Rising Food Prices Series: Part VII

Posted by Patrick O'Connor on 5/28/08 2:11 pm

This article is the seventh and final part of a multi-part series about rising global food prices. In this installment, we will discuss some of the investment opportunities presented by the global food crisis. For further information, read parts I, II, III, IV, V, and VI.

Opportunities in the global agribusiness sector

In free markets, according to the law of supply and demand, a shortage will eventually remedy itself. As demand for a rare good rises, so will its price. When the price exceeds equilibrium—that is, the place at which supply and demand are equal, so sellers are selling all the goods they have produced, and buyers are buying all the goods they have demanded—a surplus of the good will result, because buyers can no longer afford it. Producers will thus be motivated to lower the price.

However, as noted in Part VI of this series, the world’s food market is not totally free; it is rife with trade restrictions, such as import and export quotas and bans, as well as tariffs. And even if it were totally free, reaching equilibrium would take time.

As a result, it appears that sky-high food prices are here to stay for some time. But, the crisis is not insurmountable. New technology, such as genetic modification and improved fertilizers, could increase crop yields. The diversion of crops to biofuels could end once politicians realize that voters care more about eating than driving green cars. And governments and businesses alike are working to combat the effects of climate change.

Meanwhile, astute investors could seek to take advantage of the situation by investing in companies that fall under the “global agribusiness” umbrella—for example, food producers, such as farmers and livestock raisers; food refiners; and industrial infrastructure companies that are responsible for the distribution of food throughout the world. Below we offer a few examples of industries that could benefit from the global food crisis, explain why they have potential, and list a few stocks that are Navellier top-ten holdings.

Farming machinery manufacturers
This one is obvious: in order to meet increasing demand by producing more food, farmers will need more equipment.

All Cap Core Portfolio
Cummins Inc. (CMI); 1-yr Chart; Profile

Power Dividend Portfolio
Joy Global, Inc. (JOYG); 1-yr Chart; Profile
Sun Hydraulics Corp. (SNHY); 1-yr Chart; Profile

Fertilizer companies
The price of fertilizer, which is essential for maximizing a crop’s potential, has risen in response to increased demand for food and high natural gas prices, according to the Tennessee Farmers Cooperative. For example, one fertilizer, DAP, cost $398 a ton last year; this year, it costs $1,000 a ton, according to Arkansas-based Oakley Fertilizer. It is not surprising, then, that some fertilizer companies are doing well. Read More

Vantage Portfolio
Chemical & Mining Co. of Chile (SQM); 1-yr Chart; Profile
Terra Nitrogen Co., L.P. (TNH); 1-yr Chart; Profile

Dynamic MPT Portfolio:
Mosaic Co. (MOS); 1-yr Chart; Profile
Potash Corp. (POT); 1-yr Chart; Profile
CF Industries Holdings, Inc. (CF); 1-yr Chart; Profile
Terra Industries, Inc. (TRA); 1-yr Chart; Profile

Water treatment companies
Climate change, as we noted earlier in this series, is leading to water shortages in some parts of the world. Moroever, it has been estimated that most of the 3 billion people projected to be added to the world population by mid-century will be born in countries already experiencing water shortages. This could create opportunities in water treatment, such as desalination, and irrigation improvements.

Small-to-Mid Cap Growth Portfolio
Valmont Industries, Inc. (VMI); 1-yr Chart; Profile

Food producers
Food producers may seem an odd choice to benefit from rising global food prices since their input costs are rising. But they may be able to pass on these rising input costs to the consumer due to dominant market positions and growing sales.

Biotechnology companies
Genetic modification of crops—such as the development and production of hybrid seeds—could improve crop quality and yield, which we believe could become far more important as countries look to produce more food on the same amount of land.  However, biotechnology companies tend to not have earnings early on.  As such, they’re usually too risky for our strategies.

Shipping-related companies
As demand from growing populations such as those of China and India skyrockets, the United States’ opportunity to export increases. That could bode well for companies involved in shipping—port operators, cargo container manufacturers and shippers. The first two may be particularly promising. Increased demand combined with a weak U.S. dollar has led to an increased demand for U.S. exports. But American agricultural producers cannot find enough empty cargo containers to ship their goods overseas, according to the Agriculture Transportation Coalition, a Washington-based lobby that seeks to help food producers become more competitive internationally. Port operators are also intriguing, as they have high barriers to entry, which could decrease competition, thereby increasing the profability of companies within the industry.

Power Dividend Portfolio
CSX Corp. (CSX); 1-yr Chart; Profile

Fundamental ‘A’ Portfolio
TBSI Int’l Ltd. (TBSI); 1-yr Chart; Profile
DryShips, Inc. (DRYS); 1-yr Chart; Profile

Dynamic MPT Portfolio
Excel Maritime Carriers, Ltd. (EXM); 1-yr Chart; Profile

Risk mitigation technologies
At least one major world insurer has said that there is an increasing need to mitigate risks in global agriculture. Climate change advisory services and related companies could help do this. For example, one company offers a geospatial information service that monitors more than four million square kilometers via five observation satellites—an increasingly important service when weather volatility could create cash flow risks for insurers.

Finally, a word of caution. As you may have guessed, many companies that could potentially benefit from the global food crisis are global, and global investing presents risks not associated with domestic investments, such as lack of transparency, political and economic changes and currency fluctuations. This could result in greater price volatility, so be sure to consider your suitability for a foreign stock before investing.

Navellier’s International Growth Portfolio has positions in some of the aforementioned industries.

We want to hear your thoughts!  Comment to this post by clicking the ‘comments’ link below.

Investment in equity strategies involves substantial risk and has the potential for partial or complete loss of funds invested. It should not be assumed that any securities recommendations made by Navellier & Associates, Inc. in the future will be profitable or equal the performance of securities made in this report. For a list of recommendations made by Navellier & Associates, Inc., for the preceding twelve months, please contact Tim Hope at (775) 785-9416.

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