"When you concentrate on agriculture and industry and are frugal in expenditures, Heaven cannot impoverish your state." - Xun Zi
The quote highlights the importance of agriculture and are even more relevant in light of news that South Korea Daewoo’s plan to transform Madagascar into its breadbasket came to an abrupt end. Madagascar’s new president Andry Rajoelina said they would shelve the plan, which some considered as “neo-colonial”.
The announcement was made just hour after Daewoo officials said they would press ahead with their project, regardless of the political situation in Madagascar.
The South Korean Daewoo Group had planned to develop 1.3m ha of farmlands that would create 45k jobs.
This case highlights the growing importance of global food security issue. We are living in the resource-constrained world, crisis or no crisis. Chances are good that the next bull market is in agriculture.
The world adds about 70mn people to the population a year and many developing countries (China especially) are increasingly moving to a more protein-rich diet – accelerating demand.
On the supply side, there are severe constraints on new land that can be brought under production (in addition to other issues such as falling water table, shrinking number of farmers, and top soil erosion). And about the only new land that’s being cleared for agriculture now is either in the Amazon or Indonesia.
This is where Indonesia can shine. Indonesia could be Asia’s next food basket, as the country has comparative advantage in the agriculture area.
The plantation sector is one way to play the agri theme in Indonesia. Stocks such as Sampoerna Agro (SGRO IJ) and London Sumatra (LSIP IJ) are trading at US$2,175 and US$3,075 EV/ha respectively, well below the replacement cost of US$3,500/ha. Buying these plantations would not only save investment cost but also many years of waiting time (takes around 5 years before a palm tree becomes productive)
We also learned that work on plantation can be quite strenuous and dangerous. Worksites are usually remote and isolated. Physical risks are high too (even higher than physical risks for stock brokers these days), as they are working in a hot climate without proper protection against insects, snakes, and even lightning. Clearly, I prefer buying plantation stocks rather than operating plantation assets.
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