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business newsWhy Potash, McDonald's Stand to Profit From Locavore Food Trend
At first blush, POT and MCD seem to be the antithesis of the locavore, slow-food trend, but they are actually integral parts of the movement and are poised to profit from it.
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Local is good, especially when it comes to food. Today I want to focus on two companies that at first blush seem the antithesis of the locavore, slow-food trend, but are actually integral parts of the movement and are poised to profit from it.
It may have come across over the past months and years that I’m basically a bear (for reasons more psychological and technical), but I do try to keep one foot in the fundamental door. And one macro theme that has overlaid my investing for the past few years is growth in the emerging market middle class, and how it has boosted corporate profits. The number of people in China, Brazil, India and Indonesia (which comprise 95% of the emerging middle class under the age of 50) set to migrate (think mobility in all its facets) and urbanize approaches a billion in the next 10 years. That is over 3x the U.S.’s current population. This “hockey stick” graph of growth will unleash an unprecedented amount of both government and consumer spending. It makes sense to have exposure to multinational companies with good exposure to emerging markets.
More Food, Better and Quicker
This is the natural order things. As citizens -- and that is a key word here -- gain more wealth, they will want better housing, better food, and more mobility. It is well-known that once a population moves toward a more protein-based diet, it never goes back. The increase in demand for grain-fed protein along with the decline in farmable acres, make food supply shortages the largest macro disruption (outside tech/Internet) to have occurred in the past 100 years. Projections show it continuing for the next 50 years. This results in a basic series of logical steps around behavioral spending; “wanting it to be better, cheaper.” Of course, convenience and assurance of a base level of quality are two crucial selling points. Basic Building Blocks
On the front end of the food supply there will be an ever-increasing need to boost yield. As arable land declines and demand increases, the only way to bridge that gap will be to boost yield. And one of the few ways to boost yield is through the use of fertilizers, such as those supplied by Potash (POT) which remains both the largest and lowest cost producer of both sulfite- and nitrate-based products. It can be a high beta stock, but the secular trend is its friend. Food, and the tools that boost food production, will be an in-place for the next 20-30 years.
Infinity Served
McDonald's (MCD) is the other top pick for tapping into emerging taste buds. It has the best operational edge in the business, from internal processing to external distribution to overarching branding. The ability to deliver in a number of formats (car, walk-in, delivery) is unparalleled. McDonald’s has shown an ability to adapt, making headway into the coffee and health food market in the U.S. But its real growth will be providing a reliable, quick, and inexpensive meal in China and India among other nations. And while a guy in San Francisco might not think a double McCheese is anything to be pleased about, to a man in Mumbai, having the ability to get such a protein-filled meal that has been backtested and true in terms of quality and safety, its a very attractive prospect.
Potash and McDonald's represent two ends of the food processing chain that are bound to benefit from an increase in the consumer class and urbanization in the emerging markets. I would look at buying at-the-money calls with nine to 12 months remaining until expiration as a way to participate in these stocks.
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