Food, glorious food!
Hot sausage and mustard!
While we’re in the mood –
Cold jelly and custard!
Pease pudding and saveloys!
What next is the question?
Rich gentlemen have it, boys –
In 2012, I think of food as the most potentially glorious investment one can make – on the production and the consumption side of the food chain. The proof in the pudding – I could not resist the pun – was the radical success of the Annie’s (NYSE:BNNY) IPO last week. The stock of this organic food producer climbed 89% on the first day of trading. Investing in food can be split between production and consumption – and there are great companies in both sectors of the food chain. What are the drivers? Growth in worldwide demand and the personalization of food – organic, locally grown, freshly served and made to order at a restaurant.
A worldwide demand for better food
The number of people entering the middle class is at least 80 million per year around the globe. This trend is the foundation for investing in agriculture – the more money people have the more they spend it on more, and better, food. This phenomenon is most common in fast-growing “emerging economies” – China, India, and Brazil come to mind – but is also happening in “recently emerged economies” – Indonesia, Malaysia, much of South America and Asia. Just the five countries mentioned here have a combined population of 3.2 billion or 45% of everyone on the planet.
The bottom line for investors: When a few million people want to buy more and better food, it is a nice little trade. When more than 3 billion want to do so, and are on a track to do so, it is time to, and I am now stealing a line from Jim Rogers, “trade that Mercedes for a tractor.”
Wall Street has caught on through its love affair with commodity markets but has yet to understand the secular nature of this change in food consumption in places like China. Demand for more and better food should increase for the next 50 or 100 years. The only other industry where this can be said is energy – but substitution among energy sources will keep prices down. This kind of price substitution does not apply to agriculture on a large scale – there are no technological breakthroughs that are going to make growing corn radically cheaper than growing soybeans or wheat or even rice.
Suppliers to agriculture
Wall Street has not caught on and is focusing on the past – there are still fears that cutbacks in the ethanol program – where Uncle Sam subsidizes millionaire farmers to grow corn to burn in cars, bright idea, eh? – will hit the sector. This fear has created an opportunity for the cutbacks in the ethanol program are going to be replaced by rapidly growing demand from China – and that is why prices are firming, in addition to drought conditions in major grain producing nations.
Bottom line: Once a family eats better pork and chicken, they are not going back to soup even if it means delaying purchase of that moped because the factory is cutting back. Chinese and other nations’ imports of corn and beans are at record highs and will go higher over the next 12 months. Companies supplying farmers in turn meeting the burst in worldwide demand are going to do very well.
Where to look for investments:
Start with suppliers that benefit from intensive agriculture such as Terra Nitrogen (NYSE:TNH), which also sports a near 9% dividend or Deere (NYSE:DE), a terrific company with the best tractors in the world, including ones that do not need drivers and are moved by satellites measuring the moisture in soil and crops.
Another outfit that comes to mind is Brasil Foods (NYSE:BRFS). They are not just a play on Brazil – although they dominate their segments of the market in that country – they are a huge chicken exporter, vertically integrated and even though they have more than $14 billion in sales, relatively unknown on Wall Street.
Profit from personalization
Wall Street so misunderstands food and restaurants you could make a living just by going counter to what the top ten analysts recommend. Why? I think –and don’t laugh –this is in part due to the lack of access to national chains by analysts working in Manhattan. I remember when I ran an institutional research group and was presenting survey results about Starbucks (NASDAQ:SBUX) the analysts sat dumbfounded, unfamiliar with the company’s larger footprint stores that were a favorite destination of kids, including my baseball team of ten year olds.
Personal food is just that: food tailored to the individual tastes and buying habits of consumers. This can mean organic foods found at Whole Foods Market (NASDAQ:WFM) or provided by Annie’s, foods prepared exactly as you request at Chipotle Mexican Grill (NYSE:CMG), or Panera Bread (NASDAQ:PNRA) or revised menus with light fare and calorie counts bring in new customers at Cheesecake Factory (NASDAQ:CAKE).
Am I exaggerating because I like food too much?
- The grocery business grows around 2%-3% per annum, in a good year. Whole Foods grew 11% in FY 2011.
- Starbucks continues to grow despite a very weak economy – and it’s the first and largest purveyor of personalized coffee.
- Chipotle, with a 23.6% growth rate and Panera, with an 18.1% growth rate, are radically outperforming the fast casual segment.
- And, as I mentioned, little Annie’s, with 2011 sales below $120 million, saw its stock nearly double last week on the day it went public.
It is easy to see that the trend in personalization is everywhere – technology, medicine, even education. The best place, for it has yet to be properly identified and categorized by Wall Street, to invest in this trend is food, glorious, food.