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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Fertilizer Prices are Soaring

Posted by Louis Navellier on 5/27/08 11:12 am

This post contains two fertilizer stocks that are top-ten holdings.

If you thought food and energy prices were skyrocketing, take a look at what is happening in the fertilizer market.  Two of the most widely desired elements in fertilizers are phosphate and potash.  And prices for both are soaring off the charts.

Phosphate, a mineral found in fossilized marine life, is up roughly 175% since last year; and potash, a rock mined from the earth, is up a staggering 200%.

Fertilizer costs are now eating away at farmers’ profit margins more than fuels, seeds, livestock, machinery, and chemicals.  As such, farmers are begging lawmakers to step in and do something about it, but their plight will not be easily resolved.

The reason is there are obscure laws around the world that protect makers of phosphate and potash from antitrust laws.  In the U.S., the 1918 Webb-Pomerene Act is one such law that allows Mosaic Co. of Minnesota to set its prices by following price increases from competitors.

Here are two phosphate and potash companies that are top-ten holdings in one of our all-cap portfolios.

Dynamic MPT Portfolio:
Mosaic Co. (MOS); 1-yr Chart; Profile
Potash Corp. (POT); 1-yr Chart; Profile

As I mentioned, putting a lid on fertilizer price increases will not occur overnight.  In fact, prices will likely continue to climb for the foreseeable future.

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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Famous Analyst and Billionaires Predict Deepening Credit Crisis

Posted by Patrick O'Connor on 5/20/08 12:44 pm

The analyst who was the first to boldly predict serious problems in the banking sector last year said today that the credit crisis is going to get worse.

Oppenheimer analyst Meredith Whitney estimated that banks will need to set aside an additional $170 billion for loss reserves just to keep up with estimated loan losses. Read More

Billionaires Warren Buffett and George Soros also said the credit crunch is far from over.  Watch video below.

As a result, the banking sector suffered major losses today.

Navellier’s strategies are underweight financial stocks.  You can view our top-ten holdings for our all-cap portfolios by clicking these links:

Vantage Top 10
All Cap Core Top 10
Fundamental ‘A’ Top 10
Power Dividend Top 10
Dynamic MPT Top 10

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Stocks Surge on CPI Data

Posted by Louis Navellier on 5/14/08 11:46 am

U.S. stocks rebounded today after a key consumer prices report revealed that inflation was less than expected in April.  The Consumer Price Index (CPI) rose 0.2% in April, slightly less than the 0.3% rate expected by economists.  And the more important core rate (consumer prices minus food and energy) edged up just 0.1%, half as much as the 0.2% consensus.  CPI Full Report

Overall, the CPI data are good news, but the Fed will not cut rates further, since the core CPI & PCE are still above the Fed’s “comfort zone” of 1%-2% inflation.  The CPI’s year/year core rate was up 2.3% in April; however, the 3-month annualized rate is down to 1.2%.  The big drop-off in the past three months is due to the economic slowdown.  In fact, some believe it’s indicative of a recession even though we haven’t seen official recession numbers yet.

That could change though.  The Q1 GDP data still have to go through two more revisions.  The first estimate was 0.6%, so there’s not much room on the downside to stay above official recession territory.

Moreover, the May CPI headline number is supposed to be bad, largely due to the big run-up in food and energy prices this month.  But, that doesn’t necessarily mean the food and energy prices will get passed through enough to increase the core rate if the overall economy is still slowing.

In the meantime, we’re still underweight consumer stocks in Vantage, All Cap Core, Fundamental ‘A’, Power Dividend, Dynamic MPT, and our other portfolios, too.

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