Agribusiness

This is an example of how I make decisions in near real time. In no way am I offering any particular advice. That is not the purpose of this blog. I do try to inform the reader as to proven methods of approaching these kinds of decisions, but I will never tell you what particular course action to follow. I leave that to the highly entertaining talking heads found on cable TV stations.

For quite some time I have been considering investments in the agribusiness sector. It occurs to me there are 7 Billion people living on this planet and all of them need food. It also seems to me that large scale agribusiness and high technology are the best and most likely solution to this problem.

I don’t think there is any debate that small scale organic farming and local distribution chains provide a superior product, but I don’t see those kinds of small businesses feeding the world. Also I don’t know how to invest in small scale farms.

I have been particularly interested in Syngenta, a Swiss firm involved in seeds and pesticides. I thought this would give me another position in a stable foreign country as well as an initial position in a new sector. As the number of individual stocks I own has grown, I have begun to lean more towards Exchange Traded Funds (ETF) or mutual funds. It is easy to pick out companies like Coca Cola or Chevron. It is harder to know what Brazilian tree farm represents the best such investment in the nations of the developing world. So I am currently considering Market Vectors Agribusiness ETF (ticker symbol MOO) rather than any individual position.

Here are their top ten holdings:

1) Monsanto Company
2) Potash Corporation of Saskatchewan, Inc.
3) Syngenta AG
4) Deere & Co
5) Mosaic Co
6) Agrium Inc
7) Archer-Daniels Midland Company
8) Wilmar International Ltd
9) Yara International ASA
10) CF Industries Holdings Inc

I asked a friend of this blog with considerable knowledge of the agribusiness sector what he thought of my idea. Here is his answer.

“I see a lot of industry heavyweights on the list. I suspect a number of them have enjoyed nice appreciation in the last six months due to the rise in commodity prices and quantitative easing. It's a good question whether those gains will continue. Quite frankly, I am frightened of the stock market. I think we are going to plunge into another recession early in 2013.

You asked me what I thought... In terms of hot sectors, this is one. I wonder if you are getting to the party a little late though.”

This morning I did my due diligence. My friend was right on target. Looking at the fund’s large positions, research seems to indicate that most of them are rated as a hold or a weak buy. Deere is rated a sell. Most of these companies are pretty near the top of their range.

It turns out MOO is not a dividend play as I suspected from looking at a list of their top ten holdings. They only pay out a little over a half a percent. MOO is a growth fund. This is not a bad thing. Typically, this makes the fund more sensitive to market fluctuations than a more conservative dividend play. However, one of the rules of thumb for investors is, “Don’t fight the FED!” Even if quantitative easing proves to be a bad idea with unintended future consequences, all those new dollars created out of thin air have to go somewhere. Lately, they have been juicing returns in the market. How long can that continue? If I knew the answer to that question, I would probably be living somewhere on the South West coast of Maui rather than in the suburbs of our nation’s capital.

I look at the agribusiness sector a little differently than most consumables. People have to buy food. Therefore, I suspect that this fund will be less subject to downturns than similar funds in other sectors. It might even continue to grow even if the market declines.

How important is entry point to patient long term value investors? In an article entitled, “Does Entry Point Matter to a Dividend Growth Investor?” the author examines a number of particular examples. For the mathematically inclined, this is worth reading.

Does Entry Point Matter to a Dividend Growth Investor

For the moment I will accept the author’s advice, “I believe in buying stocks only when they are below fair value, and this analysis reinforced my conviction. Undervaluation leads to better total returns, less risk, more dividend paying shares, and more income down the road.”

I believe I MUST initiate a position in agribusiness, however not today.