The price of a pound of sugar has been bouncing around all-time lows for the past month or so, as record crops from India, Brazil and Thailand all dump extra supply into the already over supplied market. Obviously, with prices at an all-time low and extra supply coming to the market, the price of sugar could have further to fall, hurting sugar producers even more, but this could provide an opportunity.
As a crop, sugar is subject to all the usual environmental factors such as drought and poor weather, which can send the price skyward almost overnight. Sugar is also being used increasingly to produce ethanol and some-time ago, this caused concern that the global supply of sugar was not enough to meet demand for both consumption in food and the production of fuel.
Demand for ethanol remains strong
However, these fears have not yet been realized and demand for ethanol remains strong. In addition, the low price of sugar means that companies are paying less for their input and receiving more in the way of profit from the sale of the produced ethanol.
This is where Adecoagro SA (NYSE:AGRO) comes in. Adecoagro buys, develops, farms/operates and sells farmland throughout South America. The company's fields yield corn, soy, rice, wheat and sugarcane.
Adecoagro stock hit with a "double whammy"
Adecoagro SA (NYSE:AGRO)'s stock has been hit with a double whammy over the last year. Firstly, the low price of sugar has put pressure on earnings and secondly, investors have sold off stocks in emerging markets fearing political instability. Thirdly, a large portion of Adecoagro's land is in politically unstable Argentina. All of this means that Adecoagro trades at a 20 percent discount to the value of its land - currently worth $8.40 per share and land prices keep going up.
Having said that, 70 percent of Adecoagro's earnings for this year are expected to come from sugarcane crops in Brazil and investors would be right to question the company's ability to remain profitable with sugar prices at current lows. However, Adecoagro SA (NYSE:AGRO) has an ace up its sleeve in the form of 7.2 million tons of sugarcane crushing capacity, so the company is able to switch from selling sugarcane to ethanol depending of supply/demand and price factors - all good news for investors. In addition, management are planning to add 4.3 million tons of crushing capacity by 2017.
Furthermore, the use of ethanol as a fuel is supported and encouraged by the Brazilian government. Ethanol has a 41 percent share of the Brazilian fuel market and the government recently increased the limit of ethanol that is required in the gasoline fuel blend from 20 percent to 25 percent. The government also introduced financial incentives for companies and individuals using the fuel.
Adecoagro has multiple options for its crops
So, this means that while the price of sugar is low, Adecoagro SA (NYSE:AGRO) can produce ethanol and when the price of sugar is high, the company can sell the crop. Also, 30 percent of Adecoagro's crop yield is not sugar, so the company is able to benefit from the rising global demand for food - a sustainable long term investment.
One thing that does raise concern is the company's use of financial derivatives to hedge the value of it crops. However, far from removing risk, these derivatives have caused some large losses over the past year or so.
Still, Adecoagro SA (NYSE:AGRO) offers an interesting opportunity, the company is a long term play on the global population and its sugar/ethanol production facilities present a degree of diversification. I should also point out that George Soros' Soros Fund Management owns more than 20 percent of the company.