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.

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Kate Stalter: What about the equipment makers, like Deere (DE) or the Caterpillars (CAT) of the world? Do they factor into this at all in your view?

Ramesh Gulati: I was just going to say that. Now that we have the seed, the fertilizer, and the water, and we’ve got these plants growing, what are we going to do with them? That’s where the equipment manufacturers come in.

There was one that just had some earnings that came out, and it’s Titan Machinery (TITN). They have companies across the Midwest that supply tractors and all the equipment that goes into harvesting this food. This stock, it blew out the earnings, and it recently just jumped from $28 up to $36 in a matter of a day or two. So, once again, on that one you probably want to wait for a pullback.

That’s more of the smaller retailer, but the big companies—like you said, Caterpillar and Deere—they’re also factoring in where they move along with the prices.

You see, this is an area where technology has grown so much, where now farmers have these tractors that are GPS-centralized, where they can actually plug in their coordinates to help them in harvesting their food, which you really don’t think of technology in the farming area.

This is one area that you do find technology really helping. You have these farmers that are getting crops, they’re making so much money on their crops, they’re going out and they’re buying these beautiful tractors that are situated with GPS, and they have amazing stereo systems, air conditioning, and everything else in there. It’s like driving a Bentley on your farm.

Kate Stalter: Let me ask you one other follow-up question here, Ramesh. We’ve been talking about the developed world as well as emerging markets. How should individual investors make that distinction when they’re deciding where to put their money?

Ramesh Gulati: Well, the emerging markets are very difficult. I always think that there should be a certain percentage of your assets that are dedicated to emerging markets.

What I have found, obviously you’ve seen with everything going on in Europe, is that things can get very hairy, very quickly with debt. Obviously you have a lot of different moving factors that go into that.

But I do suggest some of the emerging markets, your BRIC countries—Brazil, Russia, India, China—those countries, because of their booming populations, are going to be places to invest and have a portion of your money, pretty much at all times. You might switch from anywhere from 10% to 20% depending on what’s going on at the time, but that is an area where you definitely should have a portion of your money.

A way that I have found to, if you don’t want to be going into specific individual companies when you’re looking at the ag space, there are a number of ETFs, or exchange traded funds, that are available that I can list.

These first two are actually leveraged funds, so be very careful. They will trade at two times either on the up or the down side. PowerShares DB Agriculture Double Long (DAG) is two times long wheat, corn, soybeans, and sugar, and the inverse of the DAG is the PowerShares DB Agriculture Double Short (AGA), and it’s two times short.

So, depending if you’re bullish or bearish, you can use these on a short-term basis. I wouldn’t suggest holding those for more than a week or two, because they do decline in value very much because they use futures.

Some of the other ones in this area are: Dow Jones-UBS Grains Subindex Total Return ETF (JJG), which focuses on grains and soybeans, Elements MLCX Grains Index (GRU), also which focuses on wheat and corn. Dow Jones-UBS Agriculture Subindex Total Return ETN (JJA) is also very good. It hits seven different commodities, including cocoa and sugar.

Elements Rogers International Commodity Index (RJA) is an index by Jim Rogers, as I had mentioned. He is very well known in the commodities area. Then there are a couple that focus more on livestock, like Market Vectors Agribusiness (MOO), and iPath Livestock ETN (COW), which are funny symbols to let you remember what you’re investing in there.

Then there are a couple of water ETFs. The PowerShares Water Resources (PHO) and the PowerShares Global Water (PIO) are very good if you want to segment and focus in on the water area.