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Published: November 11, 2009
“If you can tell me something else where
the fundamentals are so attractive... I’d be happy to put my
money there,” said Jim Rogers, the famed investor and self-made
billionaire in a recent interview. “But I don’t know of any
other place.”
What’s he talking about? Today, we take a look and invest right
alongside his idea. And it should start to pay off with the
arrival of the first swallows of spring in 2010. It’s also
timely now -- in this weak-kneed economy -- because it has
traditionally held up well even in when the economy is on the
ropes. Even the Great Depression couldn’t put this thing down.
We start with simple truths. The world’s population has more
than doubled since 1950 -- from about 2.5 billion to 6.7
billion. By 2050, there will be more than 9 billion people on
the planet. Almost all of this growth will come from undeveloped
markets such as China and India. And they will all be doing one
thing, for sure -- eating.
Now, hang on. I know that is a banal insight by itself, but this
story has layers like a tiramisu. The second layer is the mix of
food eaten, which is important. These undeveloped economies are
getting richer. Predictably, as people everywhere have done and
continue to do when they have a little more money in their
pockets, they change their diets. They spend more on food. The
average Chinese spends 40 cents of every additional dollar
earned on food. In India, it’s about 70 cents of every
additional dollar. What do they buy?
They buy more meat, more fruits and more vegetables. Their
calorie intake rises. That’s why the U.N. says we’ll need to
boost food production by +70% by 2050 -- a big task, given
increasing restraints on water and quality arable land.
How do we meet that demand? Here the plotlines start to thicken
and things get interesting...
Let’s look at soybeans specifically. China is the largest
importer of soybeans and has been since 2000. China was once the
largest exporter of soybeans, but flipped to a net importer in
1995. It may well be impossible for China to meet its demands
for soybeans by producing more of its own. Passport Capital, an
astute hedge fund, estimates that in order to grow enough
soybeans to become self-sufficient, China would need to
cultivate an area about the size of Nebraska.
That looks impossible against China’s arable land base, which
has been in decline since 1988 -- this despite the fact that
China’s subsidizes agriculture. Another reason is the low level
of water resources in China. Soybeans require a lot of water --
1,500 tonnes of water for one tonne of soybeans.
Who has lots of water? Brazil. So it is no surprise to
discover that the increase in demand for soybeans from China has
largely been met by increasing soybean acreage planted in
Brazil. (Brazil is the second largest exporter of soybeans in
the world, behind the U.S. and ahead of Argentina and Paraguay.)
The easiest way for China to get around its water shortage is to
import soybeans. By importing soybeans, Passport calculates that
China is effectively importing 14% of its water needs.
It looks likes this trend will continue for quite some time.
When you look across the world, arable land per person is in
decline. (Arable land simply means land that can be used for
farming; it doesn’t mean that it is currently used for farming.)
But one nation has more potential for converting arable land
into producing farmland than anybody else by a country mile.
It’s Brazil again.
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Brazil has a large tropical savanna known as the cerrado. You
can think of it as the world’s arable land bank. It’s an area of
about 250 million acres -- about as big an area as all of the
arable land in the U.S. It gets plenty of rainfall and sunshine.
The soil is very old and runs deep. But there is a problem: The
soil is nutrient poor. You need to add a lot of potash and
phosphate -- two key nutrients -- to grow soybeans there.
According to estimates by SLC Agricola and Morgan Stanley, the
average new acre of farmland in the cerrado requires 14 times
the amount of phosphate and three times the amount of potash of
a typical American acre. This means that it is expensive to grow
grains here. You need a high soybean price to make it worth the
effort -- and there is more to it than just adding the
nutrients. There is road and rail access, for instance. Someone
would have to build all that out, too.
Connecting the Dots -- Grains Are Cheap
So now we are in a position to connect some dots. China’s
increasing population and affluence will drive its soybean
imports. These imports will come mainly from Brazil. And Brazil,
as it converts more arable land to producing farmland, will need
a lot of potash and phosphate.
What is true of soybeans is also true of wheat and corn and rice
and other agricultural commodities. We’ll need more of all of
them. And all of them face the same challenges for water and
land. All of them require lots of fertilizer.
I’ve not mentioned the biofuel component. But this is another
big pull on demand for grains. The U.S. alone aims to produce 15
billion gallons of ethanol by 2015. All over the world, food
crops now compete with energy needs.
This is not a gloom-and-doom scenario. It simply means that
there is a lot of support for higher prices for agricultural
commodities. Inventory levels still remain low worldwide. Grain
prices are all well off their highs. After adjusting for
inflation, many of them are as cheap as they’ve been in decades.
This is why Jim Rogers said he likes the agricultural
commodities. That’s what he was talking about in the quote up
top. I couldn’t agree more.
I also mentioned how this idea was hard to kill. In the Great
Depression, purchases for jewelry and clothing and the like fell
by -50%. But purchases for food -- even for meat -- held steady.
We’ve seen similar patterns in recent busts. In the Asian Crisis
of 1998-2001, the demand for food held steady even while other
markets collapsed.
Put it all together and you have a great case for higher grain
prices. You also have an environment that is very good for
fertilizers -- in particular, potash and phosphate. An
investment in the fertilizer stocks is an investment right
alongside the grains.
I’ve just alerted my Capital & Crisis readers to two
fertilizer stocks that I believe are best positioned to profit
from the coming agricultural commodity boom, but there are a
number of fertilizer plays out there that are also ripe for the
picking.
A couple worth taking a look at include Agrium (NYSE: AGU)
and Western Potash (TSE: WPX). Naturally, I’m partial to
the ones that I’ve recommended to my C&C readers -- and they’ve
got pages of research to back up why that is -- but these two
tiny stocks could make interesting moves nonetheless.
-- Chris Mayer
Contributor
Penny
Sleuth
Editor's Note: This
article originally appeared in
Penny Sleuth. |
