Week 249 - Warren Buffett’s Interest In The Food And Agriculture Sector

NOTE: There is one fact and one assumption that contribute to our blog’s philosophy and approach to financial security. Market volatility is increasing (look at any chart of the S&P 500 Index over the past 90 yrs), which we assume is related to the fact that personal financial security is decreasing. The increase in market volatility is related to the upward drift in P/E, which is secondary to improvements in “information and communications technology.” The task of our blog is to help you choose and create your own “market” which will be less volatile than the S&P 500 Index. We also have the goal of helping you understand that your “personal financial security” has to mesh with your concept of “personal safety.” Accordingly, we recommend that your retirement savings be in a non-speculative category. That means over half is invested in 10-yr US Treasury Note equivalents and the rest in stocks of large US corporations. Here at ITR, we’ll consider the Vanguard Wellesley Income Fund (VWINX) to be our key benchmark going forward, replacing the Vanguard Balanced Index Fund (VBINX).  

Situation: Most investors now understand that the commodity “supercycle” is ending. China has largely finished building out its economy, which is close to 21st century standards along its Eastern seaboard. The country also has abundant stores of grain, iron ore, copper, bauxite, and petroleum. The world has had to expand commodity production to make this possible. Now that China has cooled off, the world has almost twice the ability to supply commodities than is needed to continue developing emerging markets. 

Food is the exception. While food storage facilities have been replenished, almost 20 million people a year continue to emerge from poverty. They can finally afford a protein intake of 60 grams a day for an adult male, as recommended by nutritionists. This will require agricultural logistics to continue expanding, albeit more slowly. 

As investors, we can’t help wondering how Warren Buffett views the ups and downs of commodity production, namely the implosion that began in the spring of 2011 and has now become a Bear Market for the Basic Materials and Energy industries. You can be certain Mr. Buffett figures to make money from buying stock in some of those bargain-priced companies: “Be fearful when others are greedy, and be greedy when others are fearful” is his motto. 

Mission: Track positions that Berkshire Hathaway has established in commodity production and processing since 2011, particularly in the Food and Agriculture sector.

Execution:
Berkshire Hathaway purchased control of these Food & Agriculture companies prior to 2011:

• See’s Candies, purchased for $25 Million in 1972;
• Dairy Queen, purchased for $585 Million in 1997;
• CTB (an agricultural equipment manufacturer, purchased for $180 Million in 2002;
• The Pampered Chef (a kitchenware manufacturer), purchased for ~$900 Million in 2002.

Berkshire Hathaway began accumulating these Food & Agriculture stocks prior to 2011:

• Coca-Cola (KO), 400,000,000 shares worth $17.4 Billion, purchases since 1988;
• Wal-Mart Stores (WMT), 56,185,293 shares worth $3.7 Billion, purchases since 2005;
• Dow Chemical (DOW), preferred shares worth $3 Billion, purchased in 2009.

Berkshire Hathaway has purchased these commodity-related companies since 2011:

• Iscar (Israel toolmaker), purchased for $10 Billion in 2013;
• HJ Heinz, purchased jointly with 3G Capital for $23 Billion in 2013;
• NV Energy, purchased for $5.6 Billion in 2013;
• Phillips Specialty Products, purchased for $1.4 Billion in 2013;
• Kraft Foods Group, purchased jointly with 3G Capital for $50 Billion in 2015;
• Precision Castparts, purchased for $32 Billion in 2015.

Berkshire Hathaway has been accumulating these commodity-related stocks since 2011: 

• Phillips 66 (PSX), 75,550,000 shares (14% of business) worth ~$6.1B;
• NOW (NOW), 1,825,569 shares (1.7% of business) worth ~$25M;
• Suncor Energy (SU), 300,000,000 shares (21% of business) worth ~$7.2B;
• Kinder Morgan (KMI), 26,533,525 shares (13% of business) worth ~$460M;
• Kraft Heinz (KHC), 325,634,818 shares (27% of business) worth ~$24B; 
• Deere (DE), 22,884,190 shares (7.2% of business) worth ~$1.8B;
• Costco Wholesale (COST), 4,333,363 shares (1% of business) worth ~$650M;
• Restaurant Brands Int’l (QSR), 8,438,225 shares (3.7% of business) worth ~$280M;
• Mondelez International (MDLZ), 578,000 shares (0.4% of business) worth ~$23M.

Administration: Looking at Berkshire Hathaway’s commitment to commodity-related companies since 2011, most of the outright purchases and share holdings have been in Food and Agriculture sector. HJ Heinz and the Kraft Foods Group were taken private to form Kraft Heinz (KHC) with an Enterprise Value of $110B, which started trading on 7/6/2015. LG Capital and Berkshire Hathaway each own a little over 25% of KHC shares, the remaining 48% being owned by outside shareholders. LG Capital will operate the new company. Berkshire Hathaway now owns shares in 8 publicly-traded Food and Agriculture companies (see Table). Those shares are worth ~$51B, representing almost 39% of Berkshire Hathaway’s stock portfolio.

Bottom Line: Over the past 4 yrs, Warren Buffett has almost doubled Berkshire Hathaway’s commitment to the Food and Agriculture sector. Kraft Heinz (KHC) is second only to Wells Fargo (WFC) in the Berkshire Hathaway stock portfolio, and he has built a large position in Deere (DE) shares. Prior to 2012, Warren Buffett’s interest in this sector was confined to purchasing 4 small companies for $1.7B, maintaining a large position in Coca-Cola (KO), and building a position in WalMart (WMT). The combined value of KO and WMT shares is ~$21B, whereas, the combined value of KHC and DE shares is ~31B. 

Risk Rating: 7

Full Disclosure: I dollar-average into Wal-Mart Stores, and also own shares of Berkshire Hathaway, Deere, Coca-Cola, and duPont (which is merging with Dow Chemical).   
        
NOTE: Metrics in the Table are current for the Sunday of publication; metrics highlighted in red denote underperformance vs. the Vanguard Wellesley Income Fund (VWINX). Total Returns in Column C date to 9/1/2000, a peak in the S&P 500 Index.

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