A good record
According to Reuters: “Over the last two decades, Harvard’s $31 billion endowment, the nation’s largest, has delivered annualized returns of 12.5 percent…” That’s pretty impressive. So it makes sense to listen when the head of the endowment, Jane Mendillo, talks about investment themes. The food demand theme has pretty long legs.
Although developed markets are mature and food demand is relatively stable, that isn’t the case in emerging regions. Residents of these nations have often lived largely agrarian lifestyles. As industrialization has taken hold, however, that has begun to change. More and more people are moving to cities and are working in factories. And earning more money, too.
As more people shift to non-farm work, it means there are less people living off the land. This increases demand for farm products. Additionally, as a nation industrializes, the eating habits of its citizens often change. More meat tends to be consumed. Increasing wealth is a key driver of this trend.
It takes more grain to feed livestock than it takes to feed a human. So, as more meat is consumed, more grain must be grown. Add in the fact that many emerging markets still have relatively fast growing populations and it’s easy to see why seed companies have an opportunity to thrive. Three to look at are:
Monsanto
Monsanto Company (NYSE:MON) is the industry giant and breaks its business down into two segments, Seeds and Traits and Crop Protection. The Seeds and Traits division produces seeds for such crops as corn, cotton, and soybeans. A key aspect of this business is creating seeds with desirable traits like drought resistance or increased yields. The Crop Protection business produces and sells herbicide products, notably “the world’s best-selling herbicide, Roundup.”
Seeds don’t sound like a high-tech business, but they are. The company earmarks around 10% of the top line toward research and development. Monsanto Company (NYSE:MON) focuses most of its research on “new biotech traits, elite germplasm, breeding, new variety and hybrid development, and genomics research.” Basically it is looking to create seeds that do more than just grow.
The company’s top and bottom lines have been on a fairly steady upward climb since the middle of the last decade. Its dividend has been on a steadier accent, though the yield isn’t particularly impressive. The company is recovering from some pricing gaffs, but is well positioned in the agricultural industry.
Note that an antitrust review of the company’s business may leave the shares open to new- driven performance, so conservative investors may want to stay on the sidelines for now.
DuPont
E I Du Pont De Nemours And Co (NYSE:DD) is much larger than just seeds, but it has been moving to grow in the area of late. Basically, it sees everything that Harvard’s Mendillo sees. So, this diversified chemicals company is a relatively safe way to gain exposure to the grain market without taking on all of the risks of a company with a singular focus.
The company’s seed business represented about 30% of sales in 2012. Sales in the division grew 14% last year on higher volume and pricing. Moreover, the company just settled a legal battle with Monsanto that should clear the way for continued growth.
Although the chemicals business is cyclical in nature, management has been moving toward less cyclical industries. The increasing importance of seeds makes E I Du Pont De Nemours And Co (NYSE:DD) a good option for investors looking to find a diversified play in the space. A 3.5% or so dividend yield is further enticement, as chemical companies are currently in the doldrums.
Syngenta
Syngenta AG (ADR) (NYSE:SYT) is a leading maker of herbicides that has begun to move into the seed space. Its 2012 sales broke down roughly 70% herbicides and 30% seeds. This puts the company in a pretty good position, since it has an established position in crop protection and a growing presence in the seed market.
The push into seeds, however, is all about self preservation. Indeed, as more and more seeds are engineered to reduce the need for pesticides, Syngenta AG (ADR) (NYSE:SYT)’s herbicides businesses will suffer. So it is important that the company continues to grow on the seed side.
The company has been putting up generally solid numbers on the top and bottom lines for some time. Its dividend has been a bit variable, but it currently yields north of 2%. Investors should monitor the seed business for continued growth.
Farm profits
Investors looking to join Harvard in the agriculture market should take a look at the three stocks noted above. Of them, DuPont is probably the most interesting candidate for income investors and more conservative types.
The article Harvard Sees Opportunity in Food Demand originally appeared on Fool.com and is written by Reuben Brewer.
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