The recent FAO numbers suggest that food prices have weakened and, by extension, that the agricultural sector is now in a post-boom phase. According to their data, world food prices are stable and nowhere near as high as in 2011. The World Bank confirms this and specifies stable and declining global food prices. But should investors put their trust in these reports?
The truth is: Beef prices are at their highest levels in 10 years while research from the Wall Street Journal states that food prices are increasing and are likely to continue doing so --- 3.5% more this year. Sky-high food prices are one cause of recent riots in Venezuela. More protests are expected to erupt globally, like in 2008 and 2011 when there was wide-spread social chaos related to food prices.
Droughts, subsidized ethanol production and exploding Chinese consumption of meat are just three leading factors of the price surge, yet there are other factors which may worsen things. Geopolitical shocks, such as Russia’s recent involvement in Ukraine, may disrupt crop production and impact the food price index. There is virtually no way the global food supply can accommodate global disruptions to any significant degree.
I told my readers in early 2009 to prepare themselves by holding agriculture stocks in their portfolios, including MarketVectors-Agribusiness (MOO)), which has since doubled. So is now a good time to sell? Not yet. There are eight factors which could send MOO, and all agriculture equities, much higher:
- China, India and the developing world’s food consumption is growing due to expanding per capita GDP.
- Middle class ranks are booming, globally, which increases meat demand significantly.
- The supply of arable land is inelastic, and can’t be rapidly expanded to accommodate increased crop requirements.
- Farm yields are still growing, but at a declining rate.
- Fuel crops like ethanol are displacing food production, due to subsidies.
- Civil governments’ economic interference is leading to supply-demand imbalances.
- Global climate is in a cooling phase.
- Water scarcity is hitting crop production and is dramatically impacting agricultural productivity.
All these challenges in the world’s food production system are likely to worsen, not improve. There is no "quick fix" solution to any of these factors, which makes me remain bullish.
Furthermore, Africa and South America have been facing a farmland acquisition binge, driving up arable land prices, primarily because food prices are expected to rise dramatically. China is the main player, but so is India, Saudi Arabia, various investments syndicates and individual speculators.
China is swallowing up millions of hectares of the world’s farmland in order to:
· Transform its USD stockpiles into real assets
· Stabilize its soy and corn input prices
· Exert itself geopolitically
For poor jurisdictions which have arable land, leasing tracts to the Chinese seems like an attractive opportunity, not just because of the quick cash, but also because of the infrastructure investments which are often promised. But appearances can be deceiving and what now seems to be a profitable exchange could eventually become a disaster. The people know it. They know that by turning over the land, they’re also turning over water rights and the local farms may end up having insufficient water for irrigation. Inevitably this will lead to chaos.
But the wealthy leaseholders are covered, because in some cases their contracts specify guaranteed military support. Therefore the stage is set for clashes. The main concern is that cultivatable land cannot be quickly obtained. Although in Brazil vast strips of forest are turned into farmlands, the soil is not that fertile, being acidic, shallow and lacking the necessary organic matter for long-term agricultural productivity.
But to be reasonable to the Chinese, we have to understand their predicament. They have a huge country, but their arable land only represents about 10% of their land mass. That may sound relatively workable, but remember they have a chronic deficit of fresh water, particularly in their southern regions. And since most of China’s fresh water is heavily polluted, their agricultural situation is worse than most people realize. Farmland needs proper irrigation and China has precious little of it. People living in China are 20% of the world’s population, yet their fresh-water supply is just 7% of the existent global fresh water supply. They are water desperate. And remember, their army is the largest in the world.
China is not the only one. In Brazil and even India (yes, "vegetarian" India) food and especially meat consumption is exploding, alongside per-capita income growth. Cattle, chicken, and pork all require significant feed inputs such as grains and hay, all of which are land and water intensive. Transporting and processing the meat is fuel intensive. When you consider that global meat consumption will double in 35 years time, according to the FAO, it begs the question of precisely how this will be accomplished given the current and projected fresh-water deficit. Cheap food will soon be history.
But there’s more. Synthetic inputs, such as chemicals, proprietary hybrid seeds and patented GMO’s are required for the highly intensive monoculture operations which dominate the global food supply. UG-99, a powerful wheat fungus, has been destroying crops in Africa and Middle East. Some say it could jeopardize 80% of the world’s wheat crops. And by the time new resistant types of crops are developed, so will a new and more serious threat. The point is: even modest shocks could shake the food system to its core, leading to higher prices.
All this is in addition to the usual problems: droughts, unexpected low temperatures, and oil price surges. There is a high correlation between the price of oil and the food index. If you are an oil bull, you should be an agriculture bull too.
Ultimately, even though the “when” is unknown, the probability of a world food crisis is so high that it simply cannot be ignored by investors. With that in mind, take a look at your portfolio. Are you positioned to benefit from higher food prices and a surging agriculture sector? If not, the good news is that you still have time --- the bullish trend is likely to last for decades. Agricultural ETFs like MOO, farmland funds and niche agriculture stocks are all excellent ways to invest.