Agricultural commodities have performed extremely poorly over the past couple of years. For example, the PowerShares DB Agriculture Fund (NYSEARCA:DBA) has fallen from a peak of $35 per share in 2011 to just $24 per share today. This fund invests in futures contracts for the most heavily traded agricultural commodities, including corn, wheat, and sugar, and its weakness gives a general picture of the performance of the broader complex.
Despite weakness in agricultural commodity prices, the case for investing in agricultural commodities is simple, straightforward, and difficult to find fault in. Consequently, I think investors should consider investing a part of their portfolios in agriculture-related assets.
In particular, I think investors should focus on the grain complex: corn, soybeans, oats, and wheat. That is not to say that there aren’t other opportunities in, say, coffee or sugar. But the investment case for grains is especially strong because virtually everybody in the world consumes grains on a regular basis. It is much easier for us to imagine a life in which we don’t have cocoa, coffee, or sugar than one in which we don’t have grains. They are staples not just for us but for the animals we consume.
Thus, in what follows, I provide three very compelling reasons to own investments that benefit from the rise of both grain prices and production levels. In particular the first two arguments give reason to believe that grain prices will rise. The third argument supports this thesis, but it makes an especially good case for investing in companies that increase the efficiency of grain output such as fertilizer producers and irrigation system producers.
First, the global population is growing. As of now, the global population is just over 7 billion people. By 2050, this figure is estimated to reach 9 billion people. Not only that, but food is the last thing that people can go without besides air and water. As a result, food consumption is rising and will continue to rise.
Second, the global population is increasing its meat consumption. People are eating more meat on a per capita basis. In 1980, the average person ate 20 kilograms of meat per year. In 2015, this number is expected to be roughly 40 kilograms. While not all livestock eat grains, most do. Furthermore, it takes 4.8 pounds of grain on average to produce one pound of meat. This means that grain consumption is rising at a faster pace than population growth, and this is extremely bullish for agricultural commodities.
Third, the amount of arable land per person is shrinking. Currently, there are just 0.2 hectares of arable land per person. This figure exceeded 0.4 hectares in the 1960s. This means that the amount of grain that can be produced is limited despite growing demand. It also means that farmers need to find ways to increase the amount of grain they produce on a given unit of land. Consequently, I like investments in companies that facilitate agricultural commodity production. Two sorts of companies that I would focus on are fertilizer companies and irrigation companies.
Fertilizer increases the efficiency of agricultural resources by enabling farmers to grow more on their land. Therefore, I think investors should consider purchasing shares in the Global X Fertilizers/Potash ETF (NYSEARCA:SOIL).
The more interesting investment choice, however, is irrigation. The reason for this is that the irrigation industry is extremely small, and yet it enables farmers to maximize the efficiency of their water usage, which saves them money. Also, irrigation systems don’t have volatile pricing the way fertilizer does. Therefore, I don’t think that we will see extreme swings in the sales and profits of irrigation companies the way we do for fertilizer companies.
The one publicly traded company that offers investors high exposure to irrigation is Lindsay Corp. (NYSE:LNN), which gets most of its revenues from sales of its central pivot irrigation systems. These systems are computerized and allow farmers to divert scarce water to where it is needed the most. Given this innovation, Lindsay Corp. has had double-digit revenue and profit growth over the past several years. Furthermore, the company has a clean balance sheet and $150 million in cash.
One drawback to investing in Lindsay Corp. shares is the company’s road barrier infrastructure business. This business makes up only about 15 percent of the total company, but its growth, which was strong prior to the financial crisis in 2008, has dissipated. Furthermore, it has been losing money as of late. But because the irrigation business is by far the company’s largest, I still believe Lindsay Corp. is a solid investment. While it trades near multiyear highs, it has a trailing P/E ratio of just 16.5, which is inexpensive given the company’s growth rate.