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Archer-Daniels and Agrium: Value in Agriculture

10/17/2017 5:00 am EST


John Buckingham

Editor, The Prudent Speculator

John Buckingham, value investor and editor of The Prudent Speculator, looks at two recent recommendations in the agricultural products sector.

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We are always braced for a downturn, but we know that far more money has been lost in trying to avoid the selloffs than has been lost in the inevitable pullbacks themselves, so we continue to see no reason to alter our optimism for the long-term prospects of our broadly diversified portfolios.

After all, we think, as Mr. Buffett just echoed, that equity valuations are reasonable within the context of the extraordinarily low interest rate climate, while we very much like what market history shows about rising rates and the stellar performance, on average, of Value stocks.

Archer-Daniels (ADM), one of the largest agricultural processors and food ingredient providers in the world, is in the business of converting agricultural harvest such as corn, wheat and soybeans into basic ingredients for both consumer and industrial product manufacturers.


Though the stock price is down in 2017, shares have strengthened a bit since the company reported better than expected third quarter earnings on improving demand for exported U.S. corn and soybean products, the continuation of strategic operating measures and cost-cutting initiatives.

Additionally, we were pleased to see the jump in free cash flow during the quarter. While operational headwinds remain, we are optimistic about the longer-term global secular growth trends in agriculture and we like that ADM’s scale gives it advantages over regional competitors.

We also note that the company continues to work to strengthen its balance sheet, reshape its portfolio and return cash to shareholders as the dividend yield is currently 3.0%.

Agrium (AGU) is one of the largest retail suppliers of agricultural products and services in North America, South America, Europe and Australia, as well as a wholesale producer and marketer of all three major agricultural nutrients (nitrogen, potash and phosphates).

With some regulatory hurdles remaining in the U.S. and China (they have been cleared in Canada, Brazil and Russia), AGU plans to merge with Potash (POT), which will create the world’s largest crop nutrient company, and will go by the name of Nutrien.

Despite a challenging North American agricultural pricing environment, we remain constructive on AGU’s retail business, owing to numerous growth drivers (including attractive bolt-on acquisitions) and a lower-risk business model.

While the wholesale business has lagged, we see opportunity for improvements via synergies and scale with its coming marriage to Potash, and we remain positive on the long-term prospects of the company and its diversified business, as well as the long-term potential of agriculture in general.

The decline of global arable land, continued population growth and the growing demand for increased meat proteins in emerging economies should force farmers to be more productive and should drive growth of crop inputs. AGU yields 3.3%.

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