Benefiting from the Ag Boom

I've been meaning to post about this for some time but now that we were discussing POT in the last post, I thought this would be a good opportunity. Why are food prices going up?

The factors include rising energy costs, less arable land, rising populations and higher meat consumption in the developing world. Rising energy costs is a double whammy for food because not only has ethanol in the US distorted corn prices, but you need energy inputs in the transport, and cultivation of the plants (diesel, fertilizer).

Another factor are government subsidies, tariffs, and policies that seem to distort the normal market mechanism of pricing. As the food riots around the world have hit the presses, the government responses have been swift and short sighted. The Phillipines for example is instituting a rice export tariff in response to rising rice prices. The Kazakhstan gov't did the same with its wheat exports! Even the Cdn. gov't had to get in on it by paying Canadian pork farmers $225 per breeding pig sent to slaughter, so as to aid the already depressed Cdn. pork market!

Although POT may still be a goo way to play this, I'm going to suggest that the former Saskatchewan Wheat Pool now known as Viterra (VT) is a good local way to play this. They are now the largest grain handler in Canada, having successfully merged with their rival (larger rival) Agricore United last year. Their primary way of making money is charging farmers to ship and market their grain. They also have smaller fertilizer operations as well as crop and seed retail type businesses catered to Cdn. farmers. (full disclosure - i still own shares since ~2003 before their reverse stock split)

The former SWP ran into trouble in the early 2000's after three consecutive drought years in the prairies along with a high debt load and over diversification in other business lines. They have since restructured debt, sold off irrelevant lines of business and now even merged with Agricore.

The pro forma earnings from the combined companies last year fiscal 2007 would have EBIDTA of almost $400 million. This is before the full synergies of the merger have been recognized. With the price of wheat at multiyear highs, Cdn farmers will move as much product off their farms as possible. The enterprise value of VT is now around $3.3 billion. The trailing EV/EBIDTA is a conservative 8.25.

There aren't many other North American public grain handlers for direct comparison. ABB Grain is in Australia and Carghill is an even more diversified food conglomerate. The only comparison was with Agricore United and the old SWP traded at a discount to it because of its poor performance.

I'm happy to own more of this viz a vis the club if we decide this is a good investment but I wanted some other analysis. Comments appreciated.