“Taking the long view, we are running out of dirt.”
– David R. Montgomery, geologist
Over the summer, Iran bought a large amount – more than 1 million tons – of wheat from the U.S.
That’s something we’ve not seen in 27 summers. In Iran’s case, a tough drought cut the wheat harvest by a third, forcing the country to look abroad. But still, the fact that Iran had to come to the U.S. is telling. It’s like Lee asking Grant for rations in the summer of 1863. As one analyst put it: “Do you think Iran would come to the U.S. if they had any place else they could buy it… They’re searching the world for wheat. They’re buying the U.S. because it’s the only thing they can buy.”
Markets, like great unscripted dramas, develop their own plotlines as time rolls on. Now unfolding is a new plotline in the agriculture boom. It begins with the fact that there are fewer and fewer options these days for importers looking for large quantities of high-quality grains. But it speaks more to a deeper issue: an emerging shortage in fertile soil. Yes, we’re running out of good dirt.
In fact, fertile soil – good dirt – may become more important to land values than oil or minerals in the ground. Some say it is already a strategic asset on par with oil. As Lennart Bage, president of a U.N. fund for ag development says, “Now fertile land with access to water has become a strategic asset.”
Doubtful? Consider rising export restrictions around the globe, which act as a sort of fence keeping the goods within borders. India curbs exports on rice. The Ukraine halts wheat shipments altogether. The number of grain-exporting regions has dwindled, like the vanishing buffalo herds. Before World War II, only Europe imported grain. South America, as recently as the 1930s, produced twice as much grain as North America. The old Soviet Union, for all its faults, exported grain. Africa was self-sufficient. Today, only three major grain exporters remain: North America, Australia and New Zealand.
No surprise, then, to find faith in the global food supply at generational lows. So begins the scramble to secure farmland. Saudi Arabia, for example, is particularly at the mercy of the winds of global agriculture. It has little ability to produce its own food. The kingdom, reports the Financial Times, “is scouring the globe for fertile lands in a search that has taken Saudi officials to Sudan, Ukraine, Pakistan and Thailand.” Saudi Arabia’s quest is not one it pursues alone. There are many hunters.
The UAE has also been looking to lock down acreage in Sudan and Kazakhstan. Libya is looking to lease farms in the Ukraine. South Korea has been poking around in Mongolia. Even China is exploring investing in farmland in Southeast Asia. While China has plenty of cultivable land, it does not have a lot of water.
“This is a new trend within the global food crisis,” says Joachim von Braun, the director of the International Food Policy Research Institute. “The dominant force today is security of food supplies.” Food prices reflect this crimp in supply.
The mainstream press focuses on issues such as population, dietary shifts and the impact of biofuels. One thing that doesn’t get talked about much may be the most important thing of all: a growing shortage of quality topsoil. Call it the topsoil crisis.
Quality soil is loose, clumpy, filled with air pockets and teeming with life. It’s a complex microecosystem all its own. On average, the planet has little more than 3 feet of topsoil spread over its surface. The Seattle Post-Intelligencer calls it “the shallow skin of nutrient-rich matter that sustains most of our food.”
The problem is that we’re losing it faster than we can replace it. And replacing it isn’t easy. It grows back an inch or two over hundreds of years.
This is not lost on certain far-seeing investors. Jeremy Grantham, the curmudgeonly head of the money manager GMO, wrote about soil depletion in his last quarterly letter. “Our farmers are in the mining business! Yes, the soil is incredibly deep, but it is still finite.” For every bushel of wheat produced, we lose two bushels of topsoil.
Until the final decades of the 20th century, the amount of new farm acreage added to the mix by clearing land offset the losses on a global basis. In the 1980s, the amount of land under cultivation began to fall for the first time since humble early humanity began to farm the rich land around the Tigris and Euphrates. It continues to fall today.
We lose topsoil to development, erosion and desertification. “Globally, it’s clear we are eroding soils at a rate much faster than they can form,” notes John Reganold, a soils scientist at Washington State University. Estimates vary. In the U.S., the National Academy of Sciences says we’re losing it 10 times faster than it’s being replaced. The U.N. says that on a global basis, the rate of loss is 10-100 times faster than that of replacement.
In any case, it seems safe to say that good dirt is in short supply. The obvious investment conclusion: Buy farmland. That’s hard to do as an individual investor, although there are at least a few options. One is Cresud, which owns 1 million acres of farmland in Argentina. It trades on the NASDAQ. Our own Leucadia National (NYSE:LUK) owns 8% of the company and is the largest shareholder. Though harder to buy, Black Earth Farming owns farmland in Russia – which presents its own risks. The stock trades on the Pink Sheets in the U.S.
Another way into the idea is to own farming assets in grain-exporting countries. Viterra, which trades in Toronto, is the largest grain handler in Canada. (We own both Cresud and Viterra in Mayer’s Special Situations.) Viterra thrives on volume. A busy grain market portends good things for Viterra’s business. It is well financed and owns truly world-class assets.
More investment ideas will surely surface as time goes by. The topsoil crisis has a long way to go. It’s not going to resolve itself anytime soon. In the meantime, though, investors may want to rethink the phrase “cheap as dirt.” I’ll keep an eye on this new trend in these pages.
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