Three ways to profit from the agricultural squeeze
Aug 06, 2009
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The world's population has grown by 138% in the past 50 years. It's projected to swell by another 50% in the next fifty years. That means another three billion mouths to feed.
This would be no great problem if the amount of agricultural land was going to increase by the same proportion. But of course it is not. And in this respect, the argument for investing in the agri-sector is stronger than that for investment into hard commodities. Let me explain.
There is no shortage of sources of most metals. It's just a matter of finding them and getting them out of the ground fast enough. But agricultural land cannot be created. It needs soil, sun and fresh water. And, unlike mining, where the nature of the process has not really changed over time, land is being affected by climate change, a shortage of fresh water, and by the methods of intensive farming that destroy fertility.
A major investment theme unfolding
According to the broker, Equity Development, somewhere between 12.3m and 19.7m acres of land falls fallow every year due to deteriorating quality. And there are two further pressures on food supply. One is the increasing penchant of farmers to grow biofuel crops. The other is the demand for meat that goes hand in hand with rising prosperity in developing countries.
It takes 2kg of cereal to produce 1kg of chicken meat, 3kg for every 1kg of pig meat and 7kg for every 1kg of beef. Fortunately, the world's chemical companies have been extremely successful at improving crop yields. Cereals are still by far the world's most important source of food and since the mid 1960s the world has managed to raise cereal production by almost a billion tonnes...
It's true that innovative companies can enhance crop yields. But even so, there will still remain a gap of about 40% between the theoretical maximum crop yield and that actually achieved. And this is a gap that could be filled by new techniques.
One of these is the genetic modification of food crops. This is a controversial issue that raises the hackles of both consumers and environmentalists. In spite of that, these so-called biotechnology crops are now being planted on 125m hectares worldwide, triple the area of 2000. While the western world agonises over issues of sustainability, the developing nations are leading the way. China is aiming to become self-sufficient in food production. Last year it launched a $2.9bn plan to develop GM crops, while in India biotechnology techniques are being used to improve bananas, cabbage, cauliflower, sweet corn, groundnuts and okra.
A second area of innovation is into 'natural' growth enhancers. The idea here is that plants are treated in ways that enhance their natural properties of development and resistance without any damaging side effects. This is something that is popular with consumers, or to be more accurate with supermarkets that like to push 'natural' foods. And it is also popular with government regulators who are increasingly concerned at the impact of intensive farming on the wider environment.
Ways for investors to play this
For investors there are plenty of ways to get involved. If you have the stomach for it you can, of course, trade soft commodities. But if you are a longer-term player you can find a variety of investment opportunities.
Amongst the farmers, Equity Development mentions AIM-listed MP Evans (LSE: MPE) which owns palm oil plantations in Indonesia and has cattle ranches in Australia. It also mentions some innovative small companies, including AIM-listed PureCircle (LSE: PURE) , the maker of a high-intensity sweetener and Tyratech (LSE: TYR), which makes plant-derived pesticides.
It's clear that with rapid population growth, there will be long-term pressures on supply and demand for agricultural products and soft commodities. This is an investment theme that will run and run in the years ahead.
There are a couple of ideas mentioned above which I have not checked out in detail. The one I really like is an exciting penny share that is providing a crucial service to farmers in Africa. I described it in detail in the latest issue of my subscription newsletter.
• This article was written by Tom Bulford, author of the
Red Hot Penny Shares newsletter
, and is taken from his free daily email the
Penny Sleuth
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