Profiting from rising food prices, booming agriculture

Posted By Dick Sterling
April 3, 2013

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 mid 2008 and early 2011. See this chart. 

So is it time to dump Ag stocks? I don't think so, not by a long shot. It all comes back to the factors which are driving the Ag boom:
  • Economic growth driven by countries like China and India has led to an increase in demand for food, in general.
  • The world's growing middle class is demanding more meat, in specific.
  • There is a global deficit of available arable land.
  • Declining growth rates in productivity from existing farms.
  • Subsidized fuel crops are continuing to displace food production.
  • Heavy interference from civil governments guarantees supply-demand imbalances.
  • Global water shortages continue to reduce agricultural productivity.
  • Climate is in a global cooling phase.
None of these factors are likely to change in the near future, nor is there a "magic bullet" to rapidly increase the global food supply.

The worldwide agricultural land-grab, particularly by the Chinese, reflects the reality of a globally-shrinking arable land base. And there's no quick way to "manufacture" more cultivatable land. While it's true that massive portions of Brazil are being transformed from forest to farmland, the soil is shallow and acidic, and devoid of the abundant organic matter required for intensive agriculture.

With modern methods of production, highly-intensive operations and chemically-dependent crops have become the norm --- leading to a fragile and unsustainable food production system. There's no buffer to absorb serious exogenous shocks.

Huge crop failures could easily result from a drought or abnormally cold temperatures. Depletion of a critical aquifer would have a similar effect. An oil price spike could drastically raise food transportation costs, leading to famine in the poorest parts of the world. There is also the potential for a serious epidemic affecting livestock or crops.

A strain of wheat-fungus (ug-99) has been wiping out crops in Africa and has now spread overseas. The fungus could wipe out more than 80% of the world's wheat crops. How likely is this? No one knows but the bottom line is this: some kind of food crisis is likely, and the food "system" as it currently functions is not capable of handling modest demand pressures, never mind the types of events I've mentioned here.

But the good news is this: investors can position themselves now to take advantage of higher food prices and a booming agricultural sector which shows little sign of slowing down. There are several agricultural ETF's, including Market Vectors Agribusiness ETF (MOO) --- which are simple ways to ride the wave. Beyond that, I'm focused on niche agricultural stocks, specifically those which are based in the US and Canada.

Global food prices have (temporarily) stabilized --- meaning that any weakness in Ag stocks is a buying opportunity. While the timing of the next spike in the FAO's food price index is unknowable, the drivers of global food demand are firmly entrenched. I remain therefore strongly bullish, and see the Ag boom extending through the remainder of this decade and beyond.

If you haven't already purchased Mastering the Bubble, I urge you to do so. There's still time to deploy your assets to take advantage of the stunning profit opportunities which lie ahead.

Posted by: Dick Sterling, Editor   contact here