Healthy soil and sustainable growing

["Tradingpost" <tradingpost@lobo.net>]

He just doesn't get it - investing in those kinds of companies doesn't plant 
one more potato.

paul tradingpost@lobo.net
-----------------------------------------

Could we really run out of food?
http://finance.sympatico.msn.ca/Investing/JonMarkman/Article.aspx?cp-documentid=6424206


Biofuel production, poor harvests and emerging nations' growing appetites are 
emptying the world's pantry, sending prices soaring. It's a good time to 
invest in agricultural stocks.
By Jon Markman
March 06, 2008

As if a bear market, U.S. credit crunch, energy crisis and city financing 
emergency were not enough for one year, experts say the world is now facing 
down the barrel of the worst catastrophe of all: famine.

The very idea that the modern world could run out of food seems ludicrous, 
but that is the flip side, or cause, of the tremendous recent increase in the 
cost of raw wheat, corn, rice, oats and soybeans. Food prices are not 
escalating because speculators have run them up for sport and profit, but 
because accelerating demand in developing nations, biofuel production and 
poor harvests in some areas have made basic foodstuffs truly scarce.

In energy circles, folks who warn about the beginning of the end of cheap 
fossil fuels talk about "peak oil" as a point we have dangerously and 
expensively crossed. Likewise, you can now add "peak wheat" to your political 
and investment lexicon. And it's a lot worse.

Food fighting
One can always move closer to work to cut down on gasoline. But be forced to 
eat less toast, beer and steak? Them's fightin' words.

Wheat futures prices have tripled since 2004, corn prices have almost tripled 
since 2005, and soybeans have tripled since 2006. Meanwhile, crude oil is up 
merely 60% in the past three years, which makes it seem very bearable in 
comparison. U.S. stock prices have barely eked out a 10% advance since 2005, 
underscoring the diminishment of our buying power. A large pepperoni pizza 
these days costs about as much as a share of Citigroup (C.N). Citigroup 
finished Wednesday at $22.15.

This is no joke, already, in Asia. Rice prices surged to a 20-year high this 
week -- more than $18 per hundred pounds -- as countries that have the most 
are hoarding it for their own people. Vietnam, India and Egypt have 
restricted exports to keep local markets stocked. Thai, Philippine and 
Indonesian officials are warning of civil unrest if the flow of rice does not 
increase.

Russia, Ukraine and Kazakhstan in recent weeks have restricted wheat exports 
as well, slapping on big tariffs to make sure shelves are stocked in their 
homelands amid soaring prices. A major Russian grains-company chief told 
Reuters that his country "is in a condition that has never happened before." 
Higher prices are not meeting any resistance from desperate buyers.

Most unusual about this phenomenon, according to BMO Financial Group 
strategist Don Coxe, is that until now, food crises in world history were 
regional concerns that arose from crop failures, war or pests. Once global 
trade of grains got going in the 19th century in a major way, food shortages 
in one country were ameliorated by imports, he said. What's happening now is 
a lack of supply everywhere at once.

Culprits abound, but chief among them is urbanization, which has cut the 
amount of acreage devoted to farming. The United Nations reports that the 
total area devoted to crops worldwide had risen by 0.3% annually since 1961, 
to 3.8 billion acres through the latest survey. But the growth has stalled to 
0.1% annually in the past decade. Unlike energy, you can't drill deeper in 
the ocean or under Arctic tundra for more food.

Also, surging income growth among emerging middle classes in China, India, 
Southeast Asia and South America has boosted demand for meat protein, and 
feed for new Asian cattle ranches and pig farms is putting intense pressure 
on the world's corn supply. Of course, the weather plays a role, too. A 
terrible drought in the breadbasket of Australia over the past two years has 
combined with bad harvests in Argentina and Brazil to create some of today's 
shortfall.

Empty global cupboards
Shortages are real. The Financial Times reports that rice stocks have fallen 
this year to about 70 million tons, the lowest level in 25 years and less 
than half the total held in global inventories in 2000. Wheat inventories, 
called "carry-overs" in the trade, are at 30-year lows even though world 
wheat production was actually up 1% last year. In the past year, reports 
show, wheat inventories in the European Union have plunged to 1 million tons 
from 14 million tons.

A leading Canadian fertilizer executive told analysts recently that according 
to his company's calculations, global grain reserves are "precarious," at 
just 1.7 months of consumption, down from 3.5 months of reserves as recently 
as 2000.

Now the really bad news is that we might actually have been lucky in the past 
few years, as global warming has lengthened growing seasons in the American 
Plains, sometimes called the Saudi Arabia of corn. BMO's Coxe notes that the 
U.S. Midwest has enjoyed 17 straight years without significant crop failure, 
the longest winning streak on record. If this fortunate run ends soon, we'll 
likely face a worldwide crisis.

Some researchers, including climatologist Elwyn Taylor of Iowa State 
University, believe it could happen this year, as La Niña conditions are 
emerging at a time when the Midwest has become vulnerable due to a drought 
creeping up from the South.

Food prices are already way up in North America but not as much as feed 
prices because manufacturers, processors and retailers such as Wal-Mart 
Stores (WMT.N) have found ways to hold the line by cutting expenses. But they 
can dam up the flood of food inflation for only so long. Just this week, 
Procter & Gamble (PG.N) announced it was raising prices on many of its foods 
products, including Folgers coffee. J&J Snack Foods said it would lift prices 
by as much as 12% in April to offset costs, and local newspapers have been 
rife with stories about pizzerias both raising prices and cutting back on 
crust thickness and cheese quantities.

Joseph R. Dancy, who teaches law at Southern Methodist University and runs a 
small hedge fund, lays the immediacy of the crisis directly on 
ethanol-production mandates in an energy bill recently passed in the U.S. The 
bill, intended to boost America's energy independence, is expected to push as 
much as 31% of the U.S. corn crop into biofuels production, up from 24% last 
year. In other words, at the exact moment we most need corn on our plates, it 
is being funnelled into cars. A full tank of gas requires the equivalent of a 
quarter of a ton of raw foodstuffs, enough to feed one person bread for a 
year.

Coxe's solution: As a first step, shut down all ethanol plants immediately. 
"It's criminal to burn corn for fuel when we are out of food," he said. In a 
particularly pernicious development, he noted that a big boost in demand for 
soybeans for use as biodiesel in Europe has driven up the price of palm oil 
in Southeast Asia, where it is the main source of protein for the poor.

If global famine is one bad crop away, then surely there is an investment 
angle. On dips, the companies to focus on are mostly the same as I described 
in my year-opening column, "10 market predictions for a glum '08:" Seed 
innovators Monsanto (MON.N) and Syngenta (SYT.N); fertilizer makers Potash of 
Saskatchewan (POT.N), Mosaic (MOS.N), CF Industries (CF.N) and Agrium 
(AGU.N); tractor maker Deere (DE.N); and, for exposure to the food futures 
themselves, the exchange-traded funds PowerShares DB Agriculture (DBA.N), 
iPath AIG Agriculture (JJA.N) and iPath AIG Grains (JJG.N).

Some additional small caps to consider are equipment retailer Titan Machinery 
(TITN.O), irrigation-equipment maker Lindsay (LNN.N) and processing-machine 
maker Key Technology (KTEC.N).

I guess this gives a new meaning to the term "seed capital."

Fine print
Coxe has published a book summarizing his view of investment bubbles and 
declines called "The New Reality of Wall Street." . . . To learn more about 
law professor Dancy, visit his Web site. . . . To keep an eye on commodity 
futures prices, visit here or here. The Chicago Board of Trade has a great 
page summarizing the action. The U.S. Department of Agriculture Web site has 
pages and pages of material to help you get up to speed...

I previously wrote about ethanol as bad public policy on Feb. 10 in a blog 
item and on Oct. 11, 2007, in a column, "Shuck the ethanol and let solar 
shine."

At the time of publication, Jon Markman owned shares of Monsanto, Potash of 
Saskatchewan, Mosaic, CF Industries, Agrium, Lindsay, Powershares DB 
Agriculture, iPath AIG Agriculture and iPath AIG Grains.