Individual investors who don't count themselves among those wealthy enough to be so-called "qualified investors" have pretty limited options for playing the growth potential in agricultural commodities. Certainly there are now more commodity-specific ETFs than ever before, and investors can choose from among funds like Teucrium Corn (Nasdaq:CORN), the iPath DJ-UBS Livestock ETF (ARCA:COW) or more diversified options, like the Market Vectors Agribusiness ETF (ARCA:MOO).

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Beyond that, though, it gets more difficult. There are a respectable number of fertilizer, seed, equipment and agribusiness stocks out there, like Potash (NYSE:POT), Tyson (NYSE:TSN) and Archer Daniels Midland (NYSE:ADM), but what about land? Farmland has been one of the best-performing asset categories in recent years, but there are almost no investment options for the individual investor. Argentina's Cresud (Nadsaq:CRESY) is one of the few exceptions. (For related reading, see 22 Ways To Fight Rising Food Prices.)

A Major Farm Operator
Cresud is a sizable South American agribusiness, operating farms in Argentina, Bolivia and Paraguay where it produces crops, livestock (beef, mostly) and milk. Cresud owns almost 500,000 hectares of usable farmland and controls more than 100,000 more, through various agreements.

That is not all that Cresud does, though. Cresud also owns a stake in BrasilAgro, a Brazilian agricultural company. Even more significantly, Cresud owns a controlling stake in IRSA Investments and Respresentations (NYSE:IRS), one of the largest Argentine real estate developers.

Doubling Down on Volatility
Investors considering Cresud as an investment have to be realistic about the huge potential for volatility in their operations. Grain and beef prices have been strong of late and that has meant fat times for South American farm companies. The reality, though, is that agriculture is still a volatile business - it was only a year ago, for instance, that investors were fretting over exceptionally high wheat and cotton prices. Now a year and a good harvest later, those concerns are just anecdotes and memories.

It's not hard to argue for sustainably higher agriculture prices; world populations are growing, arable land is shrinking and so forth. That sounds reasonable, but then so did many of the arguments in favor of "sustainably" high prices for technology shares a little more than a decade ago or housing about five years ago. With farmland prices rocketing up in both the U.S. and South America, the prospect of a bubble, or at least an over-heated market, cannot be ignored.

Making matters worse, Cresud has that huge IRS stake. IRS owns 11 shopping centers, three hotels, over 143,000 square meters of office space and ample undeveloped land. However, real estate developers need a healthy home economy to thrive and stable growth in Argentina has long been hard to find. In good times, IRS is a crown jewel. In bad times, it's an anchor.

Considering the Valuation
For better or worse, Cresud investors can look at companies like Adecoagro (Nasdaq:AGRO), BrasilAgro, SLC Agricola and Sao Martinho and not a whole lot else as comparables, apart from some palm oil plantations based in Southeast Asia and those are hardly comparable. Here too is a problem; Brazil isn't Argentina, land values are different and many of these Brazilian companies have sizable exposure to sugarcane and/or ethanol.

Nevertheless, it is important to try to give some sense of value on Cresud shares. If Cresud can grow its revenue at a single-digit rate (in line with the world GDP growth) and maintain recent free cash flow margin, it's close to fair value. That is deceptive, though, as it gives little credit for growth in IRS (though it also assumes farming stays profitable at a historically-uncommon rate). (For related reading, see The Importance Of Inflation And GDP.)

Looking from an NAV perspective, Cresud's farmland alone looks to be worth close to $9 a share, meaning that investors are paying very little for the stakes in IRS or BrasilAgro, as well as the actual farm operations. Maybe Argentine farmland is overvalued today, but that still strikes me as too much of a discount.

The Bottom Line
Cresud is a hard stock to value and will have a lot of volatility in its reported earnings and cashflows, because of the ups and downs (and accounting rules) that go with farming and real estate development. That said, it is hard to say that the shares are anything worse than fairly valued and may in fact be as much as 20 or 30% undervalued, on fairly modest assumptions.

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At the time of writing, Stephen Simpson did not own shares in any of the companies mentioned in this article.

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