At the World Food Security Summit being held in Rome, little, if any, useful information has been given about the investment linkages between the inputs to food producers, and food users. This appears to be the major issue that's befuddled both consumers and policymakers across the globe, and no doubt also lies at the root of recent food riots. Consumers don't really know why they're rioting and policymakers don't really know how to react.
This sorry state of affairs has lots to do with today's plethora of do-good entities, ranging from the United Nations to the World Bank, the IMF, countless NGOs, civic organisations, volunteer civilian armies, and so on. The Rome summit is being hosted by the Food and Agriculture Organisation (FAO) of the United Nations, and it's unlikely to reach any firm or really useful conclusions. So far, the bottom line appears to be that the world only needs USD 30 billion a year to eradicate the scourge of hunger.
Agricultural commodity prices should ease from their recent record peaks but over the next 10 years are expected to average well above mean levels of the past decade, according to the latest Agricultural Outlook from the OECD (a club of the world's rich countries) and the FAO. The full report is rather brilliant, and incorporates an outlook period stretching forward nearly a decade, to 2017.
The report mentions the high levels of agricultural commodity prices seen in the past few years, but adds that such prices will not last, due to the transitory nature of some of the influencing factors, not least adverse weather in a number of the world's major grain growing areas. The report does not look at the wider commodity picture, anchored in early 2002, when two powerful forces converged in the form of an industrialising China, and the dollar heading down into a protracted bear market
In real (inflation-adjusted) terms, agricultural commodity prices have been much higher in prior periods. Thus, while rice may have doubled to more than USD 400/t in the past six years, it spiked to more than USD 1,400/t back in the mid-1970s, to fall, eventually, like most commodities, to trough levels in 2000.
The underlying forces that drive agricultural product supply (by-and-large productivity gains) will eventually outweigh the forces that determine stronger demand, says the FAO, both for food and feed as well as for industrial demand, most notably for biofuels production. The good news is that consequently, prices will resume their decline in real terms, though possibly not by quite as much as in the past.
The keys to productivity gains are uncontroversial: continuing investment, capacity building, better infrastructure and the dissemination of improved production technologies. In short, farmers need to be skilled and properly kitted out to produce the perfect crop, be it corn, or beef on the hoof, and lots of it, compared to the past. The FAO is no commercial organisation, and it has no reason to bridge the gap between its optimistic outlook for farm productivity, and naming brands.
The fact is that the smart money has been onto the food input game for some time now. Over the past five years, as in one instance, the NYSE stock price for Monsanto has appreciated by more than 1,200%, compared to a 40% gain in the benchmark Dow Jones Industrial Index, over the same period. Simply put, Monsanto is a global provider of agricultural products for farmers; its seeds, biotechnology trait products, and herbicides provide farmers with solutions that, according to Monsanto, improve productivity, reduce the costs of farming, and produce better foods for consumers and better feed for animals.
Consider also the likes of Deere & Company, supplying agricultural equipment: tractors; combine, cotton and sugarcane harvesters; tillage, seeding and soil preparation machinery; sprayers; hay and forage equipment; integrated agricultural management systems technology, and precision agricultural irrigation equipment. Anyone who has been around Sioux City, Iowa, during the harvest will know the Deere machines, including combines the size of small hotels. This NYSE stock price is up 270% in the past five years, vastly outpacing the Dow Jones Industrial Index.
The FAO also makes no reference to fertilisers, be it primary (NKP, being nitrogen, potassium and phosphates), secondary (lime, sulphur, magnesium compounds, and gypsum), or tertiary (micronutrients). Once again, the smart money has been onto this game for some years. Potash (potassium carbonate), mined in only 12 countries, and phosphates, mined in 42 countries, possess important tollgate qualities - from an investment viewpoint.
This is particularly so in the case of potash miners, where the estimated cost of a greenfield mine is USD 2.5bn (excluding infrastructure), and first production takes at least five years. The top five potash miners control around 65% of world production and typically also mine phosphate rocks and, using natural gas, also fix nitrogen out of the air into malleable products such as urea and ammonia.
The NYSE stock price of world leader in the field, PotashCorp, has appreciated by just under 2,000% over the past five years; the stock price for No 2, Mosaic, has risen by nearly 1,400%. The market values of a number of stocks on this, the other side of the food story, are nothing to sneeze at anymore; Monsanto now boasts a market value of USD 73bn, and PotashCorp is worth USD 67bn.
* 12 month
While the NKP story gains wider prevalence, there is an ongoing hunt for other listed stocks that stand to benefit from the longer term food story. The potential winners here include anything from agromineral developers, to well-established downstream players that offer the farming sector diversified goods and services.
Selected agromineral players
Gujarat State Fert.
Egyptian Fin & Ind
EID Parry India
* 12 month
One final word from the FAO is that when the average for 2008 to 2017 is compared with that over 1998 to 2007, beef and pork prices may be some 20% higher; raw and white sugar around 30%; wheat, maize and skim milk powder 40 to 60%; butter and oilseeds more than 60%, and vegetable oils over 80%. Over the 2008 to 2017 period, prices are expected to resume their decline in real terms, albeit at a slower rate.