Globalization, climate change and population growth are leaving the world
increasingly hot, flat & hungry
Words by Bryan Snelson
Two and a half years ago, New York Times foreign affairs columnist Thomas L. Friedman’s bestselling book Hot, Flat and Crowded was published. Since the release of Friedman’s book, part of his vision of the future has started to become our reality; price increases, sometimes dramatic, for an assortment of agricultural products. For all of the talk about the opportunities available to investors in oil, gold, and base metals, far less has been said about how best to capitalize on the world’s seemingly insatiable demand for agricultural products.
Rising demand comes from three divergent sources. The first demand is to simply put food on the table. The world‘s population is anticipated to grow by two to three billion people over the next fifty years. Not only is that a lot of mouths to feed, there is also a rapidly growing need to produce feed for the barnyard and most recently, fuel for the gas tank through cornbased ethanol.
Economic expansion within emerging markets around the world has resulted in a burgeoning middle class, which enjoys a standard of living that would have been nearly unthinkable to the prior generation. This newfound affluence is facilitating a dietary change toward more protein intake. That means meat, and rising meat consumption carries significant implications on feed grain due to meat’s multiplier effect. Beef is the highest intensity form of meat, with I kg of beef requiring up to 8 kg of grain – an 8x multiplier. The increased demand for animal feed will in tandem increase demand for fertilizer to maximize crop yields. The same holds true for agricultural equipment as farmers seek greater efficiency and scale.
It has been said that no serious contender for The White House can hope to win the much sought-after delegates of the Iowa caucuses unless he or she is an enthusiastic supporter of corn-based ethanol. Whether or not corn-based ethanol is a good idea is another discussion altogether. The fact is, more and more jurisdictions are mandating a blending of ethanol into gasoline, increasing demand for corn in the process.
Long-term issues such as climate change, declining arable land per capita, and diminishing fresh water supplies, buttressed up against multifaceted and rising demand, leads many analysts to the conclusion that we are in the preliminary stages of a long-term bull market in agricultural products. A word of caution though; while prices are likely to remain high, they will also be quite volatile. Pronounced volatility is expected to be a hallmark of this bull market for agricultural products.
Short-term and sometimes violent price drops can and do occur in this type of circumstance. Investors need to be keenly aware of market expectations and valuations versus those expectations before investing. Even when long-term macro trends are working in your favour, it’s far too easy to overpay for a security, leaving you stuck with an investment with much more downside than upside potential. Unforeseen shocks often arise and occur without much prior warning. Look for companies that not only boast a strong growth profile but also command a healthy balance sheet, able to withstand periodic commodity price drops.
The final and most important line of defence, as I’ve already noted, is valuation. Valuation is particularly important to provide an investor with what famed Columbia University professor, the late Dr. Benjamin Graham, described as a healthy margin of safety. If selecting individual names for your portfolio is not to your liking, take a look at one of the growing number of exchange traded funds that take a more diversified approach to investing in the agricultural sector of the global economy.
Structural imbalances in the world’s food supply chain are likely to lead to both threats and opportunities well into the future. With this in mind, Perhaps Thomas L. Friedman should consider as a title for his next book Hot, Flat, and Hungry.
Bryan Snelson is a Vice President, financial advisor and branch manager with Raymond James Ltd. Mississauga. His views do not necessarily reflect those of Raymond James and his article is for information only. Raymond James Ltd. is a member of The Canadian Investor Protection Fund. Bryan’s financial market reports can be heard daily at 6:45 am at 4:40 pm on the Toronto radio station JAZZ FM91.