With little more than a fortnight left before the expiry of a partial ceasefire to allow grain and fertiliser exports from Ukraine, fears are rising about global food supplies.
The United Nations brokered the Black Sea Grain Initiative last July to enable shipping to resume from Europe’s bread basket, despite the war.
Now Russia says it may not renew the UN safe passage deal when it expires on July 17. President Vladimir Putin claims that Russia has been “cheated” over promises to remove barriers to its own exports and the foreign secretary, Sergey Lavrov, said last month: “How can you extend something that doesn’t work?”
Bear in mind that Russia and Ukraine used to account for nearly a third of global wheat exports, a fifth of the world’s corn or maize trade and more than a tenth of its fertiliser potash. Thanks to the geological good fortune of sitting on a quarter of the world’s “chernozem”, or black soil, Ukraine is one of the most fertile countries on earth.
So, on top of all the human tragedy caused by the Russian invasion, it is also an environmental catastrophe. Last month’s destruction of the Nova Kakhovka dam has drained Europe’s second-largest reservoir, which used to contain 4.3 cubic miles of water that irrigated more than a million acres of farmland.
There isn’t much that individual investors can do about this. But we can help to fund the efficient production of food and fertiliser. Our money may make a difference, however small. Then, if things go well, investors willing to risk capital loss might receive growth and income.
For example, Deere (stock market ticker: DE) is the world’s biggest manufacturer of agricultural equipment and the third most valuable shareholding in my fund. This is an increasingly data-driven business, using GPS to guide fully autonomous vehicles and maximise crops.
Last year new technology enabled DE remotely to disable combine harvesters that Russian soldiers stole from Melitopol in Ukraine and took back to Chechnya before finding they could not switch them on. Tough luck, tovarich!
On the recommendation of my late uncle Norman Marshall, who was a wheat farmer, I paid $82 in November 2013 for DE shares that cost $407 today. They continue to yield 1.2 per cent income, despite dividends rising by an annual average of more than 12 per cent during the past five years.
Largely because many aspects of farming are time sensitive, requiring reliable equipment and prompt technical assistance if something goes wrong, it is difficult for competitors to challenge DE.
This business, which was founded in 1837, enjoys gross profits of 36 per cent, netting down to a return on investment (ROI) of 15 per cent. The shares are priced at less than 14 times earnings and look reasonable value for such a blue chip business in a vital industry.
Less obviously, but perhaps more fundamentally, the world’s biggest miner, BHP Holdings (BHP), is investing heavily in fertiliser to feed the growing global population.
Its C$7.5 billion (£4.5 billion) Jansen Potash Project in Saskatchewan, Canada, will boost global supplies of potassium, an essential nutrient for plant growth, but is still several years away from beginning production.
Because the price of potash tends to move independently from that of iron ore, BHP’s main product, the Jansen mine should help to smooth revenues and might mitigate this business’s exposure to commodity cycles.
The shares are trading on a price/earnings (P/E) ratio of 8.3, which is lower than their dividend yield of 9.3 per cent.
That remarkably low valuation reflects fears of global recession and falling demand for commodities, but might mean this business, founded in 1885, is priced in the bargain basement. Either way, I have been a shareholder for more than a decade and transferred BHP into my forever fund at £19.07 in September 2013 when I began writing about it here. They cost £23.41 at close of play on Friday and are my fifth most valuable holding — and one of my highest yielders.
Archer Daniels Midland (ADM) completes a triumvirate of businesses involved in agricultural commodities among my top ten shares by value. Founded as a linseed oil mill in 1902, it has grown into one of the world’s biggest traders in corn, soybeans and wheat.
This is a high-volume, low-margin business with gross profits of 7.6 per cent, netting down to 4.4 per cent, but efficient operations push the ROI up to a respectable 12.5 per cent. That mixed picture is reflected in a modest P/E of just over 9.
More positively the dividend yield is 2.5 per cent, rising by 4.5 per cent per annum. I first invested at $42 per share in May 2016 primarily because ADM has distributed dividends without fail since 1932 and increased shareholders’ income every year since 1981. The shares cost $75 and are my eighth most valuable holding.
With luck the Black Sea Grain Initiative will be renewed soon and, better still, Russia will retreat from Ukraine. But wishing won’t make it so and investing is all about hoping for the best while preparing for the worst.
Whatever does happen, agricultural commodities are worth considering for income and growth because food will never go out of fashion.
Are we still euphoric for AI, or has it had its chips?
Is artificial intelligence (AI) a no-brainer for high returns — or just high risk? Our sister paper, The Wall Street Journal, reported that the American government plans to tighten restrictions on the export of AI microchips to China, spooking the sector on Tuesday.
Nvidia (NVDA), the chip-making giant with a stock market value of $1 trillion (£790 billion), stumbled 3 per cent lower on the news. But the share price has still more than doubled since the start of the year.
This is distorting broader measures of the American market, said Jason Hollands from the wealth manager Bestinvest: “AI euphoria sent the Standard & Poor’s 500 Index into the technical definition of a new bull market, having rallied by more than 20 per cent since last October.
“But this is an incredibly concentrated bull market. While the S&P 500 has risen by 13 per cent this year, once you strip out information technology the return is only a meagre 2 per cent and it was negative until a few weeks ago.”
Current valuations are only likely to be sustained if a broader range of companies can monetise AI — just as happened with the internet. Nobody talks about “internet companies” now, any more than we would remark on a business having telephones.
That’s why I prefer diversified digital giants including Apple (AAPL), my most valuable holding, and Microsoft (MSFT), plus the global investment trust Polar Capital Technology (PCT), where NVDA is the third most valuable holding.
This gives me exposure to existing and profitable businesses while we wait to see if the AI euphoria bursts — like the dotcom bubble did 23 years ago — or whether it proves to be an “iPhone moment” for millions of consumers and many companies.
Source : The Sunday Times