Taking Stock In Farmland

October 14, 2010

Anyone that follows renowned investor Jim Rogers has heard him say forget the MBA and become a farmer. This is because he believes that food will be in short supply and prices will go much higher. He also thinks you should move to Asia as that is where the money will be made over the next hundred years. He is probably right on both, but for most people, just dropping everything to become a farmer is about as easy as moving the family to Singapore.

So can you buy stocks that generate most of their revenues from the farmland they own? Well, it is not easy, but below are a few companies that do.

Limoneira Company (LMNR) is one of the largest citrus growers in California and one of the largest growers of lemons in the United States. As you might have guessed, the lemon crop supplies the bulk of the agribusiness revenue followed by avocados and oranges. The avocado business can cause some large swings in the companies annual revenues as avocados only produce a large crop every other year. When doing your due diligence, make sure you understand if it is a big crop or small crop year for the avocado business. For instance, revenue from avocados was 75% lower in fiscal year 2009 when compared to 2010. Since this is the second largest crop, it is material.

The company owns approximately 7,300 acres of land most of which is used for the agribusiness in Ventura, Santa Barbara and Tulare counties in California. The company also has rental operations and in recent years has become more active in real estate development.

The rental operations generate approximately 7-11% of revenue. The rental revenue is generated from housing that allows the company to provide affordable housing to many of its employees and from land leases. The rental operations provide the company with a stable stream of revenues that can be invested into the other business segments. The real estate development operation has not produced any significant revenues. The company’s California projects are located in or near Santa Paula, Santa Barbara and Paso Robles. The company also owns a luxury home in Paradise Valley, Arizona.

In addition to its real estate holdings the company appears to have been prudent in acquiring necessary water rights for its agribusiness operations and as an added bonus, the company owns 665,000 shares of Calavo Growers, Inc. (CVGW) which gives the shareholder exposure to the avocado packing and marketing business.

Alico, Inc (ALCO) is a land management company with 135,466 acres in Collier, Glades, Hendry, Lee and Polk counties of Florida. The company generates most of its revenue from citrus both though harvesting its own groves and the buying and selling of citrus in the marketplace. The company also cultivates raw sugar cane to be sold to sugar processors. The company ceased its vegetable operations in June this year due to the substantial damage caused by freezing temperatures experienced in the late winters of 2009 and 2010.

In addition to its growing operations, the company allocates a large portion of its land to ranching operations where it raises cattle. The company sells its cattle to packing and processing plants. The company also leases a portion of its land for farming, grazing, oil exploration and recreational uses.

In May 2010, the company invested over $12 million for a 39% equity interest in Magnolia TC 2, LLC. The primary business activity of Magnolia is acquiring tax certificates issued by various counties in the State of Florida on properties which show property tax delinquencies. This will give Magnolia a first lien position on the properties in which it hold certificates if the property owner does not satisfy the delinquencies. This investment is recent and not necessarily part of the thesis for buying the stock, but could be an added bonus if they are able to take advantage of the current real estate debacle in Florida.

J.G. Boswell Company (BWEL.PK) is one of the largest cotton farming operations in the United States. In addition to cotton, the company also grow tomatoes, alfalfa, wheat and other specialty crops. The company owns approximately 142,000 acres in California as well as another 30,000 in Australia. The company has also been involved in real estate developments such as East Lake in Chula Vista, California and Yokohl Ranch in Tulare County California.

If you are looking for exposure to the hot cotton market this may be the play for you. However, the long-term value in this company may be the water rights it holds. It is believed the company hold huge amounts of water under it acreage that could be monetized over time.

This stock is not for everyone as it is very thinly traded on the Pink Sheets and limit orders are an absolute must. If liquidity is an issue for your portfolio, it would be best to stay away. Also, the stock has had a nice run recently due to higher cotton prices so you may want to look for a pull back.

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