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Markman: Plant a Seed in Argentina

NEW YORK ( Real Money) -- Argentina was the Greece of the 1990s, defaulting on its debt and snubbing private creditors, and investors have largely stayed away ever since. But they are snooping around now that other economically benighted regions of the world have taken the heat off this fertile and productive gem, making it look decent by comparison.

Adecoagro (AGRO - Get Report) is one of the largest agricultural businesses in South America, with operations in Argentina, Uruguay and Brazil. The company has been producing grains, rice, oilseed, dairy products, sugar, ethanol, coffee and cotton by the truckload for worldwide export since 2002.

Adecoagro's transition from a simple Argentinian agricultural business to a dominant force in the South American marketplace has been aggressive. The company began to expand by adding several farmlands in Brazil and Uruguay throughout the years before starting its sugar operations in 2005. Two years later, Adecoagro started its dairy business through the acquisition of La Lacteo (also out of Argentina).

Co-Founder and CEO Mariano Bosch has remained in charge of the company since its inception and previously was founder of agricultural consulting and technical management company BLS Agribusiness.

Adecoagro owns over 700,000 acres, spanning 38 farms, five processing plants and several storage facilities, and the company operates three primary business lines:

  1. farming;
  2. sugar and ethanol; and
  3. land transformation.

The farming segment produces a number of agricultural commodities, with soybeans, rice and corn being the largest. Adecoagro utilizes zero tilling and crop rotation to improve crop efficiency and yields. Zero tilling involves leaving plant residues on the surface of the soil after the crop is harvested with the idea that this will help diminish water loss, improving moisture levels and improve soil fertility.

Meanwhile, the crop rotation strategy utilizes various crops that are rotated on the same soil, often in a three- or four-year cycle that allows for increased soil organic matter, greater soil structure and improvement of the chemical makeup of the soil. Having a robust and expansive crop portfolio such as Adecoagro's is essential for complex crop rotation strategies and is not easily achieved by producers that focus on just a few crops.

Integrated storage and conditioning capabilities allow for increased efficiencies. The company can store, condition and deliver a number of its products with no third-party involvement. Crop storage is located relatively close to existing farms, adding flexibility to the timing of deliveries to customers. Additionally, Adecoagro's largest facility has a railway-loading terminal attached for even further streamlining.

The sugar and ethanol segment utilizes sugar cane as the primary raw material for production, as opposed to sugar beet and corn, which is more commonly used in the U.S. for sugar and ethanol, respectively. Sugar cane ethanol produces 7x more energy than corn ethanol, and with the EPA recently recognizing it as the only advanced biofuel capable of reducing carbon dioxide emissions by over 60%, sugar cane producers such as Adecoagro are at a decided advantage if they decide to penetrate the U.S. ethanol market in the future.

A number of private-equity firms hold significant interests in the company; Soros Fund Management is its largest investor. Shares went public in January 2011 at $11 and raised about $315 million, but they are down about 21% as Argentine assets overall have been in a steady decline over the past few years.

According to a survey of analysts' estimates, the company is now trading at a 36% discount to its actual net assets, giving investors an opportunity for tremendous value and renewed takeover interests from potential bidders.

If cheap, productive agricultural land in an out-of-favor market sounds attractive, put Adecoagro on your list of stocks to consider in the event that the broad market stages a decline of 20% or more this summer.
At the time of publication, Markman had no positions in the stocks mentioned.

Jon Markman is editor of the independent investment newsletter The Daily Advantage.

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