Put Option on Industrial Agriculture

Famine!  The United Nations estimates that more than 30% of the world’s population is acutely malnourished and, 2 out of 10,000 people eventually die from starvation.  Industrial agriculture  -  with its fancy hybrid seeds, designer chemical fertilizers and irrigation networks  -  was supposed to solve the problem of food shortages.  For a time it has seemed that food production could be increased enough to keep up with the world’s burgeoning population. 

Now the connection to accelerated top soil loss is making industrial agriculture look more like a death sentence than salvation.  According to the USDA Natural Resource Conservation Corps, soil in the nation’s crop lands is being depleted at an average of 18 times faster than nature is building it up.  Overgrazing and agriculture activities account for over almost two-thirds the loss.

Compacted Top Soil

Chemical fertilizers accelerate plant growth and increase yields of fruits and vegetables.  However,  these fertilizers also damage soil by increasing soil acidity that dissolves ‘soil crumbs’ that hold the rock and mineral particles together with decomposed organic matter and clay.  Without these soil crumbs, the rock particles compact back together and soil loses on of its most important characteristics to produce food crops  -  friability or crumbly texture.  Chemical fertilizers also alter soil pH and kill antibiotic producing micro-organisms needed to protect plants from pests and disease.  Also in jeopardy are the micro-organisms that fix the nitrogen balance in the soil  -  one of very nutrients  fertilizers are supposed to add to the soil. 

The United Nations estimates that at the current rate of top soil loss the world will run out of productive fields in sixty years.  That is not many years.  Of course, some countries have a longer runway.  The U.S. is estimated to have more than 100 years of harvest years.  Since the vast majority of our food comes from fields, the loss of productive soil is worrisome for humanity.

It is also worrisome for companies that cater to the farming industry.  As the years pass by, if there is no solution found to stop soil loss, the industry will be facing an ever shrinking market opportunity.   Chemical fertilizer companies in particular are destroying their own market.  However, equipment manufacturers, seed companies and others are likely to experienced disruption as well.  Of course, the biggest losers will be farming companies proper that can be expected to experience every decreasing production as available productive soil declines. 

The agriculture sector is for the most part privately held.  However, a number of large grain producers, equipment suppliers and chemical fertilizer companies have publicly traded stocks.  A section is shown in the tables below.  At this time, it does not seem the risk of market loss that could ensue from top soil loss is represented in sector valuation. If this is right, as the dwindling supply of productive soil reaches investor consciousness, there could be a chilling impact on valuation sentiment.  Shareholders may need to pay for a bit of protection through put options on these shares if the soil solution problem persists.  For others the industrial agriculture may present a short-sale opportunity!

If there are to be any survivors, it will be those that eventually begin to offer solutions to soil problems and not just a product line that accelerates soil loss.  In the next and final post of this series, we look at the watery future of agriculture. 

SELECTED INDUSTRIAL AGRICULTURE STOCKS
Company	SYM	Operations
Adecoagro SA	AGRO	Grain farming, dairy operations
AGCO Corporation	AGCO	Farm and agriculture equipment
Alamo Group	ALG	Agriculture and infrastructure equipment
Alico, Inc.	ALCO	Citrus planting and cattle grazing
American Vanguard	AVD	Specialty chemicals for agriculture
The Andersons, Inc.	ANDE	Grain farming, distribution; ethanol
Archer Daniels Midland Co.	ADM	Grain  distribution and processing
Art’s-Way Manufacturing	ARTW	Agriculture equipment, buildings and tools
Bunge Ltd.	BG	Oilseeds and sugar processing; fertilizers
Calyxt, Inc.	CLXT	Food crops using gene editing
Caterpillar, Inc.	CAT	Constructing, mining and farming equipment
Central Garden & Pet Co.	CENTA	Pet food, fertilizer and grass seed
CF Industries Holdings	CF	Nitrogen fertilizer
CNH Industrial NV	CNHI	Agriculture and construction equipment
Deere & Co.	DE	Farm, construction and forestry  equipment
FMC Corporation	FMC	Insecticides, herbicides and fungicides
Fresh Del Monte Produce	FDP	Fruit and vegetable farming
Industrias Bachoco SAB	IBA	Poultry, eggs and swine production
Israel Chemicals Ltd.	ICL	Potash mining, phosphate-based fertilizers
Limoneira Company	LMNR	Citrus and avocado production
Landec Corporation	LNDC	Produce packaging, packaged vegetables
Lindsay Corporation	LNN	Irrigation equipment, system design
Mosaic Company	MOS	Phosphate and potash crop nutrients
Nutrien Ltd.	NTR	Crop nutrients and seeds
Scotts Miracle-Gro Company	SMG	Garden fertilizers and pesticides
S & W Seed Company	SANW	Alfalfa seed development and production
Sociedad Quimicia y Minera	SQM	Plant nutrients and industrial chemicals

SELECTED INDUSTRIAL AGRICULTURE STOCKS
SYM	Sales	EPS	Price	Mkt Cap	Price / Revenue	Price / EPS	Price / Bk Val
AGRO	$793.2M	($0.21)	$6.87	$800.7M	1.01	Neg	0.75
AGCO	$9.35B	$3.58	$67.40	$5.1B	0.55	18.83	1.76
ALG	$1.01B	$6.25	$97.29	$1.1B	1.13	15.57	2.23
ALCO	$78.5M	$0.22	$27.18	$202.8M	2.58	23.0	1.28
AVD	$454.3M	$0.81	$16.96	$503.6M	1.11	20.94	1.54
ANDE	$3.05B	$1.46	$32.64	$1.1B	0.35	22.36	na
ADM	$64.3B	$3.19	$42.62	$23.9B	0.37	13.36	1.26
ARTW	$19.7B	($0.81)	$2.00	$8.6M	0.44	Neg	0.65
BG	$45.7B	$1.64	$51.70	$7.3B	0.16	31.51	1.33
CLXT	$0.2M	($0.91)	$17.23	$563.0M	nm	Neg	6.02
CAT	$54.7B	$10.26	$129.77	$74.7B	1.36	12.65	5.32
CENTA	$2.2B	$1.81	$23.93	$1.4B	0.63	13.19	1.45
CF	$4.4B	$1.24	$39.01	$8.7B	1.96	31.46	2.94
CNHI	$27.7B	$0.78	$10.44	$14.1B	0.51	13.38	2.80
DE	$39.4B	$10.40	$155.94	$49.7B	1.29	15.00	4.38
FMC	$4.7B	$3.69	$74.98	$9.9B	2.09	20.29	3.18
FDP	$4.5B	($0.45)	$26.69	$1.3B	0.29	Neg	0.76
IBA	$61.1B	$4.23	$46.55	$2.3B	0.04	11.00	1.25
ICL	$5.6B	$0.97	$5.13	$6.6B	1.18	5.29	1.74
LMNR	$139.8M	$0.39	$23.18	na	na	na	1.93
LNDC	$535.6M	$0.78	$11.74	$342.5M	0.64	14.99	1.29
LNN	$535.1M	$1.69	$94.40	$1.0B	1.90	55.89	3.68
MOS	$9.6B	$1.22	$26.85	$10.4B	1.08	22.01	1.00
NTR	$18.8B	$5.72	$50.47	$30.5B	1.62	8.83	1.26
SMG	$2.7B	$0.09	$76.44	$4.2B	1.54	813.19	17.02
SANW	$77.5M	($0.21)	$2.77	$92.1M	1.19	Neg	$0.87
SQM	$2.3B	$1.67	$38.16	$10.0B	4.43	22.84	4.82

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.