This article examines why tight supply and rising demand make it almost a certainty that the long-term trend of rising food prices will continue. It also looks at various ways in which investors can profit from it.
Making a case for higher food prices isn’t difficult. A continual process of industrialisation, urbanisation and desertification is reducing the amount of land available to farmers at an alarming rate. United Nations data shows that the world is losing 12 million hectares of arable land each year (an area almost twice the size of Scotland).
At the same time the population of the world is rising, meaning that each year we have an extra 73 million mouths to feed. The World Bank estimates that demand for food will rise by as much as 50% by 2030. The rise is partly attributed to our growing population, and partly to changing trends in what we are choosing to eat.
As people become wealthier they typically eat more meat. For example, 25 years ago the average Chinese person ate 20 kilograms of meat a year. Now it’s more like 50 kilograms, and the production of meat is incredibly resource intensive.
As Larry Elliott from Fidelity Investments explains, “The demand for more protein has a significant knock-on impact on grain demand. Livestock [in the US] is reared on grain-feed, making production heavily resource intensive. Indeed, it takes 7 kilograms of grain to produce just 1 kilogram of meat. As demand for meat rises, this increases the demand for and prices of feedstock – these increased costs of productions flow back to the consumers in the form of higher meat prices”.
Misguided government regulation is also contributing to higher food prices. In the US for example, the Renewable Fuel Standard rules require all petrol to be blended with corn-based ethanol. As a result around 40% of US corn is now used as fuel rather than food. That’s more corn than India and Africa produce combined.
The rise in global food prices can be seen below. The chart shows the UN Food & Agriculture Organisation’s Food Price Index which tracks the wholesale cost of 55 soft commodities.
UN Food & Agriculture Organisation (FAO) Food Price Index
Chart courtesy of UN Food & Agriculture Organisation. Note: The real price index is the nominal price deflated by the World Bank Manufactures Unit Value Index (MUV).
All of the factors contributing to higher food prices are compounded by the actions of global central bankers and their “accommodative” monetary policies. As governments print money via quantitative easing (QE), they dilute and therefore devalue their currencies, which causes the cost of everything to rise.
Although it is hard to predict trends such as global population growth with any real accuracy, there can be little doubt that the fundamental forces contributing to higher food prices will be with us for some time. Therefore, in order to avoid a global food crisis, the agriculture industry must produce more food from less land.
There are a number of things that can boost crop yields, however perhaps the most obvious is fertiliser, in particular potash.
Potash is the common name for various types of salts that contain potassium in water-soluble form. The salts, which are both mined and manufactured, get their name from the way there were made prior to the industrial era when plant ashes were soaked in water in a pot.
Today, more than 30 million tonnes of potash is produced each year, the vast majority of which (about 93%) is used in fertilisers.
Potash Corp. (TSE: POT): Potash Corp. is the world’s largest fertiliser manufacturer, by capacity, and has operations and business interests in seven countries. The company produces the three primary crop nutrients: potash, phosphate and nitrogen and is responsible for about 20% of global capacity.
The Mosaic Company (NYSE: MOS): Mosaic is another large producer of potash, the world’s second largest by capacity. The company is also the world’s largest producer of phosphate and operates in 10 countries. In fiscal 2010, Mosaic’s production represented around 12% of global production.
Agrium Inc. (TSE: AGU): Agrium is a major supplier of agricultural products and services to retailers in North and South America and operates close to 500 retail centres. It is also a leading global wholesale producer and marketer of nitrogen-based fertilisers, sulphur, and phosphate-based fertilisers. The company is the only publicly traded company that is integrated from mining the raw materials for fertiliser production, through to selling it to growers.
Since the March 2009 low in the major stock indices, both Potash and Mosaic have underperformed the market. Over that time the S&P 500 is up 107% while Potash is up 41% and Mosaic is up 47%. Over that same period Agrium has performed considerably better, returning 141%. The stock also sells for a p/e of 10.56 and pays a dividend of just over 1%.
General agribusiness companies
In agriculture, “agribusiness” is a generic term for the various businesses involved in food production, including, farming, seed supply, agrichemicals, farm machinery, wholesale and distribution, processing, marketing, and retail sales.
Another potential way to profit from higher food prices is by investing in companies that produce, distribute and market products to the global food supply chain.
Bunge (NYSE: BG): Bunge is a leading agribusiness and food company with operations in around 40 countries and a business that stretches “from the farm field to the retail shelf”. Among its many activities, Bunge is involved in buying and selling oilseed and grain, crushing oilseeds to make meal for the livestock industry and oil for the food processing, food service and biofuel industries. producing oils, margarines & industrial fats. Crushing sugarcane to make sugar, ethanol and electricity. Milling wheat and corn for food processors, bakeries, brewers and other commercial customers, and selling fertiliser to farmers.
Archer Daniels Midland (NYSE: ADM): Archer Daniels Midland turns crops such as corn, oilseeds, wheat, and cocoa, into ingredients that are used in food and animal feed. The company manufactures protein meal, vegetable oil, corn sweeteners and flour, and is also a leading producer of alternative fuels such as ethanol and biodiesel. The Company also has a grain elevator and transportation network to procure, store, clean, and transport agricultural commodities, such as oilseeds, corn, wheat, oats, and barley, as well as processed agricultural commodities.
Since the March 2009 lows Archer Daniels Midland has returned just 13.4%, while Bunge has returned a somewhat better 56.5%. However, both companies have performed poorly relative to the S&P 500 index and neither of them is generating impressive earnings.
If you want to avoid the risk of buying individual stocks there are a handful of funds in the agriculture sector.
Sarasin AgriSar Fund (company website): The Sarasin AgriSar Fund aims to benefit from the longer-term trends within the global agricultural super-cycle and invests across the full agricultural spectrum “from field to fork”. The fund, which is run by experienced managers Henry Boucher and Mark Whitehead, invests across all asset classes, including equity, commodities and land, and includes Agrium, Potash Corp. and Unilever among its top ten holdings.
Market Vectors Agribusiness ETF (NYSEArca: MOO): The Market Vectors Agribusiness ETF is designed to reflect the performance of the DAXglobal Agribusiness Index, which provides exposure to companies worldwide that derive at least 50% of their revenues from the business of agriculture.
The fund holds a total of 51 different companies. However among its top ten, which make up 56% of the fund, it includes Monsanto, Potash Corp. Deere & Co Archer Daniels Midland, Mosaic and Agrium.
Investors could also consider Genagro Ltd, an international investment company which specialises in financing, developing and growing farmland and farmland-related businesses, and the CF Ecletica Agricultural Fund.
The bottom line
Making a case for higher food prices isn’t difficult. Profiting from them however, is much more of a challenge, and as Henry Boucher, manager of the Sarasin AgriSar Fund, points out, “…soft commodity markets are sensitive to every weather report and swing between optimism and pessimism…” The agriculture sector is therefore prone to considerable volatility which can play havoc with investors’ emotions.
Those looking to profit from higher food prices should do a considerable amount of homework, and are probably best taking a long-term view of at least five years.