'Stock' up for the world's biggest food fight

Martin Denholm
0 Comments|June 22, 2010

Not enough arable land available to grow all the extra crops necessary

The global population is rising – it’s expected to top eight billion by 2030.

As a result, demand for everyday essentials is soaring, too.

No doubt you’ve heard the debate about how the world is striving to find adequate energy resources and beefing up aging infrastructures in order to handle the strain.

But what about items that are even more critical to basic human survival – namely, food and water?

I’ve discussed the world’s water issues here before. Today, we turn to the food industry. Because like water, with an additional two billion people on the planet in 20 years, we’re going to have to come up with ways to satisfy all the extra demand.

Longing for more land

The trouble is, there simply isn’t enough arable land available to grow all the extra crops necessary. In fact, according to the U.S. Department of Agriculture, the world needs as much additional arable land as there already is in the United States, Brazil and Argentina.

Adding to the crunch is the ongoing mandate for biofuel production across the world. We all know about the frenzy for mass-produced ethanol from corn a few years ago.

With subsidies tossed around like confetti to farmers who planted more corn for ethanol production, the rush caused a trio of problems…

  • It took massive amounts of corn out of the food production chain.
  • It left less acreage for other crops like soybeans and wheat.
  • The focus on biofuel production at the expense of food sent food prices soaring.

And although the fervor has died down from the giddy “this is the fuel of the future… let’s kick up production to warp speed” days a few years ago, one-quarter of the U.S. corn crop still goes towards ethanol production.

And now, emerging market nations are expected to take the food production baton in a big way…

Boom in the BRICs

Along with its fellow “BRIC” nations (Russia, India and China), Brazil is among the nations expected to “provide the main source of growth for world agricultural production, consumption and trade,” according to the annual Agricultural Outlook report from the United Nations and Organization for Cooperation and Development.

More specifically, the report states that agricultural output in the BRICs will grow by 27% – three times faster than production in major Western European economies. Breaking it down…

  • Brazil leads the pack, with agriculture growth of more than 40% through 2019.
  • The three other BRIC nations – Russia, India and China – are forecast to notch up 26%, 21% and 26% growth through 2019.
  • The Ukraine is also projected to enjoy an agriculture sector boom, posting 29% growth through 2019.

Overall, the UN-OECD report estimates that global production will expand by 70% by 2050.

Supply-demand-price conundrum

However, with the population growing and land acreage shrinking, global food prices are set to rise.

While the UN/OECD report doesn’t project a food price spike, it warned that these factors, coupled with higher energy costs, will result in consumers paying more for food.

For example, crop and dairy prices are projected to climb between 16% and 45%. And that doesn’t take into account any rise in energy/commodity prices.

Investments to consider include:

  • Archer-Daniels Midland (NYSE: ADM, Stock Forum): A global agriculture leader, ADM was founded in 1898 and is involved with food production across the board. Its business operates in three main segments: Oilseeds Processing, Corn Processing, Agricultural Services and the firm also sells crop insurance to U.S. farmers.
  • Bunge Ltd (NYSE: BG, Stock Forum): Bunge is even older than Archer-Daniels, dating back to 1818. It’s also a global agriculture market leader and operates in the Agribusiness, Milling Products, Fertilizer and Edible Oil Products areas.

The equation is tricky: Produce more food for more people with less land available. But it’s one that is vital for basic human survival.

Disclosure: The author does not hold positions in any of the stocks mentioned


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