Adecoagro Has Its House In Order, But The Neighborhood Is On Fire

Although I had some concerns back in April about Adecoagro’s (AGRO) exposure to volatile commodity markets, particularly the oversupplied global sugar market, the shares have done better than I’d expected since then, with a 10% rise that not only beats Sao Martinho, but trounces Cosan Ltd. (CZZ). I believe Adecoagro has helped up better in part because of its low-cost sugar/ethanol operations, as well as its greater capacity to shift production toward ethanol at a time when sugar prices are so weak.

Looking ahead, the ongoing trade disputes between the U.S. and China should continue to help crop prices in Brazil and Argentina, while Adecoagro is also able to take advantage of weaker local currencies and a pretty solid hedging position. Moreover, I think the share price doesn’t reflect the progress the company has made over the years in improving its operations, nor the potential leverage to a larger dairy business. The commodity exposure increases the risk of this stock, but I do think the valuation remains relatively attractive.

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Adecoagro Has Its House In Order, But The Neighborhood Is On Fire

Adecoagro Continues To Invest In Growth Amid Brutal Commodity Pressures

My biggest issue with investing in Adecoagro (AGRO) has always been its vulnerability to commodity price swings, and those swings have been hammering the company and the stock over the last year. At the same time, management has continued to invest in projects that it believes will deliver meaningful long-term growth – the latest being the acquisition of Argentina’s largest dairy processor. 

Adecoagro has shown that it can run its diverse operations well, but efficient operations in sugar, ethanol, and farming can only go so far in the face of commodity price pressure. With that, the shares do still look undervalued, but the company’s exposure to commodity price risk may be too large for some investors.

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Adecoagro Continues To Invest In Growth Amid Brutal Commodity Pressures

Seeking Alpha: Adecoagro Showing Some Life

I know there are at least a few Seeking Alpha readers who own Adecoagro (AGRO) for the potential this company offers in becoming a bigger player in Brazil's sugar and ethanol industries and realizing value growth in its land holdings. I also know that they've gotten a little frustrated with the stock's performance as the company has muddled through worries about crop prices, weather, and issues in Argentina.

The shares did well from the summer of 2013 into the fall and then went to sleep for about half a year. More recently the shares have headed higher again, as Brazilian equities in general have come around and sugar/ethanol producers like Cosan (CZZ) and Sao Martinho (OTC:SRTOF) have rebounded as well. With sugar prices and ethanol prices looking pretty solid, Adecoagro could be in for a better year, though currency moves could create some considerable choppiness in the numbers.

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Adecoagro Showing Some Life

Seeking Alpha: Adecoagro's Discount Remains Stubbornly In Place

All things considered, I'm happy with how Adecoagro (AGRO) has done since I made this stock an Alpha-Rich pick back in July. The shares are up about 19% since then, well ahead of the 8% rise in the S&P 500, the nearly 12% rise in the Bovespa, and the 6% rise in the iShares Brazil Index ETF (EWZ). This appreciation has come despite a drought-induced disappointing crop yield for 2012/13 and a sharp slowdown in the rate of appraised land value accretion, as improvements in sugar and ethanol have certainly helped.

Even with a double-digit improvement in Adecoagro's share price, I'm still pegging this stock as a market-beater from here. The nature of growing crops is inherently risky, and the steep price for Argentine CDS shows that there are definitely good reasons to discount the value of Adecoagro's Argentine farmland. Despite that, I believe this company's farmland is still undervalued, I believe the company will continue to grow its profitable sugar and ethanol business, and I'm willing to bet that droughts are not going to occur every year. With that, I believe these shares are still at least 30% undervalued.

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Adecoagro's Discount Remains Stubbornly In Place

Investopedia: The Investment Case For Cresud

Individual investors who don't count themselves among those wealthy enough to be so-called "qualified investors" have pretty limited options for playing the growth potential in agricultural commodities. Certainly there are now more commodity-specific ETFs than ever before, and investors can choose from among funds like Teucrium Corn (Nasdaq:CORN), the iPath DJ-UBS Livestock ETF (ARCA:COW) or more diversified options, like the Market Vectors Agribusiness ETF (ARCA:MOO).

Beyond that, though, it gets more difficult. There are a respectable number of fertilizer, seed, equipment and agribusiness stocks out there, like Potash (NYSE:POT), Tyson (NYSE:TSN) and Archer Daniels Midland (NYSE:ADM), but what about land? Farmland has been one of the best-performing asset categories in recent years, but there are almost no investment options for the individual investor. Argentina's Cresud (Nadsaq:CRESY) is one of the few exceptions. (For related reading, see 22 Ways To Fight Rising Food Prices.)

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http://stocks.investopedia.com/stock-analysis/2011/The-Investment-Case-For-Cresud-CRESY-AGRO-IRS-ADM1221.aspx

Investopedia: Will Aussie Flooding Rain On China's Parade?

Australia's summer has brought more than its usual wet season to parts of the country. This year the large northeastern state of Queensland has seen devastating flooding; the sort of flooding that leads to world news clips of people paddling boats through streets and animals seeking refuge wherever they can from the waters. Though the human toll of the disaster is likely to be severe for Australians, there are economic impacts that will stretch beyond the country and be felt throughout 2011. 

Trouble In Coal
Australia is a major producer of metallurgical coal, and mines in Queensland produce about half of the country's supply of this critical steel component. In particular, China is critically dependent upon Australia's met coal mines to feed its ever-hungry steel sector. With about 90 million tonnes of met coal already subject to force majeure, it would seem that steel customers in Asia are going to have to scramble (and pay up) to find the coal to fuel their blast furnaces.

BHP Billiton (NYSE:BHP), Rio Tinto (NYSE:RIO), Wesfarmers and Xstrata all have major met coal operations in Australia. Even for those companies and mines that are relatively less affected, there is the issue of the ports and rails - flooding has damaged infrastructure and delayed ship loadings, and it will take some time to work through the backlog. While companies like Xstrata do have other producing areas (South Africa for Xstrata, for instance), there is only so much coal to go around. Likewise, for companies like Peabody (NYSE:BTU), which does have some operations in New South Wales (in addition to Queensland), there is only so much they can do to increase mine production in the short term.
 

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http://stocks.investopedia.com/stock-analysis/2011/Will-Aussie-Flooding-Rain-On-Chinas-Parade-RIO-BHP-BTU-TCK-ANR-MEE-CZZ0107.aspx

I realize this isn't really "news" anymore ... unfortunately, it got held up in queue. 

One Small Step For Amyris

Exciting stories are usually built with a lot of boring announcements. To that end, Amyris's (Nasdaq:AMRS) recent announcement that it had finalized a joint venture with Brazil's Cosan (NYSE:CZZ) is not surprising or exciting, but it is a good example of the blocking-and-tackling type of announcements that will go into making the Amyris story and business model work over time. 

A Deal That Works For Both Sides
Amyris and Cosan will work together to produce and sell various so-called base oils that will be made with the farnesene that Amyris will produce in other facilities. It is a pretty typical win-win type of deal. Amyris needs to find as many customers as possible for its farnesene, while Cosan needs diversification away from ethanol as an end product of Brazil's prodigious sugarcane production. (For more, see Brazilian Stocks To Watch In 2011.)

Just One Brick In The Road
Ultimately, the success of this Amyris-Cosan venture in base oils is not critical to the overall success of Amyris, but it highlights what I think is an important part of the Amyris business model - working with other companies and finding as many potential markets for its products as possible. Where many failed ethanol companies like VeraSun and Aventine went wrong was in being just another commodity producer, but one that relied upon other commodity feedstocks (corn, notably) and government subsidies. In other words, they were refiners with pretty much one product to offer.

In contrast, Amyris has found a lot of potential uses for its genetically-modified yeast. The first key product will be farnesene, which can be used in a wide range of products including diesel and jet fuel additives, lubricants, detergents and flavors and fragrances. As time goes on, and the company's yields improve, it may be possible to produce a much wider range of products including fuels themselves, plastics and synthetic rubber. (For more, see Back To The Future With Ethanol.)  

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