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8 Reasons Agriculture Stocks Are Headed Much, Much HigherDick Sterling The global boom in agriculture investments is nowhere near over, nor are rising food prices, despite recent numbers from the FAO. The UN's Food and Agriculture Organization reports that world food prices are relatively stable, and well below the highs we saw in 2011. The World Bank agrees, and is reporting stable and declining global food prices. So should you trust their numbers? Here's the reality: Beef prices have just posted their biggest price spike in a decade, and the Wall Street Journal reports that food prices are surging and are expected to rise another 3.5% this year. Riots are breaking out in Venezuela with sky-high food prices partially to blame. More riots can be expected worldwide, as we saw in 2008 and 2011 when there were more than two dozen countries dealing with food-related social chaos. Droughts, subsidized ethanol production and blistering Chinese demand for meat are just three of the main drivers of food-price inflation, yet there are dozens of threats to the global food supply which could make things even worse. Russia's adventures in Ukraine are just one recent example of an exogenous shock which could disrupt crop production [subscription required] and impact the world food price index. There is virtually zero capacity for the system to absorb any significant disruption in supply, and policy makers know it. In early 2009 my readers were advised to load up on agriculture stocks, including the Market Vectors Agribusiness ETF (MOO). Since that time, it has doubled. So is it time to sell? I don't think so, not by a long shot. It all comes back to eight factors which are driving the Ag boom, namely:
All of these factors are likely to get worse, not better. There is no "quick fix" solution to any of these challenges, which is why I remain bullish on agriculture in general. Here's something else for you to consider: A worldwide rush to accumulate agricultural land has swept through Africa and South America. Who is behind it? China is the main player, but so is India, Saudi Arabia, various investment syndicates, and individual speculators. It’s a global farmland-grab that’s driving arable land prices higher, all in anticipation of a “big surge” in food prices that elite investors have been positioning for. The land-rush will continue. China’s motivation is to:
The civil governments in the host countries are willing to lease thousands (millions) of acres of arable land to foreign interests because it's a source of quick cash and long-term commitments to infrastructure investment. But the locals are typically opposed to these deals because they know they'll wind up getting the short end. Often the land comes with water rights which may be used to divert existing irrigation away from indigenous farms. And that would lead to famine. And riots. But the leaseholders should be fine, since some of their deals include guaranteed military support. Chaos is already baked in the cake. The problem is there's no fast way to increase the global supply of cultivatable land. Even though it's true that vast swaths of Brazil are being changed from forest to farmland, the soil is relatively infertile --- it's shallow, acidic, and lacks the quantity of organic matter necessary for long term agricultural productivity. Good farmland is precious. The Chinese are in for a difficult time. They have comparatively little arable land, around 10% of their total base. That may not sound too bad, but when you combine it with the fact they are in a chronic fresh-water deficit situation, things get scary. Arable land is useless without adequate irrigation. China has 20% of the world’s population yet only 7% of the world's fresh water supply. They can't feed themselves. They have the world's largest army. They'll eventually use it. And it's not just China. Demand for food and particularly meat is going ballistic in Brazil and even India (yes, "vegetarian" India). As incomes grow in the developing world, so does meat consumption. Livestock requires substantial land, not only as a direct input in grazing operations but also as an indirect input through feed inputs such as hay and grain. Meat production also requires enormous amounts of water, and fuel to process the meat and transport it. According to the FAO, world meat consumption will double over the next 35 years. Cheap food will become a thing of the past. As if all that weren't enough, there's more. The world's food supply is dependent on highly-intensive monoculture operations which in turn are dependent on synthetic inputs. Chemicals. Proprietary hybrid seeds. And now, patented GMO's. Yields have increased, but resilience has cratered. A strain of wheat fungus known as UG-99 has been wiping out crops in Africa and the Middle East. Some say it could wipe out 80% of the world's wheat harvest if it spreads. Eventually the experts will develop resistant varieties, but by then a new threat will have emerged. The bottom line is this: the food system is not currently capable of handling modest shocks, never mind major ones. And then there are the never-ending threats of drought, abnormally cold temperatures, and oil price spikes. The price of oil is highly correlated to the food price index --- they're inseparable in my opinion. If you are bullish on oil, then you should consider Ag stocks too. In short, I believe the stage is set for a worlwide food crisis. The probability is just too high to ignore, even if the timing is unknown. So brace yourself, and take a second look at your portfolio. Are you positioned to profit from it? If not, I have good news: there's still time to position yourself to ride the wave of higher food prices and a thriving agricultural sector. This will likely be a decades-long trend. There are different ways you can invest, from agricultural ETF's including MOO to farmland funds to niche agricultural stocks. I cover all these topics in my Sterling Intelligence email letter, which is free. ### Dick Sterling Copyright © 2014 Dick Sterling Publishing. All Rights Reserved. 321gold Ltd |
