Biofuel production, poor harvests and emerging nations’ growing appetites are emptying the world’s pantry, sending prices soaring. It’s a good time to invest in agricultural stocks.
As if a bear market, U.S. credit crunch, energy crisis and city financing emergency were not enough for one year, experts say the world is now facing down the barrel of the worst catastrophe of all: famine.
The very idea that the modern world could run out of food seems ludicrous, but that is the flip side, or cause, of the tremendous recent increase in the cost of raw wheat, corn, rice, oats and soybeans. Food prices are not escalating because speculators have run them up for sport and profit, but because accelerating demand in developing nations, biofuel production and poor harvests in some areas have made basic foodstuffs truly scarce.
(In this article: …global grain reserves are “precarious,” at just 1.7 months of consumption, down from 3.5 months of reserves as recently as 2000.”…)
In energy circles, folks who warn about the beginning of the end of cheap fossil fuels talk about “peak oil” as a point we have dangerously and expensively crossed. Likewise, you can now add “peak wheat” to your political and investment lexicon. And it’s a lot worse.
One can always move closer to work to cut down on gasoline. But be forced to eat less toast, beer and steak? Them’s fightin’ words.
Wheat futures prices have tripled since 2004, corn prices have almost tripled since 2005, and soybeans have tripled since 2006. Meanwhile, crude oil is up merely 60% in the past three years, which makes it seem very bearable in comparison. U.S. stock prices have barely eked out a 10% advance since 2005, underscoring the diminishment of our buying power. A large pepperoni pizza these days costs about as much as a share of Citigroup (C.N). Citigroup finished Wednesday at $22.15.
This is no joke, already, in Asia. Rice prices surged to a 20-year high this week — more than $18 per hundred pounds — as countries that have the most are hoarding it for their own people. Vietnam, India and Egypt have restricted exports to keep local markets stocked. Thai, Philippine and Indonesian officials are warning of civil unrest if the flow of rice does not increase.
Russia, Ukraine and Kazakhstan in recent weeks have restricted wheat exports as well, slapping on big tariffs to make sure shelves are stocked in their homelands amid soaring prices. A major Russian grains-company chief told Reuters that his country “is in a condition that has never happened before.” Higher prices are not meeting any resistance from desperate buyers.
Most unusual about this phenomenon, according to BMO Financial Group strategist Don Coxe, is that until now, food crises in world history were regional concerns that arose from crop failures, war or pests. Once global trade of grains got going in the 19th century in a major way, food shortages in one country were ameliorated by imports, he said. What’s happening now is a lack of supply everywhere at once.
Culprits abound, but chief among them is urbanization, which has cut the amount of acreage devoted to farming. The United Nations reports that the total area devoted to crops worldwide had risen by 0.3% annually since 1961, to 3.8 billion acres through the latest survey. But the growth has stalled to 0.1% annually in the past decade. Unlike energy, you can’t drill deeper in the ocean or under Arctic tundra for more food.
Also, surging income growth among emerging middle classes in China, India, Southeast Asia and South America has boosted demand for meat protein, and feed for new Asian cattle ranches and pig farms is putting intense pressure on the world’s corn supply. Of course, the weather plays a role, too. A terrible drought in the breadbasket of Australia over the past two years has combined with bad harvests in Argentina and Brazil to create some of today’s shortfall.
Empty global cupboards
Shortages are real. The Financial Times reports that rice stocks have fallen this year to about 70 million tons, the lowest level in 25 years and less than half the total held in global inventories in 2000. Wheat inventories, called “carry-overs” in the trade, are at 30-year lows even though world wheat production was actually up 1% last year. In the past year, reports show, wheat inventories in the European Union have plunged to 1 million tons from 14 million tons.
A leading Canadian fertilizer executive told analysts recently that according to his company’s calculations, global grain reserves are “precarious,” at just 1.7 months of consumption, down from 3.5 months of reserves as recently as 2000.
Now the really bad news is that we might actually have been lucky in the past few years, as global warming has lengthened growing seasons in the American Plains, sometimes called the Saudi Arabia of corn. BMO’s Coxe notes that the U.S. Midwest has enjoyed 17 straight years without significant crop failure, the longest winning streak on record. If this fortunate run ends soon, we’ll likely face a worldwide crisis.
Some researchers, including climatologist Elwyn Taylor of Iowa State University, believe it could happen this year, as La Niña conditions are emerging at a time when the Midwest has become vulnerable due to a drought creeping up from the South.
Food prices are already way up in North America but not as much as feed prices because manufacturers, processors and retailers such as Wal-Mart Stores (WMT.N) have found ways to hold the line by cutting expenses. But they can dam up the flood of food inflation for only so long. Just this week, Procter & Gamble (PG.N) announced it was raising prices on many of its foods products, including Folgers coffee. J&J Snack Foods said it would lift prices by as much as 12% in April to offset costs, and local newspapers have been rife with stories about pizzerias both raising prices and cutting back on crust thickness and cheese quantities.
Joseph R. Dancy, who teaches law at Southern Methodist University and runs a small hedge fund, lays the immediacy of the crisis directly on ethanol-production mandates in an energy bill recently passed in the U.S. The bill, intended to boost America’s energy independence, is expected to push as much as 31% of the U.S. corn crop into biofuels production, up from 24% last year. In other words, at the exact moment we most need corn on our plates, it is being funnelled into cars. A full tank of gas requires the equivalent of a quarter of a ton of raw foodstuffs, enough to feed one person bread for a year.
Coxe’s solution: As a first step, shut down all ethanol plants immediately. “It’s criminal to burn corn for fuel when we are out of food,” he said. In a particularly pernicious development, he noted that a big boost in demand for soybeans for use as biodiesel in Europe has driven up the price of palm oil in Southeast Asia, where it is the main source of protein for the poor.
If global famine is one bad crop away, then surely there is an investment angle. On dips, the companies to focus on are mostly the same as I described in my year-opening column, “10 market predictions for a glum ’08:” Seed innovators Monsanto (MON.N) and Syngenta (SYT.N); fertilizer makers Potash of Saskatchewan (POT.N), Mosaic (MOS.N), CF Industries (CF.N) and Agrium (AGU.N); tractor maker Deere (DE.N); and, for exposure to the food futures themselves, the exchange-traded funds PowerShares DB Agriculture (DBA.N), iPath AIG Agriculture (JJA.N) and iPath AIG Grains (JJG.N).
Some additional small caps to consider are equipment retailer Titan Machinery (TITN.O), irrigation-equipment maker Lindsay (LNN.N) and processing-machine maker Key Technology (KTEC.N).
I guess this gives a new meaning to the term “seed capital.”
Coxe has published a book summarizing his view of investment bubbles and declines called “The New Reality of Wall Street.” . . . To learn more about law professor Dancy, visit his Web site. . . . To keep an eye on commodity futures prices, visit here or here. The Chicago Board of Trade has a great page summarizing the action. The U.S. Department of Agriculture Web site has pages and pages of material to help you get up to speed…
I previously wrote about ethanol as bad public policy on Feb. 10 in a blog item and on Oct. 11, 2007, in a column, “Shuck the ethanol and let solar shine.”
At the time of publication, Jon Markman owned shares of Monsanto, Potash of Saskatchewan, Mosaic, CF Industries, Agrium, Lindsay, Powershares DB Agriculture, iPath AIG Agriculture and iPath AIG Grains.
By Jon Markman
March 06, 2008