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Stock Ideas Investors Daily Edge Argentina's Beef with Ethanol
Stock Ideas Investors Daily Edge Argentina's Beef with Ethanol 
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| Argentina's Beef with Ethanol |
| Saturday, 25 August 2007 | ||||||||
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It doesn’t matter whether you believe ethanol is an energy cure-all or not — the fact is it’s completely changed the agricultural landscape and opened the door to some intriguing plays. Yesterday, I shared my thoughts on one part of this story that’s been neglected so far — the products farmers need to boost crop production and yield. I’m talking about things like fertilizers, chemicals and equipment. And in a moment, I’ll cover another often overlooked necessity for farmers. But first, I’d like to pause and say thank you. Since announcing that I am now Agora Financial’s managing editor, the office has received a ton of warm wishes and congratulations. The folks in Baltimore have been passing them along to me, and I’ve been touched by what people have had to say. M.C. writes, “I'm very excited about Chris becoming Agora Financial’s managing editor. I wish him the best and look forward to seeing his insight into today's markets.” D.W. chimes in with, “Sounds like a great idea — I have the utmost respect for Chris and his recommendations.” And reader C.S. wrote in to say, “I agree — you guys have chosen the right person. In Chris Mayer, you have a winner.” It really means a lot to know you’re behind me! And I promise that I will keep on top of the markets and my colleagues to make sure you get the best news and advice out there. Like, for instance, my thoughts on the next stage of the ethanol boom. As I said, the investment markets are showing ripple effects from the booming demand for ethanol. In addition to the farm chemicals and machines I discussed yesterday, another overlooked investment opportunity is the farmland itself. Now, I know what you’re thinking — “Real estate? Now? But the housing market is a ticking time bomb.” And that’s true — investing in almost any land these days is a questionable venture at best. But farmland is the exception. It makes sense, if you think about it. First of all, the housing bubble inflated all real estate prices — even farmland. Developers liked being able to entice city-weary homebuyers with the dream of living a country life. But every acre that became a house was one less acre producing food. And the numbers show this happened — and still is happening — at an alarming rate. According to the American Farmland Trust, 3,000 acres of farmland disappear each day. The most recent data from the U.S. Department of Agriculture shows the amount of available cropland shrank from 445.32 million acres in 1997 to 434.16 million acres in 2002. That’s 11 million acres — gone.
As the New York Times reports people are now fighting to grab some of that remaining land for themselves because of “rising commodity prices…and the prospect of increased demand for ethanol.” The rush has pushed farmland prices to unprecedented highs. The USDA just reported that the value of farm real estate was up 15% from last year. The value of cropland alone hit a record $2,700 per acre. And the New York Times article I cited earlier tells of 80 acres of corn and soybean fields in Illinois selling for $10,000 per acre!So with U.S. farmland prices already so staggering, what’s your best play here? Well, I think an even bigger farm boom is coming to the south. Far south. South America, in fact. That’s because South America is in a nice position to capitalize on the ethanol and agricultural trends. Brazil gets a lot of the headlines because it is well along in producing ethanol relatively efficiently. Last year, Brazil shipped over 430 million gallons of the sweet shine to the United States. It did this profitably, even though there is a 54 cent per gallon tariff on imported ethanol and U.S. producers get a 51 cent per gallon subsidy. Colombia, too, is ramping up its production of ethanol. The country has five distilleries, and two more are under construction. Because of recently enacted Colombian biofuel laws, it sells into a market that must buy its stuff. Colombian law requires an ethanol mix of 10% by 2009. The requirement will eventually rise to a stiff 25%. Then there’s Argentina. Its president recently signed a national biofuel law. It has the usual trappings — a minimum fuel content requirement and tax breaks for biofuel producers. Already, in 2006, agricultural companies poured more than $285 million into biodiesel projects. Over the next four years, estimates put investment in biofuels at more than $1 billion. But Argentina is a case where its ethanol plans may run headfirst into agricultural reality. You see, churning out the crops needed for ethanol might put a squeeze on Argentina’s favorite farm product — beef.Believe it or not, Argentines eat more beef than anyone in the world. Yup — even with our love for Omaha Steaks, McDonald’s hamburgers, Ball Park beef franks and every other kind of beefy American goodness, Argentina has us beat in per capita consumption by 18 kilograms — or 39.7 pounds — each year. Even more importantly, all of the country’s beef is homegrown…it doesn’t have a single import on its books. The production of beef, though, is expensive. Livestock requires lots of grains, land and water. Meanwhile, demand for meat has taken a sharp turn up in recent years. As more Chinese and Indians find more change in their pockets, they want to eat more meat. This is a pretty predictable phenomenon. More prosperity in a given place leads to changes in diets. Poor countries eat a lot of cereals and grains. The inhabitants of richer countries enjoy a much more varied diet, with lots more meat and fruits and vegetables. Obviously, the price of steer is on the rise, though it remains well below peak levels. And now, with ethanol production diverting not only grains, but also the land available to cattle herd, it looks like a very good time to get into the South American steak business. At least that’s the thinking behind one of my most recent recommendations in Mayer’s Special Situations. It owns one million acres of land, 88,000 head of beef cattle and 6,600 head of dairy cattle spread over 17 farms. It also has a great track record of using these assets effectively. Unfortunately, it’s also on the small side and a bit illiquid — which is why I can’t reveal the name here. In any event, given the kind of market we're in now, it seems a safe bet to invest in South American farmland and agriculture businesses. You can bet I’m scouring the markets for other stock plays in this region…and I highly recommend you look here, too.So that’s it. Over the past week, I’ve shared some of my favorite investment trends with you — newborn ideas that you probably won’t read about elsewhere until the biggest profit potential is gone. And even if these insights didn’t convince you to sign up for my Capital & Crisis or Mayer’s Special Situations, I hope I’ve at least opened your eyes to the myriad of profit opportunities in plain sight. And of course, this isn’t the last you’ll hear from me. As Agora Financial’s managing editor, I’ll check in with you from time to time. So until then, happy investing! Sincerely, Chris Mayer Managing Editor, Agora Financial
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