Food is Fundamental: Ag Stocks for the Next Decade
(options news network) In November 2008, when global markets were falling off of a cliff and the S&P 500 punched through 750 (a level it had not seen since 2002), John Person called a short-term bottom and put his money to work in an industry group that surprised me. John said he liked buying Archer Daniels Midland Co. (ADM), Monsanto (MON) and Bunge (BG) for exposure to the soybean market in a seasonally strong period, and because these were companies at the center of the world’s next crisis and investing opportunity: food.
Clearly, commodity stocks and agricultural names
—especially those having anything to do with fertilizer and potash—were strong performers out of the bear market lows of 2009. In fact, many of the leaders like ADM, Potash (POT), and Mosaic (MOS) were so strong, they launched off of their October-December lows and didn’t make new lows in March when "Armageddon" was on the economic menu.What’s Driving the Agricultural Bull?
Two words: China demand. More broadly, and with three words, I would call it, "Emerging markets demand." As developing/emerging economies around the globe make the transition from agrarian to industrial economies and their rural populations boost the need for urban jobs, housing and infrastructure, two shifts happen with food. First, these formerly rural populations grow less food for others and themselves. And second, as they became further detached from those local cultural dynamics of subsistence agricultural, they also change their diets.
This second point sets the stage for an exponential increase in food demand. Why? Because urban populations change their diets by moving up the food chain ladder and relying more on animal sources of protein as opposed to good old soybeans. David Hightower explained this dynamic to me recently. He said just think of 1.5 billion people used to living on a few dollars a day raising their living standards and rapidly going from eating a grain-based diet to an animal-based, processed food diet. Hightower’s forthcoming book will focus on many commodity trends of the next decade, and food dynamics will figure prominently.
Bottom line: It takes a whole lot more soybeans to make a cheeseburger in the city than it does to feed a family for a week in their old way of life.
This got me thinking about these trends and I went looking for more perspective, short of just going to the USDA website and piling through the stats myself (which I will definitely have to do when I’m really bored). According to Chris Mayer in the Dec. 7 edition of Agora Financial’s investment letter The Daily Reckoning:
"The average Chinese person 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 UN says we’ll need to boost food production by 70% by 2050
– a big task, given increasing restraints on water and quality arable land."What About Brazil?
We know the commodity/emerging markets back story: Insatiable global demand for raw materials, energy and food to grow dozens of industrial revolutions in Asia, South America, and Africa
— and at a much faster pace than 1880’s America. These mega forces are driving the prices of stuff like oil, wheat and copper higher. But money will be made in understanding the individual chapters in this decades-long epic. Ultimately, each revolution—be it BRIC or Southeast Asian or African—depends on the resources of other economies and geographies.Brazil is a good example of one BRIC helping build another. China has a problem in that it’s the largest importer of soybeans and its available arable land (that which can be use for growing crops) is limited and shrinking due to industrial/urban pressures. China also has a lower level of water resources relative to its size and population. Why is water so important? Mayer states, "Soybeans require a lot of water
– 1,500 tonnes of water for one tonne of soybeans."Brazil has a vast plain of arable land and lots of water. And Brazil is the second-biggest exporter of soybeans behind the US, so it looks as though China will continue to depend on Brazil for its future supply of the crop. There’s one thing Brazil needs though to keep that happening and make use of the 250 million acres of yet-to-be-tilled arable land: fertilizer. The climate is perfect for growing but the soil is weak on nutrients like phosphate and potash. Again, from Mayer’s report:
"According to estimates by SLC Agricola and Morgan Stanley, the average new acre of farmland in the [tropical savanna known as the] cerrado requires 14 times the amount of phosphate and three time the amount of potash of a typical American acre. This means that it is expensive to grow grains [in Brazil]. You need a high soybean price to make it worth the effort
– and there is more to it than just adding the nutrients."What Mayer means here, of course, is infrastructure
– road and rail access for equipment, workers and grain shipping. Connecting the dots, he points out the simple math of China’s increasing demand for Brazil’s beans driving demand for fertilizer and agricultural systems in general. Mayer concludes in his piece, titled "Food… The Trade of the Decade," that this isn’t cause for gloom and it’s not a new crossroads. During the Great Depression, while consumption of things like clothing and jewelry fell 50%, "purchases for food—even for meat—held steady."Read more at:
http://www.onn.tv/articles/buy-and-trade/food-is-fundamental-ag-stocks-for-the-next-decade-274/
Categories: Agriculture Companies
Tags: Brazil soybeans fertilizer china
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