Street Capitalist: Event Driven Value Investments

One thing that does not seem to be mentioned much in the usual financial blogs I read is the current global food crisis, the credit crunch seems to be getting more exposure even though this is a pretty big deal. After all, people are killing each other over bread in Egypt.

Agricultural commodities are booming along with most other commodities. Commodities are inherently seen as safer than traditional assets right now because you have to worry about interest rate cuts by the Fed (bad for dollar holders) and then the contagious credit crisis (bad for domestic equity investors). Some people thought emerging markets could provide some kind of safety, but now there’s a lot of arguments against decoupling.

So commodities have seemed like a good choice. I will say that some of the price increase for these agricultural commodities is due to speculation, they are seen as a safe haven from the falling dollar. However, unlike gold, whose value is derived solely from the fear of investors, agricultural commodities are having price hikes because of real concerns. Take a moment to study corn prices. World wide, food prices have gone up 87% in just 3 years. For things like corn, there are other factors driving up demand and prices. Biofuels and increased consumption. With everyone head over heals for ethanol, farmers worldwide are more than willing to grow corn to take advantage of the rising prices. However, if farmers switch towards corn, it means that they are sacrificing another crop. This lowers the supply of those other crops, which ALSO drives up their demand.

via the Financial Times

Soybeans are a good case of this. We have seen protesting in Argentina over export taxes for soybeans. I might be wrong, but I don’t think that soybeans make up a big portion of the average Argentine’s diet. This means that their farmers are growing mainly to export and take advantage of demand elsewhere. When they do this, they reduce the supply of other, more useful crops for home. The export tax is most likely a mechanism to push farmers towards growing for the domestic demand (and also to help reign in the Argentine Peso).

The prices aren’t going unnoticed. Just look at the April 6th strikes in Egypt. 500 people were arrested, over rising food prices. From this kind of outrage, we will definitely see some kind of action from governments. More taxes are a given and there isn’t much to do that will prevent against that. Governments will engage in these kinds of protectionist measures because food is something that affects everyone and food is essential for living. It’s one of those basic needs and any perceived danger of it going away will illicit irrational responses.

I believe that there may be ways to profit from the crisis. Jim Rogers, the famed commodity guru believes that these kinds of bull markets last over a decade. From my research, we’re maybe 3 to 4 years into that commodity bull market. Meaning, we should continue seeing rising prices for agricultural commodities such as corn and soybeans. In addition though, fertilizer could be a good avenue for value.

Here’s a chart of DAP prices:

Governments are inevitably going to try to force farmers to increase food production and the supply is already pretty tight. Production increases really seems like a must in order to fulfill this increased demand. Demand from nations with emerging middle classes like China are taking the already tight supply. The Chinese specially are indirectly affecting the prices because of their meat consumption. If the Chinese are going to want to keep eating meat, we’re going to need more cows and we’ll need more feed for the cows. This means that inevitably, in order to grow more we’ll need more fertilizer.

Here’s a group of fertilizer related companies:

All of these have gone up quite a bit these last couple years, but they still appear to have room to gain. At the very least, they seem like a good spot to counter any of the effects of the credit contagion.I want to make clear that these are not undervalued companies, all of them trade at historical highs and on most metrics that appear overvalued. The trend in rising food prices seems far too difficult to reverse. There’s a fat chance that we’ll see a widespread liberalization of agricultural policy, so production will continue to be inefficient, leading to supply bottlenecks in the midst of soaring demand. The fact that two big global macro investors, George Soros and Jim Rogers are both bullish on China means that the nation will continue to prosper, in spite of the current food problems and fear of global financial turmoil. If China keeps growing their consumption of food commodities will increase as well which would bode well for fertilizer companies.

All this means is that you can probably obtain a profit or at least protect your investment through prudent investments in one of the above companies, or perhaps if you can find one - a global/more off the beaten path fertilizer company (some are out there), or even a passive investment like this agricultural commodity ETF (MOO, DBA, TITN).