A Long-Term Bull on Agriculture
Auxier Asset Management founder Jeff Auxier is no stranger to the whims of agriculture. Auxier keeps watch over hazelnut and timber crops on his Oregon farm and keeps his eye out for values when running his $115 million Auxier Focus Fund, which returned 5.7 percent in 2007 and has a five-year average return of 11.6 percent. The fund typically has 25 to 30 percent of its holdings in agriculture-related issues.
Auxier spoke with U.S. News about finding good deals in an extra-hot market for both commodities and agricultural stocks.
What do you think of the attention agriculture stocks are getting right now?
The fundamentals for agriculture are interesting. From 1975 to 2005 roughly, food adjusted for inflation, in particular grains, dropped 75 percent. Commodities cycles run 18 to 20 years, and if you go back, historically, there has been a recurring pattern of 18 good years and 18 lousy years. From 1982 to about 2000 was one of these grinding bear markets in commodities. What happens is capacity begins to be shut down and no one invests in the space. About two years ago, wheat was about $3.50 a bushel, and a month ago, we had some of our white wheat at $13 a bushel.
What's behind the pricing difference?
We've had the number of acres committed to wheat way down, and all of a sudden you've got new forces at work. You've got biofuel mandates out of Europe and the U.S. Then you've got 2 to 3 billion new consumers globally, on the same acreages. So that's creating this pricing phenomenon. You've also got this movement toward antioxidants and in living longer through more fruits and vegetables and healthier eating.
Which of your holdings is best positioned to profit from the strength in the agricultural sector?
Well, we've kind of had a run-up. We bought AGCO Corp. at around $16. [It's now about $57.] The problem with Wall Street is, they get excited on a theme, and they've kind of run up the fertilizer companies, and I think there's a little bit too much excitement in there. Where we're going now is the supermarkets—Wal-Mart and Kroger and Tesco out of the U.K. and some of those.
Why supermarkets?
The supermarkets are able to pass through the food prices. Food inflation has gone from around 2.5 percent in 2006, and we're running over 5 percent for 2007 and probably higher for 2008. But China had like 18 percent food inflation for November, annualized.
Are there opportunities in traditional equipment, seed, and fertilizer stocks?
They're sizzling hot right now—just too hot to buy. Their story's becoming recognized. But it's still a bull market, and it will correct. So what you do is identify those businesses that you want to own, and then, when they get hit, hopefully you're there.
What is your outlook for agriculture stocks over the next couple of years?
I think agriculture looks really bright over the next 10 years, if we maintain the biodiesel mandates, with the demographics for baby boomers eating healthier, and then the 2 to 3 billion [new] consumers. Our export market looks really good for wheat. So it looks real good from the investment standpoint. We try to buy value and buy them when they're somewhat cheap. There will be corrections as the global economy slows and people get fearful.
You're invested in chemical giant and herbicide maker DuPont and agricultural storage and transport company the Andersons Inc. Did you get in early?
We bought DuPont when it was way out of favor and pretty cheap historically.... Andersons has been more of a recent pick. But it's extremely well run, and it's been family run for 60 years. They're conservative, and they know their business.
You tend to stress business analysis and research, but doesn't the weather element make that difficult with agriculture stocks?
I think that the big thing is the U.S. technological lead, in terms of what Monsanto's doing and our leadership with Deere and Caterpillar. Our productivity lead globally will probably offset some of the weather risk. But you know, I've been doing this, living on a farm, for 20 years. So I just have a huge appreciation for how much you can lose.
So what's your best piece of advice for a retail investor looking at agricultural stocks?
I think it's like all investing. You kind of identify areas you have an understanding of, and you watch them and you kind of buy them on corrections. You need a great buy, basically. You can't count on bubbles.
advertisement
