Investing Daily

One of the biggest challenges is to find companies that can sustain and even expand their businesses despite a slowing economy.

The food industry boasts a solid collection of companies that meets that challenge, especially with the direction of long-term market trends.

Demand is growing. The global population, currently at 6.5 billion, is expected to surpass 9 billion by 2050. Income is surging, especially in emerging economies such as India and China. That means greater demand for protein-rich foods and more crop grains for feeding.

On the supply side, arable land is being paved over on a global scale; China is a prime example. Clean, safe water is increasingly scarce, and climate changes--no matter how short term they seem--are reality as droughts and floods occur with increasing frequency. Increased livestock feeding has prompted agriculturalists to allocate valuable foodstuffs to animals, with corn a primary target.

The bottom line: No matter who we are or where we live, we all need to eat. And that will continue to push prices higher. As a result, the current weakness in the food sector offers a great opportunity to step in and buy strong, promising companies at discounted prices.

Many of the best growth stories regarding vital agricultural resources are centered in Asia, the main driver behind rising demand for food in the past 15 years. With strong population growth and rapidly improving incomes, the region is an up-and-coming force in the consumption of all foods, particularly meat and milk.

China has been in the forefront of rising food consumption. For example, Chinese pork consumption accounted for 50 percent of global pork consumption in 2007, with demand rising 130 percent since 1990.

Despite that rapid growth, Asia’s daily per capita consumption remains low compared to the developed economies. Meat consumption in China is still only 30 percent of that in the US.

That’s a lot of room for future growth and a pretty solid sign the trend has a long way to run, as can be seen from the graph “The Weight of Food.” Emerging markets in general assign high weights for food in their CPI indexes, as their societies are still in the early stages of income gains.

Furthermore, a lot of the problems leading to below-potential agriculture production in developing lands are manmade: poor water systems; disease; decrepit rural transport networks; inadequate storage facilities; and lack of expertise and money to implement new technology.

Meanwhile, the rapid urbanization of Asian countries takes a growing portion of arable land out of circulation every year. Then there are changes in the climate--manmade or not--that continue to wreak havoc on traditional producing areas with too much or too little rainfall.

Grow It

With the unending expansion in demand and current limitations on food supplies, you have a prime market for growth. Although finding and applying solutions to food sector needs will take years and heavy investment, it will benefit companies that are producers and agricultural technology developers.

The US has a very strong hand in this game. US cornfields produce an average of 153 bushels an acre, double the average of the rest of the world and twice the productivity of the previous generation of farmers. Total corn acreage rose from 66.3 million in 1987 to 93.6 million in 2007. That adds up to nearly a tripling of overall US corn production in the past 20 years.

There will be ups and downs for prices along the way. A throttling back of America’s ethanol program or a move to use something besides corn to brew ethanol could take some of the upward pressure off corn prices. The global recession could also cause food prices to back off for a time.

The big cycle in food demand has begun, and long-term-oriented investors will be rewarded handsomely.

Pay Dirt

We’ve always banked on the market for food. There's a world of demand just waiting, and we have the farming technology to meet it.

Farmers get paid more from higher crop yields and better quality crops coming from their dirt. And for decades St. Louis-based Monsanto (NYSE: MON) has made both happen.

With its engineered seeds, the company can help farmers overcome more and more threats, from weeds to insects and even drought. And its crop protection chemicals work to boost harvests.

The results have been stellar for the company, which continues to grow revenues at average annual gains of 25 percent or more.

Margins, even with cost pressures from labor and materials, are expanding at rates beyond 12 percent to a current level of 25 percent-plus.

Crucially, the company has little debt, piles of cash and cash equivalents amounting to almost twice its current liabilities.

Although it doesn’t pay much, Monsanto offers a dividend just above 1 percent. Its business is sustained and expanding, finances are more than solid and with the general market selloff, it’s back to values that led us to buy it at the beginning of this decade. Now a Growth Portfolio Nibbler, Monsanto is a buy under 97.

When you think of crop technology, you don’t usually think of Bayer (OTC: BAYZF). The large German-headquartered international company has core divisions in industrial materials, drugs and consumer health staples in addition to its crop technology operations.

That crop division keeps plugging along, with its chemicals and related products that work to produce a higher crop yield more efficiently for farmers worldwide.

The company is durable. Revenues keep adding up, with overall gains of 11 percent-plus, and margins are fat, even with its staples units added in. And they’re gaining by more than 60 percent-plus.

Financially, Bayer is underleveraged. Like Monsanto, it has only a fraction of debt to assets. And cash is also heavy, giving it the ability to sustain itself even if financial markets constrict further.

Although it’s down this year in price, that makes it a better buy. It trades at a discount to trailing sales. And since our first buy recommendation in 2003, it's delivered overall gains of 161 percent or more than 20 percent annually. Buy Bayer as a Long Hauler under 62.

After Monsanto and Bayer, there's Bunge (NYSE: BG). The company provides farmers with fertilizers and chemicals then buys the crops to process intermediate and consumer food products.

Revenues are still climbing despite some concerns over biofuel market softness. Margins have been softer during the past year because the cost of buying higher-priced beans and other crops put a squeeze on finished oils and other processed products.

But with prices down, margins should expand. Cash is heavy, and credit is ample. Best of all, it’s trading at a discount of 90 percent of trailing sales. Buy Bunge under 51.

If you want to make a broad investment in crop prices now that they’ve been discounted to the floor, there's the Deutsche Bank Agriculture Fund (AMEX: DBA). We bought it when grains ran up during the biofuel and commodities market rush and sold it as the markets reversed.

The fund tracks the basic ag crops, grains and beans. With those markets now cheap, Deutsche Bank Agriculture Fund is a buy again under 27.

Consumer Cash

Nestlé (OTC: NSRGY) is one of the largest global consumer goods companies. Its operations include beverages such as coffee, bottled water and dairy beverages, food such as confectionery, milk powder, pet food, frozen food, and pharmaceuticals (e.g., eye care).

Some of its major brands include Nescafé, Vittel, KitKat, Maggi and Purina. In addition, Nestlé owns 26 percent of leading cosmetic manufacturer L’Oréal.

The company has been shifting its product lines toward health-enhancing products through a combination of acquisitions, primarily in Nutrition (e.g., Gerber) and organic growth in its US bottled water business; 31 percent of sales now come from the company’s health-enhancers.

The company has one of the strongest balance sheets in the world with an AA+ rating and $10 billion in cash, which is good enough to cover the 3 percent dividend yield and the ongoing share buyback program. More importantly, the company can still access the commercial paper market at favorable rates.

Nestle has an excellent record of delivering solid results during good and bad economic conditions. Furthermore, it offers great geographical exposure around the world. A conservative, long-term play on the consistency of consumer staples, Nestlé is a buy under 44.

Yiannis Mostrous is associate editor of Personal Finance and editor of Silk Road Investor. Neil George is editor of PF.