There are plenty of ways to skin a cat, but this approach to profiting from the growing middle class in developed nations is a unique take on this clear reality, observes Randy Bateman of Huntington Funds.
Gregg Early: I’m here with Randy Bateman, Chief Investment Officer of Huntington Funds. Randy, I wanted to ask you about the developing world, its movement into the middle class, and the challenges and opportunities that brings for food and agricultural production.
Randy Bateman: The world's arable land only constitutes about 14% of the land that’s available out there, and that’s been shrinking every year for the last five or so decades. At the same time, the population has been growing.
In 1960, the world population was 3 billion, and that constituted about 12 acres of farmland per capita. Now we’ve got a world population that’s closing in on 7 billion—and growing at a pace of 211,000 people per day—and the world ratio has now fallen to 1.5 acres.
At current levels of productivity, it’s estimated that it requires about 1.2 acres of farmland per person for a minimum level of nutrition, so we’re bumping that limit. At the same time, we’ve got a population that is expected to continue to grow on a worldwide basis, and arable land is declining as a result of number of natural and man-made factors. So it makes sense that this is one of those opportunities that we see that makes an awful lot of sense for us.
Gregg Early: Absolutely. It sounds like what you’re looking at is modern technology to increase the productivity and yield on these fields.
Randy Bateman: Absolutely. As you know, going back through history, economists have failed to recognize what Barton Biggs once called the coping mechanism of mankind. Malthus wrote about the inability of the agriculture at the time to keep pace with the population’s growth; and we’re talking about the same thing here.
We’re looking at a lot of productivity enhancements, the use of fertilizer, the use of alternative farming methods and ocean farming as well to satisfy that need, because the need is going to be there. That’s the great thing that we see out there in this particular business, is the fact that there are so many imponderables in the marketplace right now, and this is something that’s almost for certain.
We know population is going to continue to grow. We know there's a growing middle-class population around the globe. And we know that farmland is actually shrinking. So that, to us, spells a good deal of opportunity.
Gregg Early: Now, is it simply emerging-market consumer demand, or is there also production demand? Are they also interested in increasing their productivity, or is that more for the developed world that’s shipping a lot of goods to emerging markets?
Randy Bateman: Yes. It’s probably a bit of both. I think obviously in this country, we’ve enjoyed good production out of our farmland.
You see what’s happened to farmland prices. They really expanded. Actually, Iowa farmland increased about 32% in the past year alone—and in the last couple of months, it’s growth hass even gotten more substantial.
But I think the key is as this middle class is growing worldwide, they’re just going to demand more protein and they’re going to demand more diversity. That is just going to be something that this country can certainly enjoy the opportunity to export.
As you know, we’re not as strong a manufacturing entity as we once were. We’re more of a service economy. Exporting service-sector goods is much more difficult than manufactured goods, but then we’re going back to now agricultural goods or something that we do have an edge on and we can sell overseas pretty dramatically.
Gregg Early: And when you’re talking about the increased demand for protein, that I would assume is not only animal products but also beans—soybeans and things of that nature, too, right?
Randy Bateman: Absolutely.
Gregg Early: OK. Vegetable products as well.
Randy Bateman: Certainly.
Gregg Early: Who do you like in this space? Who are you following?
Randy Bateman: Well, if this all holds true, and it certainly has because farm income has grown at a strong pace—I think 18% for the past two years...it’ll be a little less this year because of the drought in the Midwest, but that’s putting more money in farmers’ hands—as a result we’ve tried to find those areas that look attractive that will play off of farm income.
Certainly you can do the more normal things like Deere (DE), and Caterpillar (CAT), and the big Ag machinery companies. But if you drill down, there are a lot of other opportunities.
In terms of fertilizer, Terra Nitrogen (TNH) comes to mind. It’s got a yield over 7%. Lindsay Corp (LNN) makes irrigation equipment, with very attractive control of that sector.
Then, if the farmers are making more money, they’re going to spend more money and maybe on non-traditional things, so we’re looking at the real community that we think will be enhanced by increased farm revenue—the Family Dollar (FDO) stores, the Tractor Supply Company (TSCO), and even a company called Cabela’s (CAB).
Gregg Early: And so it sounds like these are plays in US companies that are working with developing countries. Are you looking at any plays in specific countries outside the US, or are you looking at this from a US-based perspective?
Randy Bateman: We’re looking at his mostly from a US-based perspective. At Huntington, we do have a Global Select Fund (HGSIX) that is investing in companies across the globe that are in areas that are experiencing that dynamic growth.
Unfortunately, because of demographics and because of debt, the developed nations are going to be in a slower growth period for maybe some years in the future. We do feel that global growth, however, will continue to be strong, but it will be coming from those countries that have more favorable demographics and don’t have quite the debt dilemma that many of the developed nations have.
So the Indonesias, the Chinas, the Indias, the Brazils of the world have some big opportunities there. Through our Global Growth strategy, we’re trying to find those companies in those areas that will benefit from that. In our strategy, in general, with the farmland we’re looking at US-based companies and how our people can benefit from shipping things overseas.
Gregg Early: Sure. And I guess within that context, you also have the stability of US accounting systems and some transparency in being able to look at these companies that are still taking advantage of the growth that’s going on in the emerging markets.
Randy Bateman: Absolutely. And if you look at what’s taking place here—we’ve got a mountain of debt; we’re talking about the fiscal cliff; we’ve expanded our monetary policy very, very exclusively—that’s going to ultimately lead to inflation.
As a result of that, farmland will probably hold its value pretty well in that phase, at the same time being a productive vehicle to expand that export market that may very well get favorable treatment from the policymakers in Washington.