Grains Oilseeds

[johnlw]

Investing: Which link of the food chain should you play?

Carrie Tait, Financial Post Published: Friday, February 15, 2008

Food prices are on the rise, so much so that some economists are predicting a crisis. A slew of stocks are firmly attached to food's coattails, giving investors a number of different ways to profit by playing the food chain. But first, a word of caution: Many of these stocks have posted elephantine gains recently - here's looking at you, Agrium! - as investors climb aboard the agricultural bandwagon.

Fertilizer

Animal dung may be an effective way to fertilize the soil, but most modern, large-scale farms - the ones that eschew organic, at least - have shifted to fertilizer products such as potash. Investors do not have to look far to find a potash company.

Potash Corp. of Saskatchewan, once a Crown corporation in that province, now an international stock market darling, has been on a tear, gaining 355% since the beginning of 2006. The company does business all around the world - read: China! - so its business is diversified beyond canola farmers in Alberta or corn growers in Iowa. It is a cyclical stock and has certainly had its detractors over the years, but eight of the 11 analysts who have published current reports on it call it a buy, according to Bloomberg. The other three suggest holding it. Fai Lee at RBC Capital Markets has the highest hopes for the company, with a $194 price target, according to Bloomberg. The stock closed Friday at $X.

Agrium Inc., another western Canadian company, sells agricultural products and services in North and South America. It also exports to South Korea, Mexico, Thailand, Australia, Taiwan, Japan and South America. Just this week, the company smashed analyst expectations, posting a fourth-quarter profit of $172-million, or $1.24 per share. Six of the seven analysts tracking this company tag it as a buy, while the other calls it a sell. You might be getting in late, though. The stock has gained 70% since August.

Equipment

You know what goes well with animal dung? Enter Cervus LP, which operates 12 John Deere dealerships - think big green tractors, combines, swathers and other machinery - in Alberta, Saskatchewan and Manitoba. It also runs five construction equipment dealerships in Alberta, which peddle Bobcat, JCB and JLG equipment aimed more at customers pushing dirt around the oil patch rather than the home quarter. The stock could be bumpy, subject to seasonal ups and downs. Further, the construction side of the business could be hit if housing slows and oilpatch activity becomes sluggish. Brian Pow, an analyst at Acumen Capital Partners, has a $21.40 price target on the company. It closed Friday at $X.

Ag Growth Income Fund is another way to play the equipment angle. Forget lumbering combines - Ag Growth makes much more nimble devices like augers, belt conveyors and grain aeration equipment. Bins, too. No global exposure here, though. Instead, Ag Growth's North American operations cover 48 U.S. states and nine Canadian provinces. The company has gained 114% since January, 2006.

Food processors

There will be food-related investing pain as well. High grain prices means livestock and poultry feed goes up. In turn, producers shrink the size of their herds and flocks.

Maple Leaf Foods Inc., sits in an odd spot. It owns interests in hog farms, so it will get pinched in that part of its business. "The hog farmer is losing his shirt - big time," says Robert Gibson, an analyst at Octagon Capital Corp. But because Maple Leaf is also a processor, it can pass along the increased costs in the grocery aisles. The company is tinkering with its hog farm interests so that it owns only enough to supply its operations, Mr. Gibson says. Still, he calls it a buy, with a price target of $18.

Maple Leaf has an added advantage over other processors. It owns 88% of Canada Bread Co. Ltd., which makes bread, bagels, rolls, sweet goods, specialty pastas and sauces. Record wheat prices have not hurt Canada Bread because the extra costs can be pushed on to consumers. Advantage: non-meat food processors. Maple Leaf's positive exposure to higher food prices helps offset pain inflicted in the meat department.

George Weston Ltd., one part baker, one part grocery store, sports the same advantage as Canada Bread - the ability to pass cost increases incurred by the rising price of wheat on to those who crave doughnuts and other baked goods. "Their expectation is that they can pass it through without effecting margins," says Peter Holden, an analyst at Veritas Investment Research, noting the company touched on this issue in its conference call on Thursday. George Weston also owns 60% of Loblaw. (See below).

Grocers

The fortunes of grocery store stocks are likely to remain unchanged as the price of food climbs, according to Mr. Holden. First, higher prices can be passed along to shoppers, allowing retailers to maintain their mark-up rates. As prices rise in the aisles, competition could heat up and stores may be tempted to sacrifice their margins to lure customers, Mr. Holden adds. End result? Neutral. Companies like Loblaw Co. Ltd., Metro Inc. and Empire Co. Ltd., which controls Sobeys, could all end up playing this game.

The soggy American dollar also plays into the rising-cost-of-food equation. Canadian retailers are getting a deal when buying produce - lettuce, for example - from the U.S. because of the powerful loonie. Rather than pocketing the extra dough, Loblaw passed these savings on to its customers, noting its produce prices deflated between 6% and 7% in the third quarter.

But what about grocers that love animal dung? Organic is a hot trend - some even say it is not so much a fad as an entrenched way of life - and Whole Foods Market is the go-to for organic fanatics who can't be bothered to hit up the local farmers' market. Who said animal dung was passe?