“If you can tell me something else where the fundamentals are so attractive…I’d be happy to put my money there,” said Jim Rogers, the famed investor and self-made billionaire in a recent interview. “But I don’t know of any other place.”
What’s he talking about? Agricultural commodities like soybeans, wheat and corn.
We begin our analysis with some simple “big picture” truths. The world’s population has more than doubled since 1950 – from about 2.5 billion to 6.7 billion. By 2050, there will be more than 9 billion people on the planet. Almost all of this growth will occur in the emerging markets like China and India. And their populations will all be doing one thing, for sure – eating.
Now, hang on. I know that is a banal insight by itself, but this story has more layers than a tiramisu. After population growth, the second layer is the mix of food eaten, which is important. These undeveloped economies are becoming wealthier. Predictably, as people everywhere have done and continue to do when they have a little more money in their pockets, they change their diets. They spend more on food. The average Chinese person spends 40 cents of every additional dollar earned on food. In India, it’s about 70 cents of every additional dollar. What do they buy?
They buy more meat, more fruits and more vegetables. Their calorie intake rises. That’s why the UN says we’ll need to boost food production by 70% by 2050 – a big task, given increasing restraints on water and quality arable land.
How do we meet that demand? Here the plotlines start to thicken and things get interesting…
Let’s look at soybeans specifically. China is the largest importer of soybeans and has been since 2000. China was once the largest exporter of soybeans, but flipped to a net importer in 1995. It may well be impossible for China to meet its demands for soybeans by producing more of its own. Passport Capital, an astute hedge fund, estimates that in order to grow enough soybeans to become self-sufficient, China would need to cultivate an area about the size of Nebraska.
That looks impossible against China’s arable land base, which has been in decline since 1988 – this despite the fact that China subsidizes agriculture. Another reason is the low level of water resources in China. (See the nearby chart “Who Has Water… And Who Doesn’t.”) Soybeans require a lot of water – 1,500 tonnes of water for one tonne of soybeans.
This chart is telling. Who has lots of water? Brazil. So it is no surprise to discover that the increase in demand for soybeans from China has largely been met by increasing soybean acreage planted in Brazil. (Brazil is the second largest exporter of soybeans in the world, behind the US and ahead of Argentina and Paraguay.)
The easiest way for China to get around its water shortage is to import soybeans. By importing soybeans, Passport calculates that China is effectively importing 14% of its water needs.
It looks likes this trend will continue for quite some time. When you look across the world, arable land per person is in decline. (Arable land simply means land that can be used for farming; it doesn’t mean that it is currently used for farming.) But one nation has more potential for converting arable land into producing farmland than anybody else, by a country mile. It’s Brazil again.
Brazil has a large tropical savanna known as the cerrado. You can think of it as the world’s arable land bank. It’s an area of about 250 million acres – about as big an area as all of the arable land in the US. It gets plenty of rainfall and sunshine. The soil is very old and runs deep. But there is a problem: The soil is nutrient poor. You need to add a lot of potash and phosphate – two key nutrients – to grow soybeans there.
According to estimates by SLC Agricola and Morgan Stanley, the average new acre of farmland in the cerrado requires 14 times the amount of phosphate and three times the amount of potash of a typical American acre. This means that it is expensive to grow grains here. You need a high soybean price to make it worth the effort – and there is more to it than just adding the nutrients. There is road and rail access, for instance. Someone would have to build all that out, too.
So now we are in a position to connect some dots on this story. China’s increasing population and affluence will drive its soybean imports. These imports will come mainly from Brazil. And Brazil, as it converts more arable land to producing farmland, will need a lot more potash and phosphate.
What is true of soybeans is also true of wheat and corn and rice and other agricultural commodities. All of them face the same challenges for water and land. All of them require lots of fertilizer.
I’ve not mentioned the biofuel component. But this is another big pull on demand for grains. The US alone aims to produce 15 billion gallons of ethanol by 2015. All over the world, biofuel demand now competes with “dinner plate” demand for supplies of grain.
This is not a gloom-and-doom scenario. It simply means that there is a lot of support for higher prices for agricultural commodities. Inventory levels still remain low worldwide. Grain prices are all well off their highs. After adjusting for inflation, many of them are as cheap as they’ve been in decades.
This is why Jim Rogers said he likes the agricultural commodities. I couldn’t agree more.
I also mentioned how this idea was hard to kill. In the Great Depression, purchases for jewelry and clothing and the like fell by 50%. But purchases for food – even for meat – held steady. We’ve seen similar patterns in recent busts. In the Asian Crisis of 1998-2001, the demand for food held steady, even while other markets collapsed.
Put it all together and you have a great case for higher grain prices. You also have an environment that is very good for fertilizers – in particular, potash and phosphate.
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