Fabrice Taylor, CFA, publishes the President's Club investment letter. His letter and The Globe and Mail have a distribution agreement. You can get a free copy here.
It's doubtful that Jana Partners is looking at the long-term picture in its attempt to shake up Agrium Inc. The idea of spinning off the company's retail operations makes little sense, either tactically (who would support it?) or fundamentally (Agrium has thrived since it bought its way into the front lines of the farm economy).
Rather than trying to make a short-term killing, investors are, in my view, better served by keeping their eyes on a long-term vision of global food supply and demand. In case you missed it, the vision goes like this: Demand up, supply strained, prices soaring.
It's not just the weather, although that's obviously a lasting factor. Just as important is population growth and rising affluence. That billionaire Chinese entrepreneur who bathes in champagne while noshing on Kobe tenderloin? His grandparents got a bowl of rice a day.
As expounded in this space and elsewhere over the past few years, it takes a lot more land to make a steak than a bowl of rice. Simply put, when people get rich they want to get fat, and they do. In the absence of more land, the only solution is higher yields: getting more per hectare tomorrow than we did yesterday.
We get those higher yields most directly from fertilizers, the potash, nitrogen and phosphate that Agrium and others sell by the millions of tonnes annually. These companies will certainly benefit from the growing possibility that we are entering an era of food scarcity (by which I mean higher food prices, not wholesale starvation as some predict; there are way too many excess consumed calories in the world to worry about that).
But everyone has heard the food-supply story and everyone can rhyme off the big names such as John Deere, Agrium, Potash, Archer-Daniels-Midland and so on. If you really want to make a buck in agriculture, go beyond the obvious.
The surest way to profit from what's coming is to buy a farm and strike a deal with a farmer to raise crops on it. That is admittedly difficult to do unless you have lots of money and a solid understanding of what you're doing. (It's easier in some ways if you want to farm it yourself, but keep in mind that the modern farmer is highly educated in not only crop science but also futures markets. Running a profitable farm these days is not like raising a vegetable garden.)
What makes land the most attractive alternative is that it's the investment that's least burdened by competition – another potash producer can always challenge Agrium but the supply of land is truly limited. There are a handful of funds, usually limited to investors of significant means, that will sell you an interest in a pool of farmland. They usually pay a yield. But shop carefully because some of them charge a lot while others cap your upside.
Another area of interest is science. Crop yield improvements, by some measures, are slowing down or have tapered off. Traditional means of putting nutrients in soil aren't increasing output like they once did. Science can help, whether through genetic modification or special pesticides and so on. Monsanto is the leader in this area, but it's like Agrium – well-known and unlikely to surprise.
There are other, smaller, nimbler firms with proven technologies for increasing food supply. At the moment, they're too small and risky to recommend here, but I expect to see a huge amount of interest in this area over the years ahead. I recommend you watch developments carefully.
Finally, there are the specialty crop companies that are just starting to list on exchanges. Again, these stocks are still at too early a stage of development for most investors, but I like their potential and recommend you keep your eyes on this area.
The attraction of these firms is that they're easy to understand. They make one thing, or one type of thing, and they sell it directly to customers. Second, they tend to either own land or land-use rights, and as mentioned, owning land is probably the best way to benefit from an age of increasing demand for food.
Sticking to the big, well-known names is likely to produce gains over the long term. But if you want to be a stock picker, and you're prepared to roll up your sleeves, do your own research and take the risks, there are better investments out there.