Booming Demand for Agricultural
Commodities Driving Mergers
Thursday, March 15th, 2012
By Sasha Cekerevac, BA for Profit Confidential
The recent news that trading giant Glencore International AG (LSX/GLEN) is in the hunt to buy Viterra Inc. (TSX/VT) is yet another sign that the global demand for agricultural commodities is going to continue to increase over the next few decades. The investment strategy for firms lately is to look at the demand and supply equation of agricultural commodities and see that the future is one of higher prices over the next decade. This is going to drive corporate earnings of firms involved in agricultural commodities, especially since many of the companies control a dominant position in the market.
Viterra operates as a grain marketing and distribution business in Canada, the U.S., China, New Zealand, and Australia. Glencore obviously sees that, with the purchase of this one firm, it can gain a big foothold in a diverse country base heavily involved in agricultural commodities. Not too long ago, Potash Corporation of Saskatchewan Inc. (NYSE/POT, TSX/POT) was offered over $38.0 billion to be bought, which ultimately ended up failing due to the Canadian government deeming the company too important to lose. Countries are now wising up to the fact that agricultural commodities are a key investment strategy; after all everyone needs to eat. That demand will not go down, as the population of the world continues to grow.
Where can an investor profit from this boom in agricultural commodities? One investment strategy will be to look for companies whose corporate earnings will grow with the increased demand for food. Potash is one of the larger fertilizer suppliers. Fertilizer is used in agricultural commodities to increase the yield, or production, per acre of land which then drives up the corporate earnings of both Potash and the farmer.
Looking at fertilizer companies is a good place to start as an investment strategy in agricultural commodities. Another company with a more unique perspective is Monsanto Company (NYSE/MON). This firm develops new seed technologies and herbicides to allow the agricultural commodities better yields through stronger genetic traits, such as resistance to bugs and cold weather. The more agricultural commodities a farmer is able to extract that aren’t damaged, the better the yield. Higher yield means more corporate earnings for both Monsanto and the farmer.
Monsanto has had a strong run since the fall and I wouldn’t recommend buying it right now. Instead, think of these stocks like the agricultural commodities themselves. There’s a time to look into planting seeds and then there’s a certain period of time needed for the seeds to grow up and mature before being harvested. Being impatient means planting seeds at the wrong time and not making the returns you would expect. Determine the agricultural commodities best suited for growth over the next decade and then focus on the companies that can help corporate earnings of those involved in growing, harvesting and ultimately bringing the end product to market.