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3 Plays on the Food Boom

10/27/2011 3:48 pm EST


Neil George

Editor, Profitable Investing

Skyrocketing demand for grains is going to drive up the high-end seed engineers and fertilizer producers the most, says Neil George of The Pay Me Strategy, who shares three of his favorite picks in this exclusive interview with

Neil, glad to have you by. I want to talk to you about global food production and any type of opportunities you see there.

Well, thanks again for having me, Karen. You know many people are looking at so much upheaval in the markets, and a lot of people have been concerned that we’re looking for some sort of a major global slowdown, or potentially a global recession.

The idea is that many manufacturers are being discounted right now in the stock market, and you are seeing many consumer stocks are seen as potentially under threat. But the one key industry that is seeing growth, both in demand and more so in price, has been the food industry—particularly with raw agricultural products.

Even in economies that are threatening maybe to slow their growth—such as China or Brazil or Indonesia, and so forth—we’re seeing just tremendous surges of demand for grains, beans, livestock, and so forth. We’ve seen this for the last several years, even with the ups and downs in the markets, the ups and downs of the economy, such as what happened in 2008 with the initial financial meltdown.

What’s been happening more recently with the US and European credit issues and the stock markets having its troubles? The overall market for food is sort of tracked and measured by part of the United Nations Food Organization Authority, the FAO.

It has been looking at seeing an average annual price gains in the second segment, running up roughly about one third every year for the past several years, including more recent conditions. If you look at the past year, we have seen even more aggressive ramp up in pricing.

So the idea is that people still need to eat, we have an expanded population, and again, the idea of how to capitalize on that.

How could we? I’d love to get a piece of a 30% or a 33% annual return.

Right. That’s the whole thing—there are several companies out there now.

Now the key thing: when you think of food, you start thinking about the food producers. In other words, companies that take the raw materials and then process it and put it in packages and sell it. They’re the guys that are coming under all sorts of other pressure, because they have rising costs across the board.

That they can’t pass off.

That maybe they’re even having difficulty passing on. So you really have to go to the companies that are effectively making money helping the farmers and so forth around the globe be able to produce more.

So therefore, what we’re looking at are genetically modified companies. In other words, we’re focusing on seed engineering, seed production, as well as some of the very specialized chemicals and fertilizer chemicals. Again, some of the very high value-added stuff. Not the bulk potash and so forth, but very specific, higher-end proprietary products.

Such as…

Well, the primary one—which over the past five years has been a little bit more volatile, as they’ve been getting away from the lower value-added bulk chemicals to the very specific GMO seeds and the related chemicals—has been Monsanto (MON). And you’ve seen that it’s really started to be very positive, even this year where the rest of the general market has been taking some pretty heavy beatings.

But it’s not alone. One of the other countries that is very sort of chock full some of these high-end scientists that work very well at dealing with some of the most adverse growing climates are in Israel. Israel really has become sort of one of the global centers for agricultural technology.

There are a couple of companies particularly. One is called—and again my Hebrew is always sort of being butchered here—but Makhteshim-Agan (MAIXF).

And you’ll see this company is in the process of getting a major stake in it along with capital from China Chemical, which is effectively going to be taking a lot of their technologies and so forth directly to the Chinese agricultural markets. So they have really a sort of a built in massive upturn coming in the not too distant future.

The stock price, even with the general markets having all sorts of hysteria, has been very steady and very positive. It’s also in the shekel, which converted back to US dollars has been going up quite nicely. So it’s as if you’re getting an additional kick.

How’s liquidity?

Liquidity is very good on a global scale. Again, on Nasdaq it’s over the counter. You’ll see that it’s fairly reasonable. So the idea is that individual investors can start to nibble and put a few of these shares in their portfolio.

Then a larger firm, which is one of its cross-town competitors if you will in Tel Aviv, is Israel Chemical Company (ISCHF). It is a major company. It has a wide variety of various product lines.

Some of them might have seen some suffering because of global demand for some of their industrial products. But their food and agricultural divisions are really basically sort of stealing the show, if you will, and therefore you’re seeing some very strong positive elements—amplified because, again, it’s outside the dollar.

Therefore, when their dividends come in, which is paying about 4% as well as you’re looking at the pricing of it back to dollars, it’s reflecting a weaker dollar and a stronger shekel and its revenues that are coming from well outside the US.

It’s a cross-town rival. You’re getting the benefit of a weaker dollar. Strong food demand, strong food pricing, and the strong demand that’s been occurring in some of the big markets such as China.

Do you own any of these?

Yes, I’ve owned Monsanto for a while and I’m just starting to add in the other two companies.

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