I can think of no better asset to own during any kind of financial crisis than farmland or investing in agriculture stocks.
In some ways, farmland is even better than gold or silver. At least farmland is an intrinsically useful thing. It provides a tangible yield in the form of good things from the earth. We all have to eat. As consumers trim their sails, they ‘ll give up a lot before they give up their calorie intake. In fact, worldwide, the per capita calorie intake is likely to rise, while quality soil will become a scarce commodity. Altogether, I see five big reasons why agriculture investments are as good as green gold…
Invest In Agriculture: Reason #1
Grain inventories are falling to their lowest levels in more than 40 years
Obviously, we can’t continue to dip into inventories. The natural response you would expect to see is rising prices for grains and for the farmland that produces them. Global grain inventories, drought pending, are expected to rise this year, but will still remain well below historical level.
The big thing to keep your eye on here is stocks-to-use ratio. That compares the amount we have on hand to the amount we’re using. The higher the number, the closer we are to having fully stocked granaries. In the case of big commodities like corn, wheat and soybeans, the cupboard’s pretty bare. Based on USDA numbers, the stocks-to-use ratio for 2008-2009 looks to be the second lowest in history.
U.S. ending stocks are projected to nearly double, going from 7 million metric tons to nearly 14 million metric tons. Many countries, even grain powerhouse Argentina, are still holding onto local supply by restricting exports.
Mark McLornan made this comparison in the May issue of Marc Faber’s Gloom Boom & Doom Report: Investing in agriculture today will be like investing in the oil sector in 2001-2002. (If you’ll remember, that’s when oil raced up to $143 a barrel from its $30 low.) Right now, this sector remains locked in underinvestment, so there’s opportunity here, considering the case of future demand.
Invest In Agriculture: Reason #2
Grain consumption is on the rise
The world consumes, on average, 2,600 bushels of grain crop per second. That’s almost twice what we ate back in 1974. And that amount could easily double to 5,200 bushels per second over the next 20 years. The amount of pressure on the global food supply network is enormous. You can see the steep downward trend in wheat supply in the chart below.
Why are we eating so much more grain? The big factor here is meat. Hundreds of millions of people in China and India are joining the middle class. As people get wealthier they eat more meat. And more meat requires more grains to feed cattle and hogs. It takes 10 pounds of grain to produce one pound of meat. Because of that, most of the demand growth for coarse grain and oilseed meal will come from livestock in developing economies or the countries feeding them. So long as the middle class expands, you can be sure meat and grain consumption will follow.
Invest In Agriculture: Reason #3
Biofuels are driving ag demand up to new levels
Most every oil-consuming country has biofuel targets in place that will kick in over the next five years. These places include the U.S., the EU, Canada, Japan, Brazil, India and China. To meet their targets, according to work by Agcapita, we‘ll have to commit some 240 million acres to biofuel production. That represents about 50% of the arable land in North America and about 6% of all the arable land in the world.
Let’s consider ethanol alone for a moment, courtesy of some World Bank stats. From 2004-2007, U.S. biofuel use increased by 50 million tons, while world production increased only 51 million tons. That leaves only 1 million tons left over to cover a 33 million ton increase in the rest of corn demand the world over. Meaning we didn’t cover usage and caused the price to rise. By 2008, U.S. farmers were already planting every available acre with corn, the second biggest planting in 60 years, and producing one of the largest corn crops in history.
This helped push U.S. farmland values up to new record highs. Massachusetts farmland fetched the highest price at $12,200 per acre. As you can see, the biofuel craze puts more pressure on farmland demand. And, there are other pressures as well…
Invest In Agriculture: Reason #4
Arable land per person is falling
We are losing quality topsoil faster than we are replacing it. Quality soil is loose, clumpy, filled with air pockets and teeming with life. It’s a complex microecosystem all its own. On average, the planet has little more than three feet of topsoil spread over its surface. The Seattle Post-Intelligencer calls it the shallow skin of nutrient-rich matter that sustains most of our food. Replacing it isn’t easy. It grows back an inch or two over hundreds of years.
This is not lost on certain farseeing investors. Jeremy Grantham, the curmudgeonly head of the money manager GMO, recently told his clients: Our farmers are in the mining business! Yes, the soil is incredibly deep, but it is still finite. For every bushel of wheat produced, we lose two bushels of topsoil.
We lose topsoil to development, erosion and desertification. Globally, it’s clear we are eroding soils at a rate much faster than they can form, notes John Reganold, a soils scientist at Washington State University. Estimates vary, but in the U.S., the National Academy of Sciences says we’re losing soil 10 times faster than it’s being replaced. The U.N. says that on a global basis, the rate of loss is 10-100 times faster than that of replacement.
In any case, it seems safe to say that good dirt is in short supply. This ensures a growing scarcity of good farmland, and plenty of countries including Saudi Arabia, China, and South Korea, that will pay for it at any price.
For the first time ever we’re in danger of slipping below one acre per person. Of course we don‘t need 2.8 acres per person anymore, because of advances in agriculture over time. But gains in yield per acre are slowing. Over the last 40 years, we’ve increased the yield per acre by 2.1% per year. But the pace of those gains is slowing. Since 2000, the increase in yields per acre has averaged less than 1% per year.
We may see new innovations in seeds or other technology that we can scarcely imagine now. But any solution will take time and money to implement. Meanwhile, the world’s agriculture markets just get tighter and tighter…
Invest In Agriculture: Reason #5
Low water supplies cut down farm productivity
China is a biggie to watch when it comes to food supply dynamics. It feeds 20% of the world’s population on only 10% of the world’s arable land and with only 6% of its water. China’s water tables are falling too. In parts of its traditional breadbasket in the north production of wheat and corn is in jeopardy. Chinese officials are well aware of this urgent need.
As the Financial Times reports: The country is investing heavily in agriculture. Its agriculture budget increased 27% in 2007, 38% in 2008, and about 20% in 2009. No other big country, barring India, has increased spending on farming so much, says the FT. Still, increasing output will be a challenge.
One British study suggests that if China imports to meet just 5% more of its grain demand, it could swallow all the world’s exported grain. In 2007 and 2008, China imported practically zero wheat. However, today imports are on the rise, sometimes increasing over 100% from month to month. Part of that’s due to drought, which we can expect a lot more of in China as the years roll on and the water table decreases even more.
It also means that any way to secure better water supplies will be worth its weight in gold. Growing crops and keeping livestock hydrated uses three-quarters of the world’s water. That’s a lot of water, and China already doesn’t have enough.
A United Nations report puts it in stark terms: The population of China, India, Pakistan, and other big Asian countries will grow 1.5 billion by 2050, doubling the continent’s food demand. Some of the best returns this decade will come from agriculture investing, and the kinds of companies that keep us supplied with water, food, and energy. Position your portfolio accordingly.
Thank you for reading,
Chris Mayer for The Daily Reckoning