The Case For Agriculture From Hedge Fund Passport Capital ~ market folly

Monday, October 12, 2009

The Case For Agriculture From Hedge Fund Passport Capital

John Burbank's hedge fund firm Passport Capital has put out numerous interesting research pieces in the past and we've tried to detail some of their intriguing investment plays, such as their curve steepener. This time around though, they have taken an in-depth look at the agricultural sector as an attractive investment going forward. Their bullishness on the sector is noted through their newly opened Agriculture fund that debuted in March of this year and has seen solid performance. Additionally, they have large agricultural stakes in their portfolio, as some of their top holdings include the likes of Potash (POT) and Mosaic (MOS). Their research piece is entitled, "The Case For Agriculture" as they provide a compelling case from how you go from dirt to the dinner table. The overall meme of investing in agriculture is by no means new and is largely contingent on global growth, expanding populations, and increased consumption of product. That said, Passport expands on these arguments below in their exclusive look.

The hedge fund's specific view is that "growing global demand for agricultural commodities and food products with constrained supplies, processing capacities, and distribution channels provides an attractive investment opportunity." While they cite the typical arguments of global population increase and increased demand for crops, they also delve into the cycles as illustrated below:

(click to enlarge)

As you can see above, they've laid out the secular trends with cyclical influences to lay out four stages in the global food cycle. There are two extremes in which you see supply destruction and/or demand stimulation where prices obviously are most likely to rise and then you see demand destruction and/or supply stimulation where crop prices are most likely to fall. They also highlight the fact that demand for food has not historically declined as significantly as demand for other goods during times of economic constraint. After all, people have to eat to survive.

As middle class workers around the world begin to accumulate wealth, they are able to enjoy a more protein rich diet that they were previously not used to. Passport identified this trend and has also noticed demand for agricultural products is rising. They cite those two reasons as major growth drivers and also note the fact that agricultural demand has outpaced production, thus limiting inventories and raising prices.

Overall, they believe a unique opportunity has arisen due to tight credit conditions and reduced asset values. They are particularly focused on fertilizer producers, sugar producers, as well as companies that produce proteins through various dairy or meat products. They think the agricultural industry is set for a shift and is in the early part of a metamorphosis. We've already touched on the rising demand for agricultural products, but they believe this is set to rise even further as the global population is predicted to "increase by more than one-third, to a staggering 9 billion people by 2054."

(click to enlarge)

If you're looking for a solid long-term trend to play, this could very well be a nice place to look. Don't forget that there are also a few other strong proponents of the agricultural sector in addition to Passport. Ex-Quantum Fund manager and noteworthy investor Jim Rogers has been bullish on agriculture for a while now. Additionally, market Strategist Don Coxe also likes the sector. While we saw the stocks of fertilizer producers and various ag companies run rampantly higher preceding the crisis, they too were hit in the equities downturn. While they have rallied back with the rest of the market, it will be interesting to see if they can outperform over the long-term as this investment idea is focused on capturing the trend shift. Passport has compiled an excellent presentation on the sector and you can access their excellent in-depth look below.

CLICK HERE to view & download Passport Capital's presentation entitled, "The Case For Agriculture."

For more on John Burbank's hedge fund Passport Capital, make sure you also check out their curve steepener play, an overall bet on inflation. Additionally, you can check out our post covering Passport's portfolio to see what other ideas they're playing.

blog comments powered by Disqus