Banking on Agriculture

Well, I've sounded like a broken record lately, praising Canadian banks repeatedly, especially Royal Bank of Canada. In an article today in the Globe, Toronto-Dominion Bank's Ed Clark is quoted as saying "the current turmoil in credit markets is 'a very good thing.'

He said Canadian banks are “in very good shape” as the U.S. subprime mortgage market crisis plays out.

However, in the wider world “it's going to be quite ugly in the next few months,” Mr. Clark said.

He noted that the housing slump concentrated in seven U.S. states has already hit banks as far afield as Australia and Germany, and “I think people haven't gone to confession yet.”

Meanwhile, investors “are dumping quality assets because they have to” in order to cover losses on low-quality debt.

Still, “This is good, because if people do stupid things and don't pay a price for it, you don't run a good market system — and you've got to cleanse this out.”

Asked how long the cleanout will take, Mr. Clark replied: “I'm sort of hoping that by next March, we're through this.”

The key to playing the subprime mortgage market crisis is picking up those quality assets. Some of those quality assets are the big Canadian banks themselves. Accross the board, the future looks good for them.

But enough about Canadian financials and the credit crunch for now - lets look at something different.

I read an article the other day that looked at the boom in agricultural markets - partly prompted by fast expansion in the biofuel business. As the aticle states, this has opened up a world of potential opportunities for adventurous investors. The article high-lights three main companies.

As luck would have it, today, the stock price of one of the companies mentioned that I wanted to profile since reading the article four days ago, has shot up.

Check out Ag Growth Income Fund on Google Finance

Ag Growth Income Fund ... is a Winnipeg-based firm that sells grain handling equipment, such as conveyors and storage bins, across North America. It has benefited from the explosion in corn production that has followed the ethanol boom, chief executive officer Rob Stenson said yesterday, mainly because corn growers store the grain on their farms for just-in-time delivery to the ethanol plants.

The stock has gone up $2 since the article was published - coincidence or not?

Hemisphere GPS Inc. is another company mentioned in the article that "sells an entirely different product to farmers: Global positioning systems that help them precisely plant or harvest their fields, sometimes even automatically controlling the steering on their tractors." At an agricultural investment conference that he organized in Toronto, Mr. Winslow said that "Hemisphere's prospects are good because this fall's harvest will likely give farmers lots of discretionary income to buy the products. He rates the company a 'strong buy.' "

All in all, the point of the article and the agricultural investment conference was that a wide range of companies that service the farming sector is poised to do well.

Mr. Winslow predicts that demand for food products will steadily rise as higher income levels in Asia prompt increases in consumption of protein, more grains are used to generate ethanol and the worldwide population grows.

At the same time, the amount of arable land is shrinking, water supplies are under duress, weather is less predictable and yield improvements are slowing, he said.

That combination likely means "we are in the early to mid-stages of a multiyear secular uptrend in the global agricultural economy," Mr. Winslow said yesterday at an agricultural investment conference he organized in Toronto.

I'll be keeping my eyes on this sector over the coming months.

DISCLOSURE: I have no units of Ag Growth Income Fund, or shares of Hemisphere GPS Inc or Royal Bank.

Tell your friends and the enemies of your enemies about Inspector Stock . . .

Still Not Tired of Canadian Tire

A couple of weeks ago, I profiled Canadian Tire and recommended CTC.A as a good value stock pick - its share price has gone down this past month along with everybody else's. However, as I wrote then, Canadian Tire is still a great company.

Beyond the bricks and mortar retail strength, I mentioned Canadian Tire’s strong online presence in Canada as a reason I like CTC.A - compare Canadiantire.ca with Walmart.ca and you will see the difference between a fully integrated online presence and a half-assed, sorry excuse for a website. CanadianTire.ca sets the benchmark in Canada for how to do online retail. CanadianTire.ca offers 100% of what it offers at its physical stores and includes useful features such as inventory checks of all of its items at each of its stores. By contrast, Walmart.ca seems to offer about 1% of its bricks and mortar equivalent, and despite head-quarters having the most efficient real-time inventory system in the world , has no inventory feature online on its Canadian website. And this has been the case for years!

The other major business area that I mentioned in my previous post that I liked, and still do, is Canadian Tire’s credit card. Last year, 30% of Canadian Tire's profit before taxes and other costs was generated by its financial services arm. Canadian Tire now boasts more than four million credit card customers (keep in mind Canada’s population is around 32 million).

With the success of its credit card business, Canadian Tire has recently announced plans to offer combined mortgage/checking/savings accounts to customers in three markets – London, Ontario; Kitchener-Waterloo, Ontario; Calgary, Alberta. In an article in today’s Globe and Mail, the strategy for Canadian Tire’s announcement was outlined as being based on the booming housing market in Canada. Yes, the US real-estate market bubble may have burst, but Canada’s real-estate market is built on solid ground – and CT hopes this continues to hold true. The total mortgage debt is expected to hit $808-billion this year, and Canadian Tire wants a piece of the action.

The expansion into mortgages could pay off for the retailer as the Canadian housing market continues to boom, analysts said.

That's in stark contrast to the housing sector in the United States, which has been hit hard by credit issues flowing from the U.S. subprime mortgage industry.

In Canada, the mortgage market has grown by 8 to 10 per cent annually over the past few years, despite warnings of a slowdown, said Mario Mendonca, an analyst at Genuity Capital Markets. And the mortgage market poses few risks because "there are very, very few mortgage arrears of defaults in Canada.

"That's been true for years. Could that end? Sure. At some point we're going to see some kind of mortgage weakness. But so far no signs."

Still, competition to nab mortgage business is "remarkably intense," he added, and some of the big banks have been losing market share.

As stated in the article, the risk is that the housing market in Canada could slow down, resulting in fewer mortgages and a softening economy could mean more defaults. True, but in my opinion, housing prices will not go down significantly, even if the housing market cools off. Thus, banks should be able to recoup most of their money in the event of foreclosures. As for defaults, well, that’s the credit game in a nut-shell – risk versus reward. Definitely, a softening of the economy affects people’s ability to pay-off credit.

All said and done, the fed is going to fight off the effects of the credit crunch to save the economy from tanking – hopefully they are successful. Hopefully, we see an interest-rate cut and all their talk about inflation ends. In any case, Canadian Tire is a nice safe blue-chip and though it has run up a bit lately, is still attractively priced. Buy it on the dips.

Check out CTC.A on Google Finance

DISCLOSURE: I do not own CTC.A but I wish I had had the cash back when it was trading around 76 and I recommended it. Oh well, with these topsy-turvy days, hopefully we'll get some more buying opportunities.