February 18, 2011

If 2011 Is the Year for Agriculture Investing, Where's the Value?

Remember the old days back in, oh 2010, when metals prices only went up? They had been on a roll for years of course, but 2010 was their year: Steep, sustained ascents were the order of the day.

Metals prices remain near all-time highs, but 2011 is shaping up to be the year of agriculture.

Futures prices for cocoa, coffee and sugar among others are at or near 52-week highs and are sharply above their year-ago prices (especially sugar, which has more than doubled year on year).

That may be sweet if you own the contracts. But if the prices of agricultural-commodities futures, stocks and ag-themed mutual funds and ETFs give you a nose-bleed, there are alternative ways of getting in on the action, and there is still value to be found.

One of the assumptions involved in such investing is that world economic growth is highest in the developing world.

So, while we feel satisfied walking out of a Chinese restaurant having had perhaps a bit too much Szechuan beef, many Chinese consumers now want and can afford more than the three bowls of rice a day they’ve been subsisting on.

Increased affluence in the developing world, where scarcity once reigned, is a long-term driver of demand for food.

Also, regulations and restrictions on land use in the developed world and low crop yields in less developed areas (Ukraine, regarded as the breadbasket of Europe, yields just a third of U.S. levels) mean that the world is not currently set up to supply this higher demand.

Thus, it’s reasonable to suppose that the rise in agriculture will continue for a while to come.

Unfortunately, I haven’t come up with a whole lot of viable ideas: Too many investors got there first.

My initial thought was: Buy public companies sitting on valuable assets that are not fully appreciated by the market, specifically agricultural land.

While you and I have been getting “Dear John” letters from Zillow reminding us of residential property-price declines, farmland valuations have been rising like healthy stalks of grain.

Farmland in Kansas and Nebraska were up 19.5% and 17.6% in 2010, respectively, according to a report by the Federal Reserve’s 10th District, cited in Kay McDonald’s ag blog.

I searched for companies that own agricultural land, and found that in nearly every instance, these stocks were fully priced (or in a few cases not fully priced but very sketchy).

I found just two stocks of reputable ag land-owning companies that looked like they could interest value-oriented investors:

St. Joe Company (JOE) and Tejon Ranch Company (TRC), both of which are currently trading in the middle of their 52-ranges.

St. Joe currently has negative earnings per share, but that hasn’t kept superstar investor Bruce Berkowitz from seeking to gain control of the company in order to unlock its untapped value (though not every superstar shares his analysis.)

Tejon Ranch’s earnings are positive, though its P/E is high. However, that seems not to be uncommon among land developers.

Both St. Joe and Tejon Ranch have been primarily known as developers of planned communities: the former in northwestern Florida, the latter in Southern California.

But both possess vast rural tracts in their portfolios, and it may be safe to assume that executives of both companies are focused on rural land sales and leases at this time.

Land in Tejon Ranch’s property is ripe for production of wheat, wine grapes, almonds, pistachios and walnuts. St. Joe’s rural portfolio is mostly timberland.

Who knows? Maybe a recovery in the housing market, should it come — along with continued economic expansion in China and other developing nations — will make timber the commodity to own in 2012.

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