Don’t Miss the Strength Behind Potash Corp. (POT): Bunge Limited (BG), Archer Daniels Midland Company (ADM)

Predictions about future crop production vary greatly, but a large number of analysts are taking an increasingly negative view. Ecological degradation is a real thing. Water shortages and a growing population will all impact the global food supply. Countries facing greater food pressures will have to increase yields in whichever ways possible. Fertilizers offer a relatively simple and effective way to achieve this goal, and Potash Corp./Saskatchewan (USA) (NYSE:POT) is a low-cost producer of fertilizer inputs with a strong long-term plan.

As the charts below show, PotashCorp has been able to increase its operating income while maintaining positive free cash flow over the past decade. This is not a simple feat; larger, more diversified firms like Archer Daniels Midland Company (NYSE:ADM) and Bunge Limited (NYSE:BG) have seen great fluctuations in free cash flow.

BG Operating Income Annual data by YCharts

BG Free Cash Flow Yield data by YCharts

Food is a highly political issue. People who are starving are very prone to protest, and protests can quite easily lead to revolutions. Leaders are especially aware of this fact and are willing to go to great lengths to maintain their power by ensuring a stable food supply. Making sure that their farmers have a strong supply of fertilizer every year is a simple and effective precautionary measure that these leaders can take.

The Difficulties of Playing the Middle Man

It is very attractive to suspend exports in order to increase the domestic supply of foodstuffs. PotashCorp sells fertilizer inputs, and greater food supply constrictions will only increase the need to maintain and increase yields in the face of environmental degradation.

Middlemen who export from developing nations do not have the same luxury. In the event of severe droughts and export bans, there are simple fewer foodstuffs to export and lower volumes.

What do the Financials Show?

Out of the three companies examined here, Bunge has the highest total debt to equity ratio of 0.73. Its quick ratio of 0.4 is marginally better than Archer’s quick ratio of 0.3. Bunge’s ROI of 5.8% and ROA of 3.2% are both higher than Archer’s ROI of 3.8% and ROA of 3.8%. A higher debt load and the lower quick ratio are telltale signs of balance-sheet risks. The low ROA and ROI numbers show just how important high volumes are for maintaining these firms’ profits.

The majority of Bunge’s earnings come from its agribusiness though edible oil products, and milling products, and fertilizer make a small percentage of earnings. It’s expanding its sugarcane and bioenergy business in Brazil, but it also decided to sell off its fertilizer business in the region. Its expansion to Brazil and other emerging markets is part of their long term plan to focus on the world’s growing middle class.