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Agriculture, Coffee And Sugar: The Next Rally?

Summary We discuss the long term bullish case for Rogers Agricultural Index ETN. 3 billion additional middle class consumers will support the demand for agricultural products over the next two decades. We discuss why Rogers Agricultural Index has been in a bear market since early 2011 and what is needed for the next bull market to start. We mention that coffee and sugar might be good investments already in the short term in light of the fundamentals. In 2007 Jim Rogers lent his name to a new line of exchange-traded notes. One of them was dedicated to the agriculture: The Elements Linked to Rogers International Commodity Index Agriculture Total Return Note ( RJA). Jim Rogers has been very positive on agriculture and farmland investments. There are probably tens of interviews where he cites to be more bullish on agriculture than any other commodity. So, why Rogers Agriculture Index has been such a horrible investment since 2007 and could this change? Was Jim Rogers wrong? These are the topics we will discuss in this article. We will also mention a few isolated picks in the agricultural sector that we believe to have more upside potential in the short term in comparison to Rogers Agricultural Index. For those not familiar with Jim Rogers, he was among the most successful and famous hedge fund managers on Wall Street. Currently he is living in Singapore and travels across the world as a guest speaker at investment conferences. Chart Analysis Rogers Agricultural Index is trading 50% below its all time highs reached back in 2008. This index contains around 20 most popular agricultural futures contracts such as corn (13.61%), wheat (13.61%), cotton (12.03%), soybeans (10.00%) and coffee (5.73%). (click to enlarge) Figure 1. RJA ETN price chart. Chart : Ycharts.com The price drop in RJA can be explained by the strengthening of the U.S. dollar, at least partially. Most producers get paid in U.S. dollars. Supply-Demand Fundamentals We went through OECD-FAO Agricultural Outlook 2015 report. This report suggests that the global inventory levels, supply and demand of the agricultural commodities are in a reasonably good balance right now. In the short term we believe that most agricultural commodities will stay at their low price levels. The bull market might be getting ready to start – but not right away. When To Buy Rogers Agricultural Index? Rogers Agricultural Index might not move up before a big change takes place in the global currency markets. The U.S. dollar should start to weaken against other major currencies. However, there is an another major price catalyst in the making. Asia has already 525m middle class consumers. That is more than the whole EU population. Over the next two decades, the middle class is expected to expand by another 3 billion. That will create a spectacular rise in demand. In parallel, the global arable land is expected to increase by only 5% by 2050. That will be a challenge. That means that 90% of the supply increases must come from the yield and farming intensity improvements. We believe that such a staggering increase in the yield might be very difficult to achieve. One option would be to consider genetically modified organisms (GMOs). Changes In GMO Policies and Consumer Habits A major policy shift is occurring in EU in 2015 with a more accommodating approach towards the use of GMOs across the whole European Union . This will surely add more supply to the markets. However, the additional 3 billion middle class consumers will make both European consumers (over 500m) and farms look very small. The demand for several crop products will grow parabolically. The meat consumption is expected to double by 2050. Now, consider that producing 1 lbs of beef does not require 1 lbs of feeds. It requires as much as 5 lbs. For chicken this would be 2 lbs respectively. Consequently, Rogers Agricultural Commodity Index will have a very strong tailwind from the increased meat consumption. Sugar Might Become A Sweet Investment (click to enlarge) Figure 2. The iPath Dow Jones-UBS Sugar Total Return Sub-Index ETN (NYSEARCA: SGG ) and the iPath Dow Jones-UBS Coffee ETN (NYSEARCA: JO ) price. Chart: YCharts.com Sugar is cheaper today than it was in the ’70s. The current supply-demand balance is currently in a deficit and several price catalysts are emerging: New fuel policy in Brazil lifting gasoline prices – this will increase the demand for both ethanol and sugar. Indian sustained drought conditions. Too low sugar price – farmers might as well do nothing for the same close to zero earnings or transfer their cultivations over to something else. We believe that sugar will be pushed higher with these catalysts already in the short term. The flex-fuel cars’ ethanol usage in Brazil might even double in 2015 due to the new policy. Besides sugar we think that coffee is a good investment right now. We covered coffee and the iPath Pure Beta Coffee ETN (NYSEARCA: CAFE ) in an earlier exclusive Seeking Alpha article . Risks and Opportunities We believe that an unexpected breakthrough in genetically modified crops might be among the risk factors hindering the bull market in Rogers Agricultural Index. The recent months low inflation rates, felt globally, could also continue to press the commodity prices lower. Also a short dollar rally could push the prices lower. Rising agricultural prices would be advantageous for the farmers not earning a decent income these days in most producing countries. Through higher salaries and incomes these rural regions would start to prosper. The rising salaries and incomes in the producing countries would increase the inflation levels. Higher inflation would mean higher crop prices. This vicious circle might get stronger and stronger and support the next bull market in the agricultural commodities. Conclusion We are bullish on both Coffee and Sugar, and over a longer term RJA. As the world will count over 3 billion additional middle class consumers over the next two decades, we will see an unprecedented growth in the agricultural products’ demand. In parallel the arable land surface area is going to increase by less than 5%. The changing patterns in the climate continue to reduce the harvests even more frequently. We do not recommend our readers to buy a tractor or a pair of rubber boots. Following up the agricultural commodities prices could do it for the short term if the farmlands’ productivity increases will be sufficient. Disclaimer: Please do your own research prior to investing and taking investment decisions. This article is provided for informal purposes only and any information mentioned may change at any time without a notice. Please consult your investment advisor for finding a proper allocation for your portfolio that is adjusted with your risk levels and personal situation.

Regulatory Decision Confirms Attractive Value At Capstone Infrastructure

Competition Markets Authority released its summary decision, with management confident that dividends can be sustained under new rates. Management discussed additional levers to find value at Bristol Water, including new financing options, additional efficiencies and increased leverage. Overall, following the decision, valuation has been derisked and significant upside maintained. Nearly two months ago, we published a report on Capstone Infrastructure Corporation ( OTCPK:MCQPF ), a Canadian small-cap infrastructure company. The company has a variety of critical infrastructure assets, from solar, wind, hydro and biomass power generation, to natural gas co-generation, district heating and a water utility. The firm’s assets are geographically diverse, with the power assets located in Canada, the district heating business in Sweden and the water utility located in the U.K. The company has a market capitalization of just over C$300 million (US$230 million) and is traded primarily on the Toronto Stock Exchange under the symbol “CSE.” Today, we would like to share some analysis of a recent regulatory decision that we believe adds considerable certainty to the future sustainability of Capstone Infrastructure and confirms the company as an attractive value play. At the time of publication of our initial report, one of the material risk factors to Capstone’s valuation was the pending U.K. Competition Markets Authority (CMA) decision in the appeal of a previous Ofwat regulatory decision for its Bristol Water business. This pending decision was a major factor in the decline in Capstone’s share price and has been a drag on the stock’s value for the past several months. We are happy to now see this decision released, and investors can largely put this concern behind them. The regulator’s press release and a summary decision regarding Bristol Water was released on October 6 , clarifying several factors for the business, including increased operating expenses, increased capital expenditures on a reduced scope, a higher return on equity and higher customer billing rates. While the company felt that the billing revenue side of the decision was disappointing, overall the decision will, in the view of management , enable Bristol Water to maintain its dividend level going forward. We agree that their approach to managing the lower rates does seem reasonable and that dividends at or very near the previous levels should be able to be maintained. The trading response to this decision has been fairly muted, perhaps because the outcome is not substantially different from the preliminary findings of CMA released earlier this year. But today we stand faced with more certainty about the short-term sustainability of the dividend, which at nearly 10 percent is underpinning a great deal of the company’s value today. In our valuation case presented in our original piece, we indicated that the impact of the Bristol Water decision would be plus or minus C$7 million on adjusted funds from operations. It seems that via management’s responses on the conference call, overall distributions from Bristol Water should be maintained at their previous levels, in line with our “mid-case.” With this uncertainty removed from the picture, we can tighten the 2017 share price target range from C$2.92-7.53 to C$3.82-6.56, maintaining our mid-case target of $4.90 per share. (thousands) Low Case Mid Case High Case Comments Start: 2014 AFFO $56,412 $56,412 $56,412 Impact of Cardinal ($36,000) ($36,000) ($30,000) Low case is with project financing, high case is without. Impact of Bristol $0 $0 $0 2015 Commissioned Wind $5,000 $6,000 $7,000 Skyway 8, Saint-Philemon, Goulais 2015 AFFO $25,412 $26,412 $33,412 2016 Commissioned Wind $2,500 $3,500 $4,000 2016 AFFO $27,912 $29,912 $37,412 2017 Commissioned Wind $0 $3,500 $4,000 Corporate Savings $2,000 $5,000 $10,000 Management projects $10 million in corporate SG&A, project cost, interest and tax savings 2017 AFFO $29,912 $38,412 $51,412 2017 Projected Share Count 96,408 96,408 96,408 Based on 93,573 outstanding at Dec 31, 2014, increased by 1% annually for DRIP 2017 AFFO per Share $0.31 $0.40 $0.53 Payout Ratio 80% 80% 80% Projected 2017 Dividend/share $0.25 0.32 $0.43 Projected Dividend Yield 6.5% 6.5% 6.5% Conservative dividend level based on peer group 2017 target share price (CAD$) $3.82 $4.90 $6.56 There are still risks present in this valuation of course, including Bristol’s inability to implement cash flow enhancements to the level that management currently anticipates, or potential schedule issues or underperformance on their new energy assets. Even if these risks materialize, however, we believe the downside is not much lower than where the stock is trading today. At a significant discount to book value, this is a true value play with considerable upside for investors. We believe there is considerable short-term upside here heading into the third-quarter results in early November, and of course stand behind our call for considerable upside into 2017. To summarize, this decision derisked the situation at Capstone Infrastructure, while in the subsequent trading days, the company has maintained a substantial discount to what we perceive as a fair value. With a dividend that we’re comfortable with calling sustainable at near 10 percent and future cash flow growth supported by a higher degree of regulatory certainty, Capstone Infrastructure is currently positioned as a fantastic value play for investors with a greater than 50 percent upside to our target price and a sustainable 10 percent dividend. Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

Intel, Qualcomm Pitted In Data-Center Market Battle

Wall Street pitted No. 1 chipmaker Intel (INTC) against Apple (AAPL) chipmaker Qualcomm (QCOM) on Friday in a battle for data-center market share. The clash comes as Intel, after the close Tuesday, is expected to report roughly in-line Q3 revenue and an 11% decline in earnings per share ex items vs. the year-earlier quarter. Santa Clara, Calif.-based Intel has owned the market for chips that power data-center servers, Richard Windsor, an analyst