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It’s time to be bullish on everything related to food—restaurants, food producers, fertilizers, equipment makers, even water, says Ramesh Gulati. He tells Kate Stalter about a slew of well-known and not-so-well-known names that could benefit by growing demand for agricultural products.

Kate Stalter: Today, I’m speaking with Ramesh Gulati of Gulati Asset Management.

Now, Ramesh, we’ve spoken before. The last time we talked, you had some ideas about the agricultural sector. Can you give us an update of what that’s looking like these days?

Ramesh Gulati: Yeah, thank you very much, Kate, I appreciate the opportunity. Yes, my name is Ramesh Gulati of Gulati Asset Management as you had mentioned

Just before we start, just as a little disclosure, just to let the public know that any of the companies that we talk about, Gulati Asset Management and its clients, may or may not have long or short positions in those names, and also before you make any financial decisions, talk to your advisor.

Going forward, yes, agricultural is an area that has gone up and down pretty violently over the past year or so, because it tails into the dollar. With the change in the euro and the dollar increasing, because most of these agricultural commodities are dollar-based, with the dollar increasing, a lot of these commodities will decrease.

We’ve seen a lot of different swings in the commodity area. I think in the longer term, if you look at the demographics, you’ll see a lot of these developing nations are moving up the food chain, where people that used to eat rice now want to eat chicken and meat. When you move up the food chain in that manner, it takes a lot more grain to supplement and to grow a chicken or a head of cattle than it would if you were to just eat the grain itself.

So, everything pretty much stems back to that. What I’ve seen across the world is more of a demand on agriculture across the board.

Kate Stalter: Now, this breaks down into a few different categories, doesn’t it? Can you talk to that a little bit?

Ramesh Gulati: It does. I took a look at it pretty much from the consumer standpoint, where it actually gets consumed, all the way back to the growing of the food and also the equipment that goes into it.

So, if we were to start off: I don’t know if you saw, but a few weeks ago, there was a big IPO of Annie’s (BNNY). This is an organic food company that my children eat their mac and cheese, their cookies, and everything else, all day long. So I should have been smart enough to invest in this early on, because I know I buy a lot of it.

But the organic food industry has really taken off. You see it in companies like Annie’s, like Whole Foods (WFM), and also looking at the restaurants. The restaurants are trading at multiples higher than you’ve ever seen, pretty much in history, because a lot of these are increasing their stores on an enormous rate.

A company by the name of Chipotle (CMG), it has gone on a meteoric rise, which…I believe right now it’s overvalued, but those types of restaurants. A company like Starbucks (SBUX), or Cheesecake Factory (CAKE), or a Buffalo Wild Wings (BWLD). These are the restaurants. That really is where people are going out, and they’re consuming the food, so that’s where I like to start looking at it.

Then if you were to take one step back from there, I’d take a look at the food companies that are actually supplying the restaurants and making the actual food.

There is a company by the name of Bunge (BG), and they pretty much produce anything that has to do with soy or soy-based products, soy meals, soy oil. It’s amazing how soy is used in everything right now. Soybeans are one of the few commodities right now that are much higher than their counterparts at this time.

Another company that most people have heard of, looking at the corn area, is Archer Daniels Midland (ADM), a huge company. They are a $20 billion company. They have their product—corn and high-fructose corn syrup—in just about every product you could possibly think of.

There’s a number of food companies, and I’ll just list a few of them. Tyson (TSN), which many people know supplies chicken. Smithfield Foods (SFD), which supplies pork.

A company that I actually like right now that’s a small cap name is a company by the name of Cal-Maine Foods (CALM), and it’s got a wonderful symbol. Believe it or not, they supply eggs. It ramps up all the way into Easter, and then it just recently dropped from $42 down to around $36 or so right now. And it’s got a 2% dividend yield, which in the long term, I’d rather have my money in something like this than in a bank, with some growth potential and some dividend.

Some of the international companies are a company like Nestle (NSRGY), a huge food company. Then you have the the large US companies, like a Kraft (KFT) or a ConAgra (CAG).

So, if you were to now look at the food companies going back one more, then look at the seed companies, what it takes to actually grow these. With the water supplies dwindling, a company like Monsanto (MON), they’re coming up with technology to grow these foods with much more food, less acreage, and less water to have these foods grow. Another company in this out of Switzerland is Syngenta (SYN).

So, again looking at it from beginning of the restaurants and then go into the food companies, now the seed companies, and really what did it take to make these seeds grow into the food you need is fertilizer. Fertilizer is an area that’s had a lot of consolidation over the past couple years, and it is still in consolidation mode. Again, these fertilizer prices fluctuate like the commodities, because they are dollar-based, but this is an area that I really like.

There’s a company out of Texas called CVR Partners (UAN). They’re smaller. I think they’re ripe for consolidation right now. They have a dividend yield of about 8.5%, which I think is excellent in this environment that we’re in right now.

Then you have your larger fertilizer companies like a Mosaic (MOS), or a Potash (POT), or CF Industries (CF).

Terra Nitrogen (TNH) is another, very, very good fertilizer company with a great yield. They have a yield of 6.3%, although this is a company that since the end of 2010, it was trading at $70, and now it’s trading around $280. So, it’s probably not the best time to get into that. You probably want to wait until for a bit of a pull back on somethi ng like that.

Going into the spring season, you have all the guys going out to fertilize their lawns. So, there’s a company, Scott’s Miracle-Grow (SMG), which actually does very well at this time of year.

So, again starting from the restaurants, the food companies, seed companies, fertilizer, and then also what does it take to grow this food, is water. That’s an area where I predict that going forward, hopefully not in my lifetime, but I think we will see it in the decades to come, is we will see wars fought over water.

Water is an area…there’s not enough fresh drinking water on the planet to really feed this population that’s exploding right now, so it’s a very serious topic. The water companies that I look at are Veolia (VE), also Companhia de Saneamento (SBS), excuse the pronunciation, down in Brazil, and Water America (WTR).

So, water, fertilizer, and seed. You put those together and some acreage with farmland, which you’ve seen Jim Rogers and a number of hedge funds really boost up the price of farmland around the country.

It’s amazing that you actually see hedge funds that are buying farmland, as much as they can get, because they see in the longer time frame that food is really going to be very important to feed the booming population that we have across the world.

Continued…

Tickers Mentioned: DAG, AGA, JJG, GRU, JJA