What group of companies will have one billion new customers in the next five to seven years? Answer: farmers and by default, agricultural suppliers.
Worldwide, one billion people will enter the middle class by the end of the decade and the defining attribute of new members is a markedly increased consumption of protein. Mostly chicken and pork, which are fed with grain—much of it American grain. When a few million people want to buy more and better food, it is a nice little trade. But when it’s a billion people, time to pull out your checkbook.
And, if they are suppliers in the U.S., they have an additional advantage — U.S. farmers, due to cheap shale gas, will enjoy the cheapest fertilizer prices in the world — permanently. That gives them not just more profit, but more money to spend on other items, such as tractors and even more fertilizer.
John Deere & Company (DE): Farmers around the world are also growing more grain. The American Equipment Manufacturers Association thinks, the big driver in the sales of construction and agricultural equipment is exports and they are booming. Construction equipment exports were up 13% in 2012, and agricultural equipment exports were up 16%. And the biggest beneficiary of continuing growth is John Deere & Company. John Deere produces the world’s best large tractors and combines — the small ones ain’t bad either — and is exceptionally well managed as shown by their manufacturing operations. Wall Street is paying for growth, and Deere continues to grow here, in China and around the world.
The stock is a long term play. But if you own it , sell calls against every month, one strike out. If you speculate, the stock is moving up right now, so you can also think about buying calls.
Archer Daniels Midland (ADM): ADM is the most important grain and food processor in the U.S. It’s the middleman between the farmer and the restaurant, grocery store or consumer staples company. ADM is heading towards that new middle class with a cash based acquisition of GrainCorp of Australia. GrainCorp is not small — ADM is paying $3.4 billion for the company — so rapid expansion is possible due to the size of the infrastructure already in place. This is a great move. Once they digest GrainCorp, the acquisition enables them to expand rapidly into Asian and Middle Eastern markets without having to build infrastructure from scratch a process that can take a while when dealing with agricultural products and foodstuffs.
For income, sell calls, every month, one strike out.
Monsanto (MON): Monsanto is the world leader in seed technology which in turn has prompted European companies to scream “genetic bloody murder” and put in place various bans of genetically modified crops. This sets up a potential catalyst for the company and stock. There is a reasonable possibility that U.S. and EU trade talks will lead to a modification or end to the current restrictions on genetically engineered seeds. After these talks are over, I expect more Monsanto-grown crops in the U.S. and more Monsanto seeds will make their way to Europe. They are doing well without Europe. Their Q1 2013 numbers were great — their seeds work well in drought and they are pounding it in emerging markets. Profits were up 20%, consensus estimates are for 12% revenue growth in 2013, 25% profit growth and continuing double digit growth in 2014 despite concerns about falling grain prices.
Let me repeat — if you put it in your core portfolio, sell calls, and again, one strike out.
Mosaic (MOS): Mosaic makes the kind of fertilizer Terra Nitrogen (TNH) does not — phosphate and potash based products. Their production costs are going down due to this week’s bust up of a world potash cartel. The company and stock are a perfect complement to TNH. Interestingly, the valuation is the same as TNH on a P/E basis but the yield is less than 2%. That being said, Mosaic’s business has been growing in serous double digits, growing from $6.7 billion in 2010 to $11.1 billion last year. Mosaic is a “go to” stock when Wall Street gets hot on agriculture. The stock is now headed up — if you don’t own the shares, think about buying some calls, two or three months out, two strikes out.
Is there a fifth play in agriculture? Think food — groceries. Think Whole Foods (WFM), they beat expectations handily yesterday. Look at some in the money calls, the $55s that expire this month or next.
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