Farmland Stocks As An Investment Theme

By Roger Nusbaum | August 05, 2008 | 12:34 PM | 2 Comments

Many investors love REITs. Some folks advocate 15-20% in REITs because of their low correlation to stocks and their high dividend yields. The three of you who may have ever read my stuff before I came on board with greenfaucet might recall that I was never in the 15% camp for a couple of reasons.

One is that 15% in anything is a very big bet offering the chance to get blindsided by the unexpected. Also I just never felt really comfortable with a lot of exposure here. I consider myself very lucky to have only had one across the board REIT holding when the group started to rollover last year. I think the bloom is off the REIT rose given that the correlation to financials went up at the worst possible time.

One aspect of investment management that makes the job fun is that portfolio construction is always evolving. One bit of evolution I think I see is with REITs or more specifically land; farmland. There is a clear and obvious global need for food (crops, meat and dairy) which creates visibility for investment demand for farms and companies that provide services to farms.

The chart compares two farm stocks along with the S&P 500.  One, PGG Wrightson (OTCPK: PGWFF) from New Zealand has been a great place to hide out during the bear market while Trigon Agri (OTCPK: TRGAF) from Sweden has been crushed. There are other charts that look like PGWFF and others still that look like TRGAF.

The demand story is obvious but the segment is not simple. There are stocks from Indonesia and Malaysia that focus on palm oil, rubber and coffee. Trigon, mentioned above is listed in Sweden but the farmland is in Russia and Estonia. There are quite a few farm related stocks from Australia and New Zealand.

For a more extensive list you can click here. 

This theme only makes sense of you think the global food story has legs for the long term. It seems clear to me that the food story for many ascending countries is real but I could be wrong.

You need to do your own work on this but the way I view the theme, if I am looking for something to be a proxy for REITs then that means looking for low correlation to stocks, maybe low volatility and a little yield. Some of the Asian and antipodean names offer these traits but I might expect big bounces from Trigon and some point and another Swedish listed, Russian based farm stock called Black Earth, but I don't know when. 

Anyone looking to learn more about this segment and possibly wade in should do so in moderation. The story is compelling but I think the mindset needs to be that you are adding something that might give a little boost not adding something that will be a ten bagger.

I have a limit order in for one stock that if it excutes will amount to about a 2% weight in client portfolios.