a foundational investment sector along with precious metals as our fractional reserve banking system progressively implodes in the coming months and years.
I found some additional ADR’s on foreign food/farm-land based companies that are worth investigating. I have not bought any of them yet as I have not yet done my own “due diligence” so just consider this a “heads up” to place these on a watch list to collectively research on whether they reach a good buy point. They are not necessarily “go-out-and-buy-them-tomorrow” stocks, but I will tell you what I know about them so far. Gladstone Land Corp. (LAND) is a recent IPO that has a current inventory of 175,000 acres, which they buy and lease to farmers, and collect rent and negotiate leases. That’s all I know at this time, but intend to look into further.
China is not the only country seeking additional food production land to feed its hungry masses, much of which is found in South America, Africa, Russia/Ukraine, etc., so there are numerous capital pools formed to specifically make those investments. There is one that particularly intrigues me on my investigations so far, because it is based in Luxembourg, a tax haven, and invests primarily in South America, where Brazil and Argentina have vast tracts of land. It is Adecoagro (AGRO), has 725,000 acres, 66.6% in Brazil, 32.2% in Argentina, 1.2% in Uruquay, with the major crops being coffee beans, sugarcane, cotton, cattle ranching, dairy cows and ethanol production.
The better known domestic South American company is Cresud (Nasdaq CRESY), which I have known about for years, but somehow never got around to investing in, and I believe Travis may have mentioned it a few times as well.
I also searched out a few possibilities for American domestic producers that may be of interest, but keep in mind, weather, insects/diseases can take a toll, so a good entry point has yet to be researched by me, so proceed with caution. Alico (Nasdaq ALCO) has 130,400 acres of citrus in Florida, with 44% of their income coming from juice concentrates, 38% from supply chain management, 12% from sugarcane and 5% from beef. California is the base for Limoneira (Nasdaq LMNR) which has 7,850 acres of real estate from which it derives 12% of its income. The bulk however (88%) comes from being the largest grower of lemons and avocados, which are staples in our weekly diet as we buy them by the bag, every time we shop, while they are in season. I start my morning with the juice of a lemon in a glass of water. Refreshing and liver cleansing, a very healthy practice. Interestingly enough, shortly after having written the above paragraph early in March, one of my favourite analysts, Chris Mayer, in his March 17th issue of Mayer’s Special Situations (he is also editor of Capital & Crisis) mentioned Limoneira in respect to water rights so I have him to thank for some initial research that seems very positive to me. To quote him directly: “The market puts the value of Limoneira at around $370 million, which seems cheap” (he is an ex-banker who is primarily a value investor) “given the significant asset base it owns.” Limoneira has roots to the state of California going back to 1893, so it is not some recent startup. In fact, it carries on its books $82 million in real estate assets.
It is also a significant water play that is becoming increasingly valuable in a prime agricultural state periodically stricken by drought as it is currently. The company, realizing that potential higher value, holds shares in six different companies with significant water rights in addition to those it holds directly. Limoneira itself holds 28,000 acre/feet of water rights associated with LMNR-owned agricultural properties. In addition, they have 8,600 acre/feet of adjudicated water rights in the Santa Paula Basin and 11,700 acre/feet of class three Colorado river rights, which is very significant and warrants considerable further research of the company’s total financials.
Finally, closer to home, a company you have heard about from Travis previously, here, here, here and here, on which he beat me to the punch, both of us initially learning about the stock from Chris Mayer as well. I had been tracking it for some time and was planning on profiling it the week after his column appeared. Consequently some of you will recognize the name. I refer to Input Capital (INP.V, INPCF) ($2.30) who has adapted the “royalty/streaming model” of financing pioneered in the junior mining/precious metal industry, to agriculture. Canada is a major producer of canola oil. In fact, it is the largest and most profitable crop in Canadian agriculture, and so far Input’s experiment in applying the royalty model to canola production seems to be working well. In a recent exchange I had with Travis, he conceded that he may have been too conservative in regard to this stock, so let’s look into this stock a little deeper and consider the up-to-date facts in more detail. What is particularly impressive to me is their website comparison of their application of the streaming model compared to the original precious metals stocks. They point out the very significant fact that unlike the two-to-four years (at best) before any return of capital kicks in from mining investments, canola crops offer return of some capital in the very first year, therefore being highly efficient.
1) Input has a very impressive board/management team owning 18.4% of $61.2 million shares. They are seasoned professionals with key affiliations in Western Canada agriculture, which you can read about on their website.
2) They have raised $41 million in capital up to October 2013 and continue to expand their streaming contracts with mostly family-held farms on a selective basis, farmers with equally proven track records where downside risk is mitigated by crop insurance. They currently still have $34 million for further investment, and most importantly, zero debt.
3) Canola is a $19.3 billion industry in Canada, involving 52,000 farmers, mostly in Western Canada where Input is rapidly becoming the leading private equity partner for Canadian family farmers.
4) Farming has become very capital intensive, and Input’s innovative financing alternative is enabling lower input costs and increasing farmers’ margins, allowing a robust compounding of capital.
5) Canada is the leader in canola exports accounting for two-thirds of world production, with China being the #1 destination. The opportunity exists for further expansion as the model is proven out, to expand into Northern U.S. states as well, to say nothing of other crops such as lentils, beans, flax and more. This could truly become a revolution in agriculture with increased production as well as profitability.
In closing, I would just like to note that we live in a very unstable world. A few weeks ago I was at least considering a small stake in the Russian ETF because the stocks are grossly undervalued in spite of the positive response to their hosting of the Olympics without incident. Then the Ukranian flare-up sent both the Russian ruble and Ukrainian currency lower, so from one day to the next we never know what will confront us when we wake up each morning.
This interview paints a picture we can not afford to ignore.
Agree or disagree, this is a sobering warning from a former high government official regarding the precarious position the world is now in that could lead to nuclear war, and there may well be many more rumors of war before things get sorted out. Check KWN daily for updates.
I had planned on writing about copper in March, then came the price drop, so while I still have some great copper projects to profile, I will wait for a better entry point to do so when copper shows some recovery. I may end up selling some of my remaining free trading shares from prior years to raise some capital to buy these attractive agricultural stocks next week, none of which I currently own. Until next time, good trading.
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