Portfolio Update 05.31.2009

I took a little spill along with the rest of the market on the 13th. I've since rebounded. I bought 165 shares of AgFeed on the 12th for about $4.50 a share. On the previous day, I bought 25 shares of Boardwalk Pipeline Partners and on the day before that, I sold all of my Freddie Mac holdings at a significant loss. I'm up 18.67% since October 1st.

AgFeed Industries, Inc.

My largest holding right now is of Agfeed Industries (NASDAQ: FEED). It's an American firm and the largest independent producer of hogs in China. I'm tempted to liquidate everything I hold and just load up on it. The last time I had this crazy urge, MGM Mirage was my target, and it was trading under $3 a share. It hit a peak of $13 a month and a half later. Needless to say, I never put all of my money in MGM. I probably won't put more money in Agfeed either. I don't have the stones for that much risk. But I acknowledge that if I ever want to get rich investing on my own, moves like this will be necessary.

So, Agfeed has two market segments. They produce premix feed for pigs (farmers combine premix and different sources of protein to feed their pigs with) and sell it in independently-owned chain stores (pictured below) and directly to larger commercial farmers. As of December 31, 2008 they had 1,000 chain stores (which sell to small, backyard operations) and 660 commercial farm customers.


The feed business has been good (prices are currently high), but they've recently expanded into hog farming. AgFeed wants to raise 2,000,000 pigs in 2010, and they are now the largest producer (with less than 0.3% market share!) in a country that consumes 600,000,000 pigs a year. So, the market in China is very, very fragmented. I think China is going to move toward larger, consolidated producers like those that exist in the West. One reason is that larger farms are more efficient and in order to feed a rising China, increasing output will be essential. Another reason is that with the passage of China's new Food Safety Law (it comes into effect June 1, 2009) unsafe backyard operations could be shut down (assuming Chinese authorities don't use the law to drive foreign firms like AgFeed out of business). China's recent food scares (melamine in baby formula, etc;) have caused consumers to trust backyard production less. Just like in the West now, Chinese consumers will need brand names they can trust. As AgFeed is already a large producer with brand names, it seems like they're poised to do quite well.

AgFeed's financial statements look good too, but don't take my word for it. Here is their 2008 annual report.

China will demand more meat as it becomes wealthier (pork makes up 65% of the meat consumed), so even in a market 6x larger than in the US, it can only go up from here. Hog prices have appeared to bottom recently, which is also great for AgFeed. Growth is what makes me want to get on board though. And the fact that AgFeed is trading at $6, from a high of $19, and its revenue growth is monstrous.