The role of food in a well-nourished portfolio
In a world that is lunging from crisis to crisis, food is becoming a hot commodity, says a Canadian analyst who likes two fertilizer stocks.
Almost every commodity has its bull market.
The latest “bull” is just about the most fundamental commodity there is. Food.
But food is far more than a bullish commodity or a hot trend. It’s a looming worldwide crisis — in a world beset with crises. It’s all tied up with growing populations, changing diets and spiralling costs.
For investors, it points in one direction. Fertilizer stocks.
We get the full story from one of the world’s leading experts in the field. Mr. John Stephenson is a Canadian investment executive and the author of several noted investment books, most recently The Little Book of Commodity Investing.
Emerging markets are sending out mixed signals for investors these days, he writes in The MoneyLetter, but the developed economies are facing even greater challenges.
The secret, says this analyst, is to invest in North American companies that are profiting from growing demand for food around the world.
He recommends one from Canada and one from the United States.
Hot money
Emerging markets have become a hot commodity in recent years. “A flood of ‘hot money’ has been plowed into emerging markets as investors in the West have gone searching for return,” writes Mr. Stephenson.
But something’s out of sync. Stock markets in emerging markets have been sliding even as their economies keep on growing.
Investors are losing confidence in overseas stocks despite the fact that their economies are still growing at a brisk pace. (This article was written before the catastrophe in Japan, whose effects on the regional and world economies have yet to be determined.)
Earlier this year, the International Monetary Fund predicted that emerging market economies on the whole will grow by at least 6 per cent this year and next.
So why was the Shanghai stock exchange down more than 12 per cent last year (and narrowly up this year)? Why is the Brazilian exchange down almost five per cent and the Indian exchange down by double digits?
For one thing, all that “hot money” kicked both inflation and the local currencies upstairs. When governments attempted to put a lid on these boiling issues, investors started to cool off.
One item that has not cooled off is food.
Lose-lose situation
The prices of basic food staples — onions in India, garlic in China, cabbage in South Korea — shot up so fast that governments in those countries have been forced to impose price controls.
“Driving global food prices higher is a potent combination of slumping global food stocks, whacky weather and changing diets,” writes Mr. Stephenson. And the effects are spreading.
Consumer prices in China hit a 28-month high last November, with 75 per cent of the increase attributed to food. They’re still going up, to the tune of almost 5 per cent in February.
Investors are now fretting over a possible lose-lose situation in emerging markets, says this analyst. “Either inflation runs rampant or, to fight inflation, central banks in emerging markets ratchet interest rates so high that growth slows to a crawl.”
Yet it would be a mistake to dwell too heavily on inflation in emerging markets, he argues. Accelerating food and fuel prices may be putting even greater inflationary pressure on the West.
It’s starting to look like the 1970s all over again, he says, when commodities soared — and stocks and bonds stood still.
Meanwhile, food-processing companies like PepsiCo and Kraft have announced price increases for 2011 as corn prices have more than doubled. This food inflation will wreak just as much havoc on the policies of western central bankers as on those of the emerging world.
What’s more, most western nations import their commodities. And their economies are recovering slowly. Stagnant growth and rising inflation could even lead to the dreaded “stagflation.”
In these conditions, a basket of North American stocks looks like “a sucker’s bet,” says this analyst
Yet if growth comes in “fits and starts” in emerging markets, they’re not a sure bet either, he adds. But there is a solution.
Slapping down more fertilizer
“The way to play the rise of the emerging markets and the likely stagflation in the West is through commodities,” Mr. Stephenson tells his readers in The MoneyLetter.
The smartest way to do this, he asserts, “is through North American listed companies that offer an indirect play on growth abroad.”
And the best way to do that is with fertilizer stocks. “Rising farm incomes and better crop economics will be the justification for slapping more fertilizer down on the fields to boost crop yields this year.”
The analyst’s first recommendation may be Canada’s second biggest fertilizer firm, but it’s actually the largest agricultural retailer in the United States. Agrium Inc. (TSX-AGU) has 950 retail centres in North and South America. And as the spring planting season gets underway, farmers will be striving for maximum yields, says the analyst.
The analyst’s 12-month target price for Agrium is $115. The shares traded as high as $98 in February before pulling back and are now at $88.25, having risen almost a dollar-and-a-half today. It has a tiny yield of 0.1 per cent on its modest $0.11 dividend.
Mr. Stephenson’s second choice is CF Industries Holdings (NYSE-CF). This company distributes nitrogen and phosphate fertilizers across North America. His 12-month target price is $190. The stock, up over $3.00 today, trades at $129.98 and yields 0.3 per cent on a dividend of $0.40.
Look around you, says this analyst. “The next great bull market has arrived, and it’s in commodities, the real things you use every day.”
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