Monday, December 26, 2011

Ceres Global Ag

A Credit Bubble Stocks correspondent wrote with thoughts about Ceres Global Ag, a holding company with investments primarily in grain storage and handling facilities. It trades on the TSX and also the pink sheets in the U.S. The company has a significant investment portfolio.

We only know what the value of the portfolio is at the end of every quarter. On September 30, 2011, there was $48.3 million of cash and portfolio investments--$3.22 per share. The only other asset is the 100% ownership stake in Riverland Ag, which owns 15 grain storage facilities. In the four quarters ended September 30, 2011, EBITDA was $18 million, or $1.18 per share and net income was 45 cents. So you pay $1.78 for assets generating earnings of 45 cents--about 4X earnings for the grain storage business.
Grain storage and handling is an odd business. One way you make money in storage is to buy grain, store it in your elevators, and sell it forward. In order to be profitable, that strategy requires the futures market to be in contango: future prices that are higher than the spot price. And in order for the market to be in contango, there needs to be a glut of the commodity. Basically, the grain storage facilities get paid the most when there is a lot of commodity to store, which makes sense.

I notice that corn and hard red spring wheat are both in backwardation right now, which must be hurting elevator operators. What is the likelihood that Ceres elevator markets will once again have a glut of grain to store? You are long that option.

The other way to make money with grain handling facilities is that there is usually a spread (basis) between the cash price that the operators pay the farmers and the futures price. I suppose that spread would be a function of how many competing elevators are serving the area: location, location, location. Lack of competitiveness was a bigger issue in the past, before it was possible to ship grain by truck to competing elevators. In fact, it was a political issue, and the prices paid were sometimes regulated, or else the elevators were purchased by the farmers themselves and run as cooperatives.

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