World food prices reached their highest level ever recorded in January and
are set to keep rising for months, the UN food agency said on Thursday,
warning that the hardest-hit countries could face turmoil. Investing in the
agriculture sector can help capitalize farms and fertilizer producers,
increase food supplies and generate some pretty hefty profits in the process.
If your portfolio does not have exposure to the agriculture sector, what are
you waiting for?
In its latest survey, the Food and Agriculture Organization said its index
which monitors monthly price changes for a variety of staples averaged 231
points in January — the highest level since records began in 1990. This is
driven by increasing demand from developing nations with growing populations
and also from severe weather conditions in agricultural areas of China,
Russia and elsewhere. Lastly, it is being driven by quantitative easing and
inflationary policies by governments and central banks worldwide. This
confluence of forces has pushed food prices to record highs and the prices
are likely to continue much higher, a theme repeatedly warned by legendary
investor Jim Rogers over the past few years.
Agriculture Investment Options
The first and most widely known method is using the PowerShares DB
Commodity Index Tracking Fund (NYSE: DBA). However, it is my least
favorite option. First off, the fund has underperformed other methods
discussed below. But there are also moral and ethical implications to
investing in this fund. It is based on the Deutsche Bank Liquid Commodity
Index Diversified Agriculture Excess Return™ and is a rules-based index
composed of futures contracts on key food products such as wheat, corn,
soybeans and sugar.
While the futures markets can often be helpful in price discovery, they
can also serve to artificially inflate prices of their underlying
commodities, particularly when investors use leverage to stake out much
larger positions than their actual investment warrants. If these speculations
translate to higher food prices, it obviously has a negative consequence to thousands
of the world’s poorest people, especially in regions where over 50% of income
goes towards food. This will not factor into the equation for all investors,
but it makes DBA less attractive to me personally.
Another popular vehicle for gaining exposure to the agriculture sector is
the Market Vectors Agribusiness ETF (NYSE:MOO). This ETF replicates as
closely as possible the price and yield performance of the DAXglobal
Agribusiness Index (DXAG). DXAG is a modified market capitalization-weighted
index consisting of publicly traded companies engaged in the agriculture
business that are traded on global exchanges. DXAG provides exposure to
companies worldwide that derive at least 50% of their revenues from
agriculture business and have a market capitalization exceeding $150 million.
DXAG comprises five major sub-sectors, including agriproduct and livestock
operations, agricultural chemicals and equipment, and ethanol/biodiesel.
The top four holdings of the MOO ETF are listed below. You will get
diversification from this ETF, but many investors may prefer to pick and
choose amongst some of these top holdings. Additionally, while I generally
feel better about investing in companies that support the agriculture
business than futures contracts on the actual food, the #3 holding should
give conscious investors cause for concern.
#1 Potash Corp of Saskatchewan (POT) 9.52%
#2 Mosaic (MOS) 84%
#3 Monsanto (MON)
8.8%
#4 Deere & Co (DE)
8.4%
Monsanto has to be one of the most unethical and shady companies operating
today. They have been creating genetically-modified seeds with questionable
safety and strong-arming farmers into using only their seeds, which have a
built-in function where the resulting crops will not create new seeds for the
next harvest seasons. You don’t have to take my word for it, the dirty
details on Monsanto are documented in Food Inc, The Future of Food,
The
World According to Monsanto and various books and online resources.
Potash/Fertilizer Producers
About 93% of world potash consumption is used in fertilizers. Potash is
important for agriculture because it improves water retention, yield,
nutrient value, taste, color, texture and disease resistance of food crops.
It has wide application to fruit and vegetables, rice, wheat and other
grains, sugar, corn, soybeans, palm oil and cotton, all of which benefit from
the nutrient’s quality enhancing properties.
One of the companies held by the MOO ETF listed above is Potash Corp (POT). The company is the
world’s largest potash producer and the second and third largest producer of
nitrogen and phosphate, three primary crop nutrients used to produce
fertilizer. The stock is up 73% in the last six months alone, but I believe
the share price is likely to continue much higher.
There are also a number of up-and-coming junior potash miners that provide
a greater risk/reward profile. One of my favorites is Allana Potash(CVE:
AAA or ALLRF), which I recommended
to premium members
at $0.76, just before it climbed nearly 200% in just two months. I wrote a
free article last month entitled “Top
Agriculture Pick for 2011 – Allana Potash,” which goes into detail behind
the company and their project in Ethiopia.
Other junior potash miners include Encanto Potash (CVE: EPO) and Western
Potash (TSE: WPX),
although I still believe Allana Potash has the greatest upside potential and
will be attractive on any dip to $1.50 or lower.
Sprott
Resource Corporation
A less known method to invest in agriculture and one of my favorite is the
Sprott Resource Corp (TSE: SCP
or SCPZF), run by
well-known precious metals investor and fund manager Eric Sprott. In addition
to agriculture, the company has exposure to gold, energy and uranium, making
it a diversified play.
Current Investments
Orion Oil and Gas Corporation: CAN$105.1 million invested / 78.9% ownership
Waseca Energy: CAN$44.2 million invested / 81.3% ownership
One Earth Farms: CAN$27.5 million invested / 67% (80% fully diluted)
One Earth Oil & Gas: CAN$11 million invested / 91% ownership
Stonegate Agricom: CAN$26.0 million invested / 54.3% ownership
Gold Bullion: CAN$75.4 million invested in 2008/09 /100% ownership
Coles Hill uranium project in Virginia / 20% ownership
In addition to these current investments, which have all appreciated
significantly, Sprott has one completed investment in PBS Coals, which they
bought for US$55 million and sold for CAN$240.7 million. If this type of
track record continues, an investment is Sprott Resource Corp should prove
very lucrative to your portfolio.
The agriculture part of this play that we are focusing on comes from both Stonegate
Agricom (TSE: ST)
and One Earth Farms. Stonegate is in the fertilizer business
and is currently focused on the development of two potentially world-class,
long-life phosphate deposits, the Mantaro Phosphate Project located in Peru
and the Paris Hills Phosphate project located in Idaho. Stonegate is
confident that the two deposits have sufficient size and grade and are in the
right locations to become strategic, cost-effective sources of phosphate
supply for major fertilizer producers. The Company intends to conduct
definition and exploration drilling to confirm and expand estimates of NI
43-101 compliant mineral resources and reserves in the deposits and then
complete feasibility studies leading to a decision to proceed with extracting
and processing of phosphate and both of their properties have proven
historical merit. This far Sprott’s option agreement totaling $53,000 has
turned into a mark-to-market gain of over $100 million in just a few short
years. Stonegate’s stock is up 160% in the last six months.
The second and more interesting agriculture investment from Sprott is One
Earth Farms. One Earth is slated to become the largest farm in Canada and one
of the largest farms in North America in 2011. It’s also positioned to be one
of the largest farms in the world in the coming years. Sprott Resource Corp.
first invested in One Earth Farms in 2009 and has invested $37.5 million for
a 72.7% (80% fully diluted) ownership position.
One Earth Farms has synergistic cattle and grain operations. Its real goal
is to become a fully integrated farm operation and change the typical farming
model. Instead of the farmer buying retail and selling wholesale, One Earth
has scaled to be able to buy wholesale and is working on a model that will
allow the company to capture some of the retail margin by partnering with
food processors or retail outlets. There are very few corporate farms in
which to invest around the world and with rapidly rising food prices, an
improved business model and backing by Sprott, One Earth seems on track for
great success. The company is currently privately owned and does not trade on
any exchange, so buying Sprott Resource Corp is your only option, other than
private placement if you qualify, to get exposure to One Earth.
Sprott CEO Kevin Bambrough recently discussed the One Earth investment
stating:
One Earth Farms is, in our minds, the only way you can invest in Canadian
farming in a large way. That’s because it is in partnership with the First
Nations groups of Canada, which are federally regulated and permitted to
allow public companies and foreigners to lease land. Typically, non-First
Nations lands in Manitoba and Saskatchewan are restricted under provincial
law from public company ownership or leasing or foreign participation.
I think that One Earth Farms is a company that ultimately will be highly
valued and coveted by three different types of investors. First, large
pension funds might find it very desirable for the inflation protection it
could provide pension fund holders. Also, I think that the sovereign wealth
funds and the Ag ministries of the world that are trying to get food security
for their nations would find this to be very strategic. Lastly, we feel it
would be valued by ordinary institutional and retail investors if it were
publicly listed.
As the population continues to grow rapidly past
the 7 Billion mark, governments worldwide continue printing and debasing
their currencies and weather conditions remain volatile and ill-suited for
healthy harvest, food prices are likely to continue much higher. If you would
like to receive my monthly newsletter and stay abreast of which agriculture
investments I am buying and selling, click here to become
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Income-Producing Farmland,” which details strategies for profiting from
inflation with agricultural land.
