For years, if you saw the word agriculture in the GLOBE AND MAIL s Report on Business, you could be sure the next word would be crisis, disaster or bailout. But now the story is different. In fact, it could hardly be more different, with ag today being paired with boom, profit and growth.
Overnight, the neglected stepchild in Canada s business family has started getting a lot more respect, and a far closer look from investors, including from farmers themselves.
These days you can scarcely open the paper without finding an article on this or that investment opportunity in agriculture. Perhaps it s a story on suddenly sexy blue-chip ag stocks like Potash Corporation and John Deere. Or it may be a piece on something a bit more exotic, like farmland investment trusts that buy bare soil and lease it back to the actual farmers.
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Or, out on the edge, it could be a story on new products like commodity-based exchange-traded funds (ETFs) that let mom and pop investors dabble in the grain and oilseed markets they had always been shut out of.
Canadian farmers are reading these articles too, and now that they have some green to invest, their first impulse is to say, what could be safer than to sink it into ag companies? After all, the whole sector seems to be booming, and no one has better insight into ag companies than the farmers who buy from them.
Besides, there s the justice of it too. If your input purchases are driving the profitability of these companies, wouldn t it feel good to buy some shares and get a chance to cash the dividend cheques that your purchases are generating?
So, we put your case to the investment pros. Are there opportunities that farmers should be jumping on? Does it make sense for a farmer to invest in ag stocks? Or is that just putting too many of your eggs in one basket?
The first step, says one agriculture industry research analyst, is to fully under- stand what the sector is and how it differs from other types of investment opportunities. Robert Winslow has been watching this market for years, first for the Winnipeg-based Wellington West wealth management firm and now for National Bank following the buyout of the Winnipeg operation by the Montreal-based bank.
I would say things changed about five years ago, Winslow explained to COUNTRY GUIDE during a recent interview. After a long period, there was suddenly this interest in agriculture again, and investors began to get more aggressive.
So what changed? Your bottom line, says Alfred Lee, vice-president and senior investment strategist with BMO Asset Management, a division of the Bank of Montreal.
Agriculture commodity prices rose for a variety of reasons, which I m sure your readers are well aware of, Lee says. Population growth, economic improvements moving people in emerging markets to a more grain-intensive diet, and a limited ability to dramatically increase production and of course the effect of ethanol production converting food products to energy.
And that, chimes in National Bank s Winslow, has translated into much better numbers for most of the agriculture-related companies out there.
When commodity prices rise, we know farmers tend to plow that money back into their businesses, Winslow explains. The whole supply chain in agriculture benefits from that.
What the charts say
You can see the effect of this built-in cycle as clear as day with an Internet connection and a few key strokes, simply by heading to any website specializing in providing investor information.
Pick an ag company we took Monsanto and John Deere because both are companies that many farmers have done business with over the years. Then pick a couple of similar stocks companies in similar businesses, but not tied to agriculture. We started with airline manufacturer Boeing and pharmaceutical company GlaxoSmithKline. One makes very expensive equipment for a specific industry and the other trades in research and proprietary knowledge, which makes these companies decent proxies for similar ventures in the wider economy.
Once you ve picked your companies you can access charts that show stock performance over a number of years, generally up to about 10 years. For instance, check out our comparison of Monsanto and GlaxoSmithKline on page 13.
In almost all cases, the non-agriculture companies lack any overall pattern, other than the fact that all the companies we looked at showed the effects of the 2008 financial crisis. Instead, the stock prices of these companies rise and fall with their own outlooks, moving up for instance when they get a positive decision from a regulator and dropping back if a popular medication comes off patent.
In agriculture stocks, by contrast, there s a strong sectoral pattern. For the first half of the past decade, they flatlined, but then they suddenly sprouted, all at about the same time, achieving dramatic spikes in stock price. Again, the effects of the 2008 crisis can be seen, but many of the agriculture stocks rebounded quickly and completely, and then solidified their values.
The take home is that agriculture stocks tend to trade sideways for years, and only jump in value when the underlying farm economy supports them.
All of which means that for farmers, these may be exactly the wrong companies to be investing in.
When farmers are flush with cash, and ready to make investments, the value of these equities has already increased, explains BMO s Lee. With every type of investment out there, you re looking for something counter-cyclical, and I would suggest that this isn t it.
Lee doesn t come right out and say it, but when COUNTRY GUIDE probed him a bit further he agreed that what he was really saying was that you might want to pass his number on to your cousins in the city, but when it comes time for you to do your own investing, you should probably be calling his colleagues in the company who work on broader investment strategies.
National Bank s Robert Winslow confirms that the investment community has a fixation on diversification for good reason. And for farmers, he says, the case is if anything even more compelling.
If you re a farmer, you re clearly already very heavily invested in agriculture, Winslow says. You really want diversification, so it s probably not a good idea all the investments you ve already made are highly correlated to the price of grain and other agriculture commodities. You should probably be trying to invest in other things.
Farmer investors
Even so, don t farmers also bring unique attributes that farmers bring to the table? We asked farm management guru Terry Betker. He s a former partner in the firm of Myers, Norris and Penny, and currently is semi-retired and working from his Winnipeg base through his firm Backswath Consulting.
From experience, Betker confirms that farmers like to invest in agriculture companies, and while he concedes the strategy might not be the best, he insists farmers aren t acting irrationally.
This is about investing in what they know, Betker says. I wouldn`t go so far as to say they shouldn t ever invest in them some of these companies are very well-run, blue-chip-type investments and I wouldn t be too concerned if I saw a farmer holding a few John Deere shares, for example. But when you re talking about an investment portfolio, what you re always talking about is balance.
Betker argues that it s very important for farmers to start with an investment plan, rather than just beginning making investments willy-nilly. You need to understand what you want to accomplish, and how you intend to use these investments, he says. What are your goals? What happens if you get sick or injured? What are your personal values and how should they be reflected in your portfolio? What s the life cycle of your farm? Are you nearing retirement? A young farmer? Are you working on your succession plan?
Swing for the fences
In the end farmer investors are like any other investors, Betker says. They will benefit from good planning and a solid strategy. But they also need to recognize that there are a handful of key differences that are defined by the nature of their businesses.
The biggest difference can be summed up in one word cyclical. Agriculture has always come with ups and downs, and even in the face of good times today, that trend isn t likely to be completely broken. It means from time to time a farmer may need to raid their war chest to stay in the game and win another day.
If they re holding ag stocks, they might be forced to sell when the price drops, Betker says. Nobody wins when they re in a fire-sale type of a situation.
Nor is that concern limited only to ag stocks. Any equity that isn t guaranteed is going to go up and down, and investment theory says that it will reward investors for that risk with higher overall returns over time. So farmers who face the reality of needing a reserve fund for their ongoing operation might benefit from planning around that.
You might want to do something really simple, like just keeping a portion of your portfolio in something highly liquid like a GIC, Betker says. Sure, you ll get terrible returns around one or two per cent right now but you ll be liquid and you won t see a big loss if you need that money.
So, although it might be tempting to bet big on agriculture, BMO s Alfred Lee warns this means you may be crossing the magic line that separates investors from gamblers.
The better course, Lee says, is to take a more cautious approach that recognizes the reality of the situation and offsets these risks with other broader investments.
I think of it almost as them doubling down on agriculture, Lee says, borrowing a term from the world of high-stakes games of chance. Then if there s a downturn in agriculture in general, there s no doubt the effect of that will be seen in their investments. CG
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INVESTOR INTEREST
It isn t just you. There really is a gold rush going on in agriculture these days. More and more money is coming into the sector, even more than in past boom cycles.
What s driving the rush? New tools, says BMO s Alfred Lee. Until very recently there really weren t a lot of them. Investors could buy stock in agriculture-related companies. Or they could maybe risk losing their shirts dabbling in commodities all on their own, but that was about it.
From my point of view, access has been a really big thing, Lee says. Five years ago, there just wasn t much here for an average investor.
But these days more and more instruments that allow non-farmers to make these investments have emerged. One of the most common is something known as an ETF, or exchange-traded fund. Explaining them runs the risk of getting very technical very quickly, but it essentially boils down to a few key points.
These are funds that you buy and sell shares in based on the value of underlying instruments that the fund owns. In that way they re basically identical to the mutual funds most of us have invested in over the years. But they also have key differences.
Mutual funds tend to be actively managed. There is someone sitting on top of the big pile of money making choices about what to buy or sell. ETFs on the other hand, generally don t. Instead they re a composite of previously determined investments.
For example, there are ETFs that hold the entire TSX index. Or there are certain commodity ETFs that hold a predetermined combination of contracts that never varies. The unit prices rise and fall with the value of the underlying assets, but they re passively managed and the management fees reflect that reality.
ETFs are a very economical way for average investors to get involved in ways they haven t been able to in the past, Lee says.
It s really conferring a number of the advantages that only large institutional investors had before, Lee adds. Now the average investor can benefit too.
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WHAT S NEXT?
We just couldn t resist asking National Bank s Robert Winslow and BMO s Alfred Lee to dust off their crystal balls and give us a little insight into where agriculture is heading over the next while. After all, it s their business to apply the skills of the financial analyst to agriculture. What emerged was a portrait of a sector that s sure to see its ups and downs but that also has some incredibly solid underpinnings.
We released a report a couple weeks ago that called for a correction in agriculture commodities, Winslow said recently amid a string of down days for the Toronto Stock Exchange, which is heavily weighted to commodity companies. That s what we re seeing right now, and it s happening in all the commodities.
But Winslow says that s just a temporary situation and in the medium and long term he still sees a very bright future for the agriculture sector.
We re in a very tight stocks-to-use situation and that s what s driving this, Winslow says. From about 1990 to 2000, the lowest we went was 93 days that s how much grain was on hand if the world suddenly stopped producing it. In 2007, when we saw the dramatic rise in grain prices, we were down around 60 days. Right now we re right around 70 days.
Winslow says short-term challenges herd liquidation in the livestock sector, for example or lower ethanol production may cap the nearby outlook, but overall he still sees long-term success for agriculture.
