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Seeds, Pesticides, Basmati, Milk, and Cheese: Why is Smart Money Chasing These? - Views on News from Equitymaster

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The Equitymaster Research Digest

Seeds, Pesticides, Basmati, Milk, and Cheese: Why is Smart Money Chasing These?
May 10, 2017

  • A score like ERM®
  • Will Buffett bet big on Hindi?
  • HDFC's best days behind it?

Keep perishables at the minimum. It's advice any mother would offer.

But as an investor and our subscriber, you are used to a different kind of advice. You know that, when it comes to food, you should buy businesses with strong brands. For a strong brand helps the business during times of crisis. Nestle's Maggi debacle is just one example.

But what if I told you about a food business that doesn't need to worry about perishables? In fact, not selling enough this year could mean a bumper price for the aged stock next year.

Well, in good years, basmati producers can buy their input product cheap from farmers and storehouses. In bad years, though, when the yield is bad, they can sell the aged stock at steep prices.

The handful of businesses with a stronghold in the basmati market have had investors licking their fingers the past few months with the strong gains they've posted. The catalyst seems to be the government's vision to improve farm productivity and usher in reforms towards subsidy.

The India Letter team, however, is looking at the megatrend in farm productivity a little differently.

Products like basmati rice, milk, and cheese are farm outputs. And at the end of the day, the only moat they enjoy is their brand.

Businesses that provide the 'inputs' for farm produce have been largely ignored. And these happen to be growth stories with solid moats for the very long term.

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