The inflation in the food prices is set to continue globally. The demand is rising faster than the supply can keep pace and in 2007 and 2008 there were riots in 60 countries due to run up in the prices of corn, wheat and soybeans. There are many drivers behind the rising food prices. Primary among them being the increased demand from China and diversion of agricultural resources to produce biofuels.
The result is a changing industry dynamic as established players continue to jockey to lock in supplies of essential grains and position themselves as a supplier to China. For example, the recent bid from the Japanese trading house Marubeni to acquire the US based grains merchant Gavilon (a spinoff from Conagra Foods), is squarely aimed at getting a footing in the Chinese supply channel. On the other hand, we have global giants such as Bunge investing heavily in Sugar production in Brazil for the Ethanol market.
Agriculture has the potential to be one of the most promising investment themes for the coming decade (sorry Facebook investors!). Here are some of the selected stocks that you can use to play the agriculture theme.
Fertilizers
Nitrogen based fertilizer companies are benefitting from a glut of natural gas, that makes their input costs low, and increased fertilizer demand rising out of a good season of corn plantings in 2012 and solid projections for 2013. In addition to the food applications, corn is also being increasingly used for corn based ethanol projects.
CF Industries: One of the largest US company in this space is CF Industries (CF). The company also makes phosphate based fertilizers. The stock is currently cheaply valued at 7.55 forward P/E and 0.63 PEG. The company has a 25% profit margin and pays a 1% dividend yield.
Terra Nitrogen LP: Terra Nitrogen LP (TNH) is a subsidiary of CF Industries and operates as a MLP. If you want a pure play in the Nitrogen based fertilizers to get a direct exposure to low natural gas prices, TNH is a good option. As an MLP, it pays out 8.1% distribution yield. Please note that this income is not a dividend but a partnership income and the tax treatment is generally more advantageous but could be troublesome if held in a tax deferred account. The trailing P/E is 11.21 and its profit margins are about 36%
Rentech Nitrogen Partners LP: Rentech Nitrogen Partners (RNF) is another nitrogen based fertilizer producer that recently came public in Nov 2011 and could be worth a look. It is a smaller company, with market cap of $861 million. Its distribution history is not long enough yet, but it has paid out $1.06 in May this year and has forecasted a total distribution of $2.86 for the year, which if met, gives an yield of 12.7%. The PE is a respectable 9.5 on a forward basis
