Week 308 - Barron’s 500: Agricultural Production Companies

Situation: Food commodities are coming back in favor as investments, as protein sources are becoming more affordable. Demand for meat, milk, soybeans, and cereal grains is robust. Companies that help farmers and ranchers produce those protein-rich commodities stand to benefit.

Mission: Apply our standard spreadsheet to all of the companies on the 2016 Barron’s 500 List that support agricultural production, and have a 16-Yr trading record that has been analyzed statistically by the BMW Method.

Execution: see Table.

Administration: You’ll want to know how to invest in the companies that emerge from the ongoing need to consolidate operations: Potash is buying Agrium, Bayer is buying Monsanto, and duPont’s CEO will run the agricultural assets of duPont and Dow Chemical once that merger is completed. So, 5 of the 9 companies listed in the Table are “in play”; you can learn a great deal about what each company offers its merger partner by studying the Table.

Bottom Line: Companies that supply farmers with their tools for production are slowly emerging from a financial wasteland (caused by the overproduction of agricultural commodities). Their finances have improved only because of consolidating operations and dialing back production, which has been brought about through mergers: Dow Chemical with du Pont, Agrium with Potash, Syngenta with China National Chemical, Monsanto with Bayer. Only time will tell whether lean production will translate into enough demand to sustain these new companies. China will be the key source of demand, whether we’re talking about food commodities or solar panels.

Risk Rating: 8 (where 10-Yr Treasuries = 1, S&P 500 Index = 5, and gold bullion = 10)

Full Disclosure: I dollar-average into Monsanto (MON) and also own shares of Agrium (AGU).

NOTE: Metrics are current for the Sunday of publication. Red highlights denote under-performance vs. VBINX at Line 17 in the Table. Purple highlights denote Balance Sheet issues and shortfalls. Net Present Value (NPV) inputs are described and justified in the Appendix to Week 256: Briefly, Discount Rate = 9%, Holding Period = 10 years, Initial Cost = average stock price over the past 50 days (corrected for transaction costs of 2.5% when buying ~$5000 worth of shares). Dividend Growth Rate is the 4-Yr CAGR found at Column H. Price Growth Rate is the 16-Yr CAGR found at Column K (http://invest.kleinnet.com/bmw1/). Price Return (from selling all shares in the 10th year) is corrected for transaction costs of 2.5%. The Discount Rate of 9% approximates Total Returns/yr from a stock index of similar risk to owning shares in a small number of large-cap stocks, where risk due to “selection bias” is paramount. That stock index is the S&P MidCap 400 Index at Line 32 in the Table. The ETF for that index is MDY at Line 16. For bonds, Discount Rate = Interest Rate.

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