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Friday, May 13, 2011

Man does not live by coffee alone. Food is needed as well.

When I am out in the car I like to put on talk radio to get a sense of what people are concerned about outside the my own little circle of friends and family. Here in Boston we are very fortunate to have a station known by the call letters WTKK 96.9 FM, which is not your typical talk station as they do not feature the likes of Rush Limbaugh or Glen Beck. WTKK provides both sides of the various issues without the need for the “Fairness Doctrine” as the lineup features hosts from both sides of the political spectrum. While I am not some hardcore conservative I do tend to agree more often with the conservative hosts than the liberal ones. I know it is hard to believe that in a state as blue as Massachusetts that one could find conservative talk show hosts, especially since the political stance of the state is widely know as being just this side of Lenin.

As an investor and a citizen in general I believe it is important to keep an open mind and take in facts and opinion that differ from your own, which is why I listen to both the conservative and liberal viewpoint shows. I rarely fully agree with either side but what I do appreciate is that they provide differing viewpoints and allow me to think outside the box.

Of course this is an investment column not a political column so I need to get to the point of the article which is how little people actually know about what it is that is affecting them. Just this past Tuesday one of the shows on WTKK that I frequent which goes by the title “The Jim and Margery Show”, obviously a man and woman team, with a “bent” to the liberal side. Actually, Jim is a big government guy and Margery is what I would label as more moderate.

The show I am referring to was not a highly controversial installment, but rather a more mundane one. On the show the discussion was raising coffee prices. It was not the fact that the hosts noticed that coffee prices were rising, but instead it was a couple of the items that they discussed which intrigued me.

The first thing that struck me was how the hosts had an idea that coffee prices were being impacted by the weaker Dollar, but they readily admitted that they had no idea what a weaker Dollar means. The pair then went on to talk about how things are economically challenged and that it was more difficult to justify spending on coffee. Here is the interesting part at least to me; the hosts could not be bothered with making coffee at home but instead insist that they will continue to buy their brew from either Starbucks (NASDAQ: SBUX) or Dunkin Donuts. Moreover, the notion of bringing coffee to work in a “Thermos” to economize was laughed at to the point that basically it was declared that carrying a thermos to work was not manly.

The items that stood out to me regarding this talk show were twofold. First, the fact that the hosts would talk about the price of coffee and even mention one of the root causes of the price rise, the weak dollar, yet they did not take the time to understand what a weaker dollar is nor the reasons for it or its implications. Second, the hosts’ inability to grasp the concept of people needing to economize and perhaps even encourage that kind of behavior shows just how far we as a country are from actually dealing with our problems. Sure taking coffee in a thermos is not going to solve one’s or the country’s budget problems but it is a small step in getting people back toward living within their means. Instead the hosts were joking back and forth about how they found it much cooler and satisfying to be able to walk in to a store and order a grande half calf caramel mochachino latte as if drinking this over priced foo foo coffee was so manly.

The point is that without a basic understanding of how things interrelate economically we cannot hope to fix our problems at the ballot box because the people will vote for those that promise the most goodies instead of those that would make the correct economic decisions. The populis will not be able to demand change because they do not understand which policies are actually harmful versus beneficial. Secondly, people by now understand that things are not going back to the old normal and we as a people need to reinvent o ourselves to deal with the current situation and move forward. Reinventing ourselves means going back to the basics and getting our own fiscal houses in order, which starts with small steps like taking a thermos of coffee and saving the balance.

If you are reading this column then chances are good that you understand the weaker dollar and its causes and also recognize that the journey back to fiscal soundness is a journey of 1000 steps that begins with the first step. So dear reader you are probably asking yourself how does this relate to investing??? As I have alluded to in prior article I like to invest in longer duration themes and the story related above provided insight in to a theme that can be played. The theme is the continual weaker dollar and rising food prices. Rising food prices and the weaker dollar are interrelated, but food prices also influenced by demand.

Rising food prices are a worldwide phenomenon that was recently discussed in many magazines and newspapers. We have witnessed the results of this food inflation in what the media has dubbed the “Arab Spring” but in reality the root cause is not a demand for democracy as they would have you believe but instead a demand for food. Food got too expensive and people could no longer live with the level of prices so when the government did not respond it was time for action. Here in the US, we spend less of our incomes proportionately on food and it causes people to complain but not take to the streets in anger.

At this point US food companies are either eating the margin to keep prices stable in some areas or shrinking the packages to maintain the price illusion. What I mean by price illusion is that when you go to the supermarket and buy your favorite product lets choose ice cream and you grab it off the shelf you notice the price is the same. Upon closer inspection of the carton one finds that what you used to pay for a half gallon of ice cream comes in a package that contains only 1.5 quarts. Ironically, the shrinking of portions might be a good thing in helping America deal with the obesity epidemic, but that is not as a result of a conscious decision rather an economic dictate. Even with the various companies trying not to pass along prices they are being forced in to price rises and one can see it reflected in their grocery bills.

The problem of food prices will get worse as we add more people to the planet and the demand grows. Additionally, as many of the countries in the developing world prosper their impact on the food chain will continue to drive prices especially as their diets get larger and healthier. Food production and crop yield have to be improved to keep up with the demand and one always has to be alert to the weather as it can affect crop yields both positively and negatively. To further complicate matters arable land is disappearing at a rapid clip to make room for cities and other human developments so new farming techniques need to be developed and implemented to maximize the return on food investment.

How can one invest in an area that will grow based upon this theme? There are a variety of options that one can put money into to ride the food wave, and it is probably better to split money between different subsectors. As in prior missives I favor the companies that act more like arms dealers rather than combatants. One can invest in equipment manufactures like Caterpillar (NYSE: CAT) or Deere (NYSE: DE).

There is an ETF that follows the agricultural area, Powershares Multi Commodity fund (NYSE: DBA) which will give you exposure to the underlying commodities. The Market Vectors Agri Business (NYSE: MOO) would lead one to believe (especially by the cute ticker) that they are getting live stock commodity exposure but in reality 67% of the assets are stock in companies like Deere and Archer Daniels Midland (NYSE: ADM [FREE Stock Trend Analysis]).

If you are so inclined you can even invest in farmland for example Cresud S.A. (NASDAQ: CRESY) is an Argentinean company that operates some 25 farms many of which are in Brazil or one of its competitors Adecoargro (NYSE: AGRO) who operates multiple farms and processing plants throughout South America. The risk with investing directly in farmland that you need to be cognizant of is that it is subject to external factors like weather and crop yields. I do not believe that the risks should deter one from investing in the companies as both have diversified properties and I believe long term the upside far outweighs the risks.

Perhaps the best area from my perspective to gain exposure is in companies that will help increase crop yields and there are a couple of those for you to consider. Plant nutrients are critical to increase yields and two companies I can think of are ideally suited for this are Mosaic Corp (NYSE: MOS) and Potash of Saskatchewan (NYSE: POT) . Both of these companies were high fliers a short while ago and have fallen back to earth yet their stories going forward are very compelling especially if you recognize the food crisis theme. At present at least from a charting basis it appears as if both issues are oversold and are attempting to put in a base at their 200 day moving averages. POT and MOS are both very good companies and I believe they need to be watched for good entry points. The two companies have very good metrics, however, I would personally favor Mosaic as its balance sheet particularly its current ratio is stronger.

A stock that everyone seems to love to hate is Monsanto (NYSE: MON). Monsanto provides seeds and various pesticides and herbicides for farmers to plant and increase productivity. Monasnto has developed a bad rap as there are some who feel that their genetically modified seeds are for lack of a better term “evil”. I believe that going forward we will need the specialized seeds that Monsanto sells to keep up with food demand and evil or not they are going to sell plenty of product.

For those of you that are more conservative there is always Dupont (NYSE: DD [FREE Stock Trend Analysis]) a company that has been around since 1802. Most people know Dupont for their paint or Teflon products but there is much more to them than those divisions. Dupont is a global entity and a blue chip stock that derives 40%or so of its revenues outside the US and that segment is growing. Dupont is well positioned to help in combating the global food crisis that we have unfolding as the company produces high-yielding hybrid seeds, herbicides, insecticides and fungicides. The reason that Dupont is a conservative play is that agriculture is a large segment of their business but it is only one of many divisions. Dupont has been in business for over 200 years and in 1904 they began paying dividends. The first quarter 2011 dividend was the 427th consecutive dividend payment and also came with a share buyback announcement. Dupont currently yields 3% and hopefully as the company continues to prosper they will increase the dividend which was last raised in 2008.While you are waiting for Dupont to raise the dividend you can get paid and the share buyback will also hopefully translate in to capital gains as well. The chart of Dupont looks to be one of the healthier ones as it is in an uptrend currently hugging its 50 day moving average.

Another area to consider in this theme is that of water and water distribution\conservation products of course that is a full topic in itself.

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