S.Africa: Investing for a Food Price Disaster

Food companies not necessarily the best bet, experts say.

Julius Cobbett
14 Apr 2008 18:36

If you're looking to protect yourself against soaring food inflation, then food companies are not necessarily the best bet.

Food wholesalers such as Tiger Brands (JSE:TBS) and soon-to-be listed Pioneer Foods find themselves in a tight spot, says Alwyn van der Merwe of Sanlam Private Investments. This is because they try and pass price increases on to a "very powerful buyer" in the form of the South African retailer.

Sasfin fund manager David Shapiro concurs. "My biggest fear is that food prices are not getting passed on," he says. "Right through industry companies struggle to pass on costs."

But he notes that with consumer expenditure slowing, it is better to be in the business of selling essential items such as food. Some listed companies that wholesale or retail non-essential items such as furniture and electrical goods have seen share price declines of more than 50% in recent months.

Of the food wholesalers, Van der Merwe's favourite is the unlisted Kaap Agri, which he regards as a cheaper entry into Pioneer Foods. Kaap Agri is the largest single Pioneer Foods shareholder.

Van der Merwe says that Kaap Agri's stake in Pioneer comprises virtually its entire share price. In other words, if you buy Kaap Agri at its current share price, you are effectively buying getting its additional businesses for free. He notes that these businesses provide good protection against food price increases because they sell goods and services to farmers, who are likely to spend more when they are getting higher prices for their produce.

Shapiro says he's recently bought fertiliser producer Omnia (JSE:OMN), which should benefit in a similar manner. Other companies that supply products to farmers include Afgri (JSE:AFR) and Invicta (JSE:IVT), which sells agricultural equipment, but is not a pure farming play thanks to its other business interests, which include bearings and golf carts.

He notes that sugar producers Illovo (JSE:ILV) and Tongaat Hulett (JSE:TON) offer good protection against food price increases. These companies also offer a hedge against energy prices, seeing a sugar cane is a viable source of electricity.

Investors hoping to profit from food prices might be tempted to buy fishing company Oceana (JSE:OCE) or AVI (JSE:AVI), parent company of I&J, whose hake products are visible in supermarkets.

But Van der Merwe points out that fish stock can be erratic, and that it costs a lot of money to buy diesel to keep these companies' boats on the water.

Ultimately, the best hedge against food inflation is to buy food itself. Maize futures are easily traded on the JSE. However, Van der Merwe warns that these products are geared, and you need to know what you're doing. "I'd always be hesitant to buy maize futures, especially after the prices have gone up so much already," he warns, adding that if you forget to rollover your contracts you could land up with a few tonnes of maize on your doorste

If you're looking to protect yourself against soaring food inflation, then food companies are not necessarily the best bet.

Food wholesalers such as Tiger Brands (JSE:TBS) and soon-to-be listed Pioneer Foods find themselves in a tight spot, says Alwyn van der Merwe of Sanlam Private Investments. This is because they try and pass price increases on to a "very powerful buyer" in the form of the South African retailer.

Sasfin fund manager David Shapiro concurs. "My biggest fear is that food prices are not getting passed on," he says. "Right through industry companies struggle to pass on costs."

But he notes that with consumer expenditure slowing, it is better to be in the business of selling essential items such as food. Some listed companies that wholesale or retail non-essential items such as furniture and electrical goods have seen share price declines of more than 50% in recent months.

Of the food wholesalers, Van der Merwe's favourite is the unlisted Kaap Agri, which he regards as a cheaper entry into Pioneer Foods. Kaap Agri is the largest single Pioneer Foods shareholder.

Van der Merwe says that Kaap Agri's stake in Pioneer comprises virtually its entire share price. In other words, if you buy Kaap Agri at its current share price, you are effectively buying getting its additional businesses for free. He notes that these businesses provide good protection against food price increases because they sell goods and services to farmers, who are likely to spend more when they are getting higher prices for their produce.

Shapiro says he's recently bought fertiliser producer Omnia (JSE:OMN), which should benefit in a similar manner. Other companies that supply products to farmers include Afgri (JSE:AFR) and Invicta (JSE:IVT), which sells agricultural equipment, but is not a pure farming play thanks to its other business interests, which include bearings and golf carts.

He notes that sugar producers Illovo (JSE:ILV) and Tongaat Hulett (JSE:TON) offer good protection against food price increases. These companies also offer a hedge against energy prices, seeing a sugar cane is a viable source of electricity.

Investors hoping to profit from food prices might be tempted to buy fishing company Oceana (JSE:OCE) or AVI (JSE:AVI), parent company of I&J, whose hake products are visible in supermarkets.

But Van der Merwe points out that fish stock can be erratic, and that it costs a lot of money to buy diesel to keep these companies' boats on the water.

Ultimately, the best hedge against food inflation is to buy food itself. Maize futures are easily traded on the JSE. However, Van der Merwe warns that these products are geared, and you need to know what you're doing. "I'd always be hesitant to buy maize futures, especially after the prices have gone up so much already," he warns, adding that if you forget to rollover your contracts you could land up with a few tonnes of maize on your doorstep!

The writer holds shares in Pioneer Foods, Invicta and Tongaat Hulett

Source Url: http://www.moneyweb.co.za/mw/view/mw/en/page66?oid=203121&sn=Detail

Posted By: Jan
AfricanCrisis Webmaster
Author of: Government by Deception

“Political language is designed to make lies sound truthful and murder respectable, and to give an appearance of solidity to pure wind.”
(George Orwell)

My all time favourite movie quote is from the Dwarf in Lord of the Rings: "Certainty of death, small chance of success... what are we waiting for?"

Date Posted: Friday 02-May-2008
Some famous investor in the USA said the same thing

jo shmoe
jhb
RSA