Everyone Has To Eat - That Doesn't Make Food A Great Investment

Introduction A reader brought McDonald's (MCD) to my attention last week. The stock was sitting at a 52-week low. And he, rightfully, liked the real estate that came with it, and he wanted to know whether it belonged in a long-term portfolio. I gave him a quick answer. Then I kept thinking about it for a few days. On a side note, because this isn't a McDonald's-focused article, I like MCD at these levels as a long-term investment. The business model is great, the yield is close to 3%, and it always finds a way to land on its feet. Anyway, the reason I spent so much time on this idea is that MCD at the low comes with a bigger story I hear constantly, usually in combination with companies in other areas: the population keeps growing, everyone has to eat, so agriculture is a structural winner. Just buy everything in this supply chain. On paper, that makes a lot of sense. After all, we really do need to eat. It's the most recession-proof thing there is. Even if I were to lose my apartment, I would still need to eat. And as I have been in every tax bracket in my country so far, I can tell you that my consumption barely changed. So, it's very anticyclical. As a result, I put together a four-name "food basket" that covers the chain from seed to plate. My picks are Nutrien (NTR) for fertilizer, Deere (DE) for machinery, Archer-Daniels-Midland (ADM) for processing, and McDonald's for the consumer end (the "food-away-from-home" consumer). I went with an equal-weight, quarterly rebalanced, dividends reinvested, $10,000 to start, ten-year approach. As it turns out, it beat the S&P 500 by roughly 2 points a year (without any tech!). And it taught me the opposite of what the population argument claims. In this article, I want to walk through the backtest, take it apart, and explain why the money in a food chain almost never comes from the places you expect it to come. And, as you may have guessed, as I like to apply an approach that works for everyone, the lesson applies far outside agriculture. So, let's dive in! The Basket That Beat The Market Here is what the equal-weight basket did from September 2016 through September 2026. Metric Food Basket SPY Total return 321.4% 251.7% CAGR 15.5% 13.4% Max drawdown -37.8% Beta 0.75 Final value on $10,000 $42,100 Over ten years, $10,000 turns into $42,100, with 4.8% annual alpha. Even better, the correlation between the four is only 0.66, so they are diversified as well (despite all being in agriculture). The basket yields roughly 2.3%, about double the index. In other words, this seems like the PERFECT setup. You have exposure to an area where demand is always strong, you get an income, and you get alpha. And you have to buy just four stocks. Did I just find the perfect trade? I wish. But I didn't. What These Four Companies Actually Do Before the numbers mean anything, it helps to know what you are buying. These four get mixed together as "agriculture." However, they are four completely different businesses. Nutrien is a miner that also owns a chain of stores. It is the world's largest potash producer, with six low-cost mines in Saskatchewan (Canada) and more than 20 million tonnes of capacity. They represent over a fifth of global capacity, which is truly incredible. Source: Nutrien (2022) It is also the third-largest nitrogen producer, with more than 7 million tonnes of gross ammonia capacity across the U.S., Canada, and Trinidad. Then there is the part most people miss. Nutrien Ag Solutions is the largest agricultural retailer in the world, with more than 2,000 locations that serve more than 500,000 grower accounts, selling seed, crop protection, application services, and agronomic advice. Product moves on roughly 5,600 railcars through four marine terminals to about 40 countries. The slide above is from 2022, which isn't perfect for a financ