An Indirect Play on China's Growth 

07/21/2009 9:45 am EST


Roger Conrad

Chief Analyst/Managing Partner, Capitalist Times

Ag Growth makes the grain handling equipment farmers need to feed Asia's swelling cities, writes Roger Conrad in Canadian Edge.

The rise in relative importance of Asia has by no means negated the US market for commodity producers. But it has created a new dynamic for Canadian natural resource producers.

All will definitely fare better when the US economy gets back on its feet. But they’re no longer dependent on the economic ups and downs of this market alone.

In fact, they’re tapped into what’s become the most reliable source of growing demand for natural resources: the need for emerging Asia to accommodate a population that’s moving to urban areas at the equivalent rate of an entire city every year.

Meeting this new source of demand requires, for example, a truly unfathomable amount of steel. That in turn means unprecedented demand for iron ore—the essential element for making steel—and metallurgical coal, the high grade variety that works best for uses (steelmaking) that require very high and efficient heat.

Rapidly urbanizing populations need improved nutrition. That’s a huge plus for the world’s key producers of agricultural products and the inputs like fertilizer needed for growing.

The relatively good economic health of the US farm belt compared to the rest of the nation is due to surging Asian demand that’s offset weakness in North America in driving global prices. That’s why Ag Growth International (TSX:AFN, OTC: AGGZF) continues to prosper with its business of manufacturing and selling grain handling equipment in the US and Canada.

Demand for corn has remained strong despite the sharp global slowdown, in part due to required amounts of ethanol in gasoline but also due to growing demand in emerging Asia. After completing a major expansion of production facilities last year, Ag Growth is uniquely positioned to meet surging demand.

US farmers, for example, are planting the third-largest amount of corn acreage on record, according to the US Department of Agriculture. That means robust demand for Ag Growth’s portable equipment, which is a relatively minor expenditure for farmers but a critical one. First-quarter sales and earnings before tax rose 57% and 231%, respectively. That means more growth in the 8% yield.

Ag Growth has now completed its conversion to a corporation. As promised by management, the monthly distribution has remained the same, a testament to the underlying strength of the company’s primary business of selling corn handling equipment (65 to 75% of annual sales).

Ag shares have surged this year. But with its growth potential, Ag Growth International ranks a buy up to $30. (Shares closed at C$30.20 in Toronto and $26.31 in New York Monday—Editor.)

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