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Wild About Rice

China Organic Agriculture may be perhaps one of the best bets out there if you want to take a punt on the rice price boom. The company is targeting the higher end of the market with its products which include green and organic rice.

But what exactly is organic food and why is it gaining in popularity? Confused shoppers may see food products labeled and certified as 'organic' on shop shelves and may reasonably ask the question: Why do I have to pay more?

Organics command a higher price because some consumers are prepared to pay for food that is grown as naturally as possible. That is without the use of conventional pesticides and artificial fertilizers and without the use of food additives at the processing stage. Perhaps more importantly, as a consideration for health-conscious shoppers today, organic farmers like to distinguish their produce as being non-genetically modified. That's why the organic food market is a niche area which commands a premium over conventionally produced food.

China Organic Agriculture, or CNOA, looks well-positioned to reap the benefits of strong rice demand and the growing market for organics both in China and overseas. "China is a rapidly growing organic powerhouse," Source Advisors, wrote in a recent report initiating coverage on CNOA.

With over 300,000 hectares of organic fields, China now has command of an impressive 11 percent of the entire global organic farmland, according to the Organic Consumers Association. And organics produced by CNOA are starting to find favor amongst American consumers too. The International Fund for Agricultural Development notes that the value of Chinese organic exports grew from less than $1 million in the mid-1990s to roughly $142 million in 2003.

Back to CNOA and some facts and figures. The company is one of the largest producers of green and organic rice in China, controlling some 7 percent of the green rice market and 4 percent of the organic market. Unlike its competitors, CNOA's business extends beyond production and into processing, distribution and sales.

According to Seeking Alpha, an online provider of stock market opinion and analysis, exposure to CNOA "is one of the best ways to tap into the growing affluence of the Chinese consumer. Rice is an essential staple, and with increasing spending power, the average shopper is seeking out healthier food options." Seeking Alpha also notes CNOA gets a 15 percent price differential for its organic rice and a 10 percent premium for its green rice.

The company's been on something of a growth spurt since 2002, and 2007 has been a banner year with CNOA witnessing solid growth. CNOA's net sales for the fourth quarter more than tripled to $15.7 million compared to $3.5 million for the fourth quarter of 2006. That helped boost net income to $3.9 million, compared to $1.3 million for comparable quarter of 2006.

Meanwhile, earnings per share increased to $0.08 per diluted share compared to $0.03 per diluted share for the comparable period of 2006. Increased brand awareness and a growing sales network within China have driven the company's improved profitability. "Our strong increases in sales and net income in 2007 are primarily attributable to the success of our brand awareness campaign and the greater availability of the product made possible by the new strategic distribution agreements that we signed throughout the year," said Changqing Xu, China Organic Agriculture's CEO. The company's flagship brand, ErMaPao, continues to go from strength to strength -- it has has won several quality awards and is the most popular rice brand in the country.

Now, CNOA is looking to expand overseas and diversify into the additional markets. It bought the Bellisimo Vineyard, a 153-acre operating vineyard located in Sonoma County, California in February and plans to use the purchase as a springboard into U.S.-based agricultural land "with the possibility of exporting Sonoma Valley wine directly to Chinese consumers who hold these products in high regard," the company says.

Interestingly, despite all the headlines about rice shortages and price rises, the stock has pulled back rather sharply from a 52-week of about $4.37 as quoted on the OTC Bulletin Board or OTCBB, an electronic quotation system in the U.S. that displays real-time quotes, last-sale prices, and volume information for many over-the-counter equity securities that are not listed on the Nasdaq or a national securities exchange.

As I write, CNOA's last traded price was $1.5158 on April 8, which represents a 65 percent drop from the peak just mentioned. That could present a buying opportunity for some investors.

The last word goes to Patrick J. Murphy of Murphy Analytics who wrote an enlightening report on CNOA back in July last year. CNOA is set to capitalize on the economic prosperity of China's growing middle and upper classes and their changing dietary needs, Murphy says. CNOA "targets not only those who depend on rice to live, but those whose rice consumption helps them to live well. The Chinese organic food market is only in its infancy, with significant near term and long term growth potential driven by the evolving preferences of the expanding middle and upper classes."

Send Sri your questions and comments at commoditystore@cnbc.com.

* It should be noted that Sri does not have any holdings in CNOA.