Riots in Algeria over the cost of sugar and wheat. Mexico’s government buys corn futures to hedge against rising tortilla prices. Indian Prime Minister Manmohan Singh forced to arrange onion imports from traditional enemy Pakistan. Chinese Premier Wen Jiabao promises shoppers in a supermarket in Inner Mongolia that the government will control food price inflation running at better than 11% annually.
Sure sounds like we’re headed back to the bad old days of 2008 when soaring food prices sparked food riots across the globe. According to the food price index kept by the Food and Agriculture Organization of the United Nations, the price of traded food staples such as wheat, corn, and rice climbed 26% from June to November and are near the historic highs set in 2008.
What the world is seeing isn’t an anomaly in my opinion. The peaks of 2008 and 2010 aren’t unusual events caused by an unusual coincidence of unusual bad weather and some terrible (but usual) government decisions to hoard key grains behind export bans. The peaks are indeed extreme but the long-term trend in food prices is upward and it’s the dip from the peaks of 2008 while global consumers were tightening their belts in response to the Great Recession that’s actually the anomaly.
Absent a return to global recession I think the upward trend in food prices is guaranteed to continue. The forces pushing prices upward are just too simple and massive. And the policy responses from governments that might temper the trend are just too limited. If you’re a long-term investor, the upward trend in food prices is one of the safest trends that you can invest in for the long term.
It’s also one of the most frustrating because it is so hard to find good stocks positioned to take advantage of rising food prices. Eliminate those that don’t trade publicly or in the United States and the number gets even smaller. (One of my favorites is Brazilian food processor—beef, pork, chicken, and lamb plus frozen vegetables, ready meals, and pasta—Marfrig Alimentos but while volumes are above a million shares a day in Brazil (symbol MRFG3.BZ), the stock trades hardly at all on the U.S. OTC market.)
But I think you can expand the universe—a bit anyway—if you go back to the root causes of rising food prices.
Demand for staple grains, for example, is forecast to rise by 2% in 2011. Where’s that demand coming from? A larger global population, certainly. But also rising global incomes: as incomes rise, even modestly, people want to eat more meat. Turning grain into pork or chicken or (corn-fed) beef is a very inefficient way to produce protein. And then, at least in the United States, there’s competition for grain from energy production. The International Monetary Fund estimates that 70% of the increase in corn prices in 2008 was due to demand for corn to produce ethanol.
The solution would seem to be simple, right? Grow more food. But increasing food supply isn’t easy. First, the world isn’t producing any more good farmland. In fact, we’re losing farm acres every year to causes that range from desertification to urban development. Second, while increasing the productivity of much of the world’s farm land is certainly possible, we’ve got a mismatch in much of the world between the cost of the inputs that would raise productivity—better seeds, more fertilizer, better irrigation—and the ability of the poor farmers to pay for them. Third, many of the cheapest and easiest methods for raising productivity have hit what are real limits—given the absence of investment capital. For example, cheap forms of irrigation have depleted the water table in farm areas of India and added near-toxic levels of salts from fertilizers to the soil. That situation is certainly fixable but deeper wells, drip irrigation, and soil restoration all require investments beyond the means of many farmers. And fourth, global climate change is making the weather less predictable. For example, it looks like what I think is best thought of as global weirding—and not global climate change or global warming—is in the process of changing the patterns of South Asia’s monsoon rains and the oscillation between La Nina and El Nino patterns in the Pacific.
To think about how this all plays out for investors, break it into two parts. First, rising food prices mean that there will be more farm income (however, inequitably distributed in the world) to invest in growing more food. Second, consumers—and the companies that supply them–will be looking to find ways to cut their cost.
What companies prosper as farmers have more to spend?
The classic play, of course, is farm equipment maker Deere (DE). Deere’s sales closely track farm incomes. So Deere’s shares popped when the U.S. Department of Agriculture announced, on January 12, that U.S. corn, soybean, and wheat inventories fell by 10.5%, 15.2%, and 4.7%, respectively. Lower inventories mean higher prices for U.S. farmers and higher sales for Deere. (Deere is a member of my long-term Jubak Picks 50 portfolio http://jubakpicks.com/jubak-picks-50/
Seed makers are a slightly more long-term investment because the next big payoff is drought resistant seeds that require less water and that research is just starting to put seeds into fields. My two favorites here are E.I. DuPont (DD) and Europe’s Syngenta (SYT).
Can’t grow plants, no matter how drought resistant, without nutrients, and in many countries applying more fertilizer is the best way, in the short-term, to increase yields. My picks here are Potash of Saskatchewan (POT), Agrium (AGU), and Yara International (YARIY).
In that group I’d probably give the lead to Yara International because of its recent moves on bulk liquid fertilizers. The company is in the process of acquiring the part it doesn’t yet own of Yara Nipro, the market leader in bulk liquid fertilizers in Eastern Australia. Liquid fertilizers are particularly well suited to farming in areas where water is scarce and in many of these markets liquid fertilizers are just establishing a foothold. Only 3% of fertilizer in Eastern Australia is supplied in liquid form.
And speaking of water, irrigation is a growth industry as weather gets less certain. Lindsay (LNN), a stock I added to Jubak’s Picks in December http://jubakpicks.com/2010/12/23/buy-lindsay-lnn/ is a leader in big center-pivot irrigation systems. Jain Irrigation Systems, which specializes in extremely efficient drip irrigation systems, is the other irrigation pick I’d make. (Unfortunately for U.S. investors the Indian company only trades on the Indian stock market. Ticker is JI.IN if you can buy it in India)
Now let’s go to the other side of the trend and look at companies that will profit as consumers and consumer-companies look to avoid the worst effects of rising food prices. Brazil’s Marfrig Alimentos is an example. In the last year the company has become a supplier to U.S. fast food restaurants and I think that’s a likely growth opportunity as those companies look for cheaper supplies. I’d also add Bunge (BG), the big soybean supplier. Bunge has the global contacts to source the soy beans it processes at the best global price of the moment—and that will give the company the ability to ride the changing currents of rising food prices. (The stock is also one of my Jubak Picks 50 http://jubakpicks.com/jubak-picks-50/ ) Following this same logic I’d favor the biggest of the global food companies because they can source their ingredients from whatever part of the globe is cheapest at the moment. Here my pick would be Nestle (NSRGY).
That list of 10 stocks (not counting Jain Irrigation) doesn’t exhaust the opportunity. But it should be enough to get you started.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund, may or may not now own positions in any stock mentioned in this post. The fund did own shares of Agrium, Deere, Lindsay, Marfrig, Nestle, Syngenta, and Yara International as of the end of November. For a full list of the stocks in the fund as of the end of November see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/. I’ll have the fund’s portfolio as of the end of December posted in a few days.