Tag Archives: agriculture

Farmland: A Growing Investment Option

By Tim Maverick The last 20 years have seen a new asset category grow in popularity… farmland. And it’s easy to see why, because farmland is profitable. In fact, the National Council of Real Estate Investment Fiduciaries’ ((NCREIF)) Farmland Index had an average annual return of 12% over 20 years. That beat the NCREIF’s Commercial Property Index and the S&P 500’s return of about 9%. It also topped investment-grade corporate bonds, which had returns in the 7% range. Institutional Money Going Country Not surprisingly, farmland’s outperformance has caught the attention of institutional investors. In the past two years alone, institutional investment into U.S. farmland topped $2 billion, according to iiSearches, the data arm of Institutional Investor. And the trend seems to be continuing. In August, TIAA-CREF announced that it raised $3 billion for its second global farmland investment partnership. Institutions, however, still own less than 1% of the $2.4 trillion U.S. farmland market. And their share of farmland ownership is sure to rise in the years ahead. It’s the perfect investment for institutions with long-range investment goals, such as pension funds. It’s a real asset, not correlated with stocks and bonds. And it pays steady income, as farmers pay rent on the land. The average rent for U.S. farmland over the past 16 years rose about 5% annually. It was about $141 per acre in 2014, according to the U.S. Department of Agriculture . Farmland REITs Farmland is a real asset tied to a megatrend – rising global food demand. The middle class is expected to grow from 1.8 billion in 2010 to 3.2 billion in 2020 and 4.9 billion in 2030, with 85% of that growth coming from Asia. This real asset pays a steady income, making it suitable for mom and pop investors, too. And the good news for those looking to invest in farmland is that there are now three farmland real estate investment trusts, or REITs. These are equity REITs that lease the land to farmers. The three REITs, from the oldest to the most recent, are Gladstone Land Corp. (NASDAQ: LAND ), which IPO’d in 2013, Farmland Partners Inc. (NYSE: FPI ), which IPOd in 2014, and American Farmland Co. (NYSEMKT: AFCO ), which IPO’d this year. Farmland REIT Breakdown Each REIT focuses on a different type of farmland: Gladstone Land began with fruit, vegetable, and berry operations mainly in California and Florida. It has since expanded to other states. Farmland Partners is focused on crops such as corn, wheat, soybeans, rice, and cotton in the central and southeastern United States. American Farmland’s acreage is roughly a third grapes, nuts, and specialty crops, a third in crops similar to Farmland Partners’, and a third in farmland being developed to grow grapes, nuts, and citrus. Thanks to University of Illinois professors Paul Peterson and Todd Kuethe, this graphic shows the geographic breakdown. The Outlook To date, none of these REITs have performed well – though, to be fair, American Farmland is new to the market. Perhaps the companies were overpriced when they IPO’d. They’ve also been hit by Wall Street concerns over commodities in general. But in typical Wall Street fashion, investors are only looking at the short term. One thing is certain in farming, and that’s Mother Nature’s tendency to be fickle. This year may be great for growing crops, leading to oversupply and weak prices. But next year may bring vastly different conditions, leading to soaring crop prices. Investors should take the institutional perspective on these farmland REITs and hold them for the long term. The Wall Street Journal even quoted some institutional investors as saying that it’s like “gold with a coupon.” Link to the original post on Wall Street Daily Editor’s Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

Americans Like Eating Out, We Like BITE

Summary Managed by Factor Advisors and Penserra Capital Management, BITE is the first ETF to track publicly traded U.S. restaurant companies. BITE has an expense ratio of 0.75%, which is close to the average expense ratio of equity funds. Consumers are increasing their spending on eating out and compared to grocery stores, currently Americans spend almost the same amount in restaurants and bars. The equal weighted approach of the Restaurant ETF offers investors an opportunity to gain exposure in this secular trend of increased spending on dining out. A new ETF called the Restaurant ETF (NASDAQ: BITE ) was launched in October. It would track around 50 top publicly traded companies involved in the restaurant business. Managed by Factor Advisors and Penserra Capital Management, it would follow an equally weighted index created by the Chief Executive of Big Tree Capital, Kevin Carter. Companies Included in the Restaurant ETF Currently, 46 U.S. based publicly traded companies are included in the Restaurant ETF. Although some of the companies in the Restaurant ETF have businesses overseas, it did not include any foreign company. Almost all the large brand restaurants are included in the Restaurant ETF. For example, quick service restaurants like Starbucks (NASDAQ: SBUX ), fast casual niche restaurant like Chipotle (NYSE: CMG ) can be found in the ETF along with fine dining restaurant like Ruth’s Chris (NASDAQ: RUTH ). The Restaurant ETF is an equal weighted index, which means all the companies in the index would roughly have the same stakes. The index would be re-balanced every six months in order to adjust the allocations. Right now, almost all companies have a similar percentage of holdings in the Restaurant ETF. For example, McDonald’s (NYSE: MCD ) and Starbucks has almost same allocations, 3.01% and 2.95%, respectively. However, smaller companies like Arcos Dorados (NYSE: ARCO ), that mainly operates and franchises McDonald’s restaurants in the Latin American market, have only 1.35% holdings in the index. Other smaller restaurant companies like Kona Grill (NASDAQ: KONA ), that has a market capitalization of only $183 million, got a 1.88% allocation. The Restaurant ETF currently has an expense ratio of 0.75%. According to the Trends in the Expenses and Fees of Mutual Funds, 2012 report, the average expense ratio of equity fund fell to 0.77% in 2012. Hence, we can say that the expense ratio of the Restaurant ETF is near the average. Why are We Excited about the Restaurant ETF? Just like most Americans, we like eating out, a lot. According to Rasmussen Reports, 58% of Americans eat out at a restaurant at least once a week. The telephone survey found that 14% actually goes eat out up to three times a week! However, compared to eating at home, the same food costs much higher in restaurants. That’s why, although most people only eat out a few times a week, according to the U.S. Department of Agriculture, 31.5% of all food related expenses goes to pay for services provided by food service establishments, a.k.a. restaurants. (click to enlarge) Figure 1: Spending on Food at Home vs. Food Away from Home (1869 – 2013) Source: United States Healthful Food Council The prospectus of the Restaurant ETF mentioned since 1995, the amount spent in restaurants and bars has slowly increased and in 2015, people are spending almost the same amount in restaurants and bars compared to what they spend in grocery stores. This habit of frequently eating out is one of the reasons why In 2015, the Dow Jones U.S. Restaurants & Bars Index delivered a 20.5% return compared to the 11% return delivered by the S&P 500 Consumer Discretionary Sector . Conclusion The Restaurant ETF offers investors an opportunity to gain exposure in one of the oldest businesses in the world. As the U.S. urbanized over the last 200 years’ it prompted people to eat out more and currently people in the U.S. are spending almost the same amount on eating out as they are spending on their groceries. We believe the equal weighted approach of the Restaurant ETF would enable a smaller restaurant company with surging sales to have the same impact on the ETF as a $100+ billion worth company like McDonald’s. Hence, there is a good possibility that investors would be able to have a higher upside potential by investing in the Restaurant ETF under current economic circumstances when the market is in a bullish trend for last several years. However, investors should keep an eye on overall macroeconomic indicators such as the consumer sentiment , as during uncertain economic climates, the first and most obvious place to cutback would be the eating out category in the household budget.

Agriculture, Coffee And Sugar: The Next Rally?

Summary We discuss the long term bullish case for Rogers Agricultural Index ETN. 3 billion additional middle class consumers will support the demand for agricultural products over the next two decades. We discuss why Rogers Agricultural Index has been in a bear market since early 2011 and what is needed for the next bull market to start. We mention that coffee and sugar might be good investments already in the short term in light of the fundamentals. In 2007 Jim Rogers lent his name to a new line of exchange-traded notes. One of them was dedicated to the agriculture: The Elements Linked to Rogers International Commodity Index Agriculture Total Return Note ( RJA). Jim Rogers has been very positive on agriculture and farmland investments. There are probably tens of interviews where he cites to be more bullish on agriculture than any other commodity. So, why Rogers Agriculture Index has been such a horrible investment since 2007 and could this change? Was Jim Rogers wrong? These are the topics we will discuss in this article. We will also mention a few isolated picks in the agricultural sector that we believe to have more upside potential in the short term in comparison to Rogers Agricultural Index. For those not familiar with Jim Rogers, he was among the most successful and famous hedge fund managers on Wall Street. Currently he is living in Singapore and travels across the world as a guest speaker at investment conferences. Chart Analysis Rogers Agricultural Index is trading 50% below its all time highs reached back in 2008. This index contains around 20 most popular agricultural futures contracts such as corn (13.61%), wheat (13.61%), cotton (12.03%), soybeans (10.00%) and coffee (5.73%). (click to enlarge) Figure 1. RJA ETN price chart. Chart : Ycharts.com The price drop in RJA can be explained by the strengthening of the U.S. dollar, at least partially. Most producers get paid in U.S. dollars. Supply-Demand Fundamentals We went through OECD-FAO Agricultural Outlook 2015 report. This report suggests that the global inventory levels, supply and demand of the agricultural commodities are in a reasonably good balance right now. In the short term we believe that most agricultural commodities will stay at their low price levels. The bull market might be getting ready to start – but not right away. When To Buy Rogers Agricultural Index? Rogers Agricultural Index might not move up before a big change takes place in the global currency markets. The U.S. dollar should start to weaken against other major currencies. However, there is an another major price catalyst in the making. Asia has already 525m middle class consumers. That is more than the whole EU population. Over the next two decades, the middle class is expected to expand by another 3 billion. That will create a spectacular rise in demand. In parallel, the global arable land is expected to increase by only 5% by 2050. That will be a challenge. That means that 90% of the supply increases must come from the yield and farming intensity improvements. We believe that such a staggering increase in the yield might be very difficult to achieve. One option would be to consider genetically modified organisms (GMOs). Changes In GMO Policies and Consumer Habits A major policy shift is occurring in EU in 2015 with a more accommodating approach towards the use of GMOs across the whole European Union . This will surely add more supply to the markets. However, the additional 3 billion middle class consumers will make both European consumers (over 500m) and farms look very small. The demand for several crop products will grow parabolically. The meat consumption is expected to double by 2050. Now, consider that producing 1 lbs of beef does not require 1 lbs of feeds. It requires as much as 5 lbs. For chicken this would be 2 lbs respectively. Consequently, Rogers Agricultural Commodity Index will have a very strong tailwind from the increased meat consumption. Sugar Might Become A Sweet Investment (click to enlarge) Figure 2. The iPath Dow Jones-UBS Sugar Total Return Sub-Index ETN (NYSEARCA: SGG ) and the iPath Dow Jones-UBS Coffee ETN (NYSEARCA: JO ) price. Chart: YCharts.com Sugar is cheaper today than it was in the ’70s. The current supply-demand balance is currently in a deficit and several price catalysts are emerging: New fuel policy in Brazil lifting gasoline prices – this will increase the demand for both ethanol and sugar. Indian sustained drought conditions. Too low sugar price – farmers might as well do nothing for the same close to zero earnings or transfer their cultivations over to something else. We believe that sugar will be pushed higher with these catalysts already in the short term. The flex-fuel cars’ ethanol usage in Brazil might even double in 2015 due to the new policy. Besides sugar we think that coffee is a good investment right now. We covered coffee and the iPath Pure Beta Coffee ETN (NYSEARCA: CAFE ) in an earlier exclusive Seeking Alpha article . Risks and Opportunities We believe that an unexpected breakthrough in genetically modified crops might be among the risk factors hindering the bull market in Rogers Agricultural Index. The recent months low inflation rates, felt globally, could also continue to press the commodity prices lower. Also a short dollar rally could push the prices lower. Rising agricultural prices would be advantageous for the farmers not earning a decent income these days in most producing countries. Through higher salaries and incomes these rural regions would start to prosper. The rising salaries and incomes in the producing countries would increase the inflation levels. Higher inflation would mean higher crop prices. This vicious circle might get stronger and stronger and support the next bull market in the agricultural commodities. Conclusion We are bullish on both Coffee and Sugar, and over a longer term RJA. As the world will count over 3 billion additional middle class consumers over the next two decades, we will see an unprecedented growth in the agricultural products’ demand. In parallel the arable land surface area is going to increase by less than 5%. The changing patterns in the climate continue to reduce the harvests even more frequently. We do not recommend our readers to buy a tractor or a pair of rubber boots. Following up the agricultural commodities prices could do it for the short term if the farmlands’ productivity increases will be sufficient. Disclaimer: Please do your own research prior to investing and taking investment decisions. This article is provided for informal purposes only and any information mentioned may change at any time without a notice. Please consult your investment advisor for finding a proper allocation for your portfolio that is adjusted with your risk levels and personal situation.