Retailers aren't the only ones benefiting from the recent decline in crop prices. While clothing retailers are enjoying higher margins from cheaper cotton, livestock producers are returning to profitability now that feed prices have fallen. Read on to see why I think this will be a strong growth area and what stock I think will benefit most.
Nine billion mouths to feed
The Food and Agriculture Organization of the United Nations forecasts that by 2050, the world population will increase about 34% to roughly 9 billion. Most of that population growth will occur in developing countries, and it will have a leveraged impact on global consumption, as more of these rapidly growing populations move into the middle class and start consuming more per capita.
An oft-quoted consequence is that global crop production will need to double to keep up with all that extra demand, but meat production will need to increase almost as much. Consumers will gradually move from cheap, plant-based proteins like soy, on to higher-quality and more expensive animal-based sources.
According to the FAO, from 1961 to 2005, per capita consumption of meat in developing countries more than tripled, milk almost doubled, and egg consumption increased by fivefold, all greatly outpacing grains and root vegetables. Growth in developed economies has been much slower, but the level of consumption is still substantially higher than in developing countries, leaving a great deal of room for them to catch up.
But if it doesn't make dollars then it doesn't make sense
There are basically three ways to invest in livestock (short of becoming an actual cattle rancher). The most direct way is through futures, but this requires a special trading account and skill with timing. Since many factors can quickly send livestock prices one way or another, trying to get the timing right on a relatively short-term futures contract can make this a risky investment.
A slightly safer and easier way is to use exchange-traded notes. Unfortunately, there are very few pure-plays for livestock, and they all track the same cattle-and-hogs-only index. Even broad agriculture indexes leave out milk, chickens, and eggs, which are important stepping-stones for consumers transitioning to more expensive meats.
The importance of staying in heavy rotation
The final way to invest is in actual companies. Unfortunately, many companies in this industry focus on just one segment and just one country.
Lack of product diversity can create problems for companies like poultry-only Pilgrim's Pride (NYSE: PPC ) , which suffered some of its worst losses since emerging from bankruptcy when the price of chicken feed rapidly outpaced the price of chicken, but not other meats like pork and beef.
Tyson Foods (NYSE: TSN ) does have well-diversified operations, but gets almost all its sales from the United States, precluding it from the growth expected to occur in international markets. Zhongpin (Nasdaq: HOGS ) , a Chinese pork company, has been enjoying that growth to the tune of 78% annual net income growth for the last five years. But you should be wary of betting the farm on the Chinese pork market, and while Zhongpin seems to have high-quality earnings, investors have been burned on China before.
The real monster in the game
One stock manages to marry all the qualities we're looking for. It has diversified business segments, large international sales, and it's based in Brazil, itself an emerging market. Did you guess Brasil Foods (NYSE: BRFS ) ?
Brasil Foods is essentially the Hormel Foods (NYSE: HRL ) of Brazil, selling fresh and frozen meat as well as packaged grocery products. However, Brasil Foods gets about 40% of its sales from international exports, unlike Hormel which gets roughly 4%. While most of its domestic segments were fairly weak, Hormel saw strong growth in its international profits this year, but not nearly as high as Brasil Foods' 129% income growth.
Brasil Foods' stock isn't particularly cheap, but it's not expensive either, and it's well-suited to continue benefiting from the trend going forward. I'm backing this up by making a CAPScall in my profile. Sign up to play along, or add Brasil Foods to My Watchlist to keep track of any developments.