Agriculture: Out of the Box Efficiency Plays

by: Hard Assets Investor

By Aaron J. Levitt

Sometimes we forget, but the earth is a finite resource. As the populations and economies in developing nations explode, demand will increase for energy, food, metals and other "essentials" — which will have dramatic effects on the planet's ability to provide such needs.

With that in mind, it makes sense for the long-time-lined commodity investor to think outside the box a little, as some of the best opportunities lie outside the traditional broad-based bets on energy or gold. Instead, it may be time to get back to basics: farmland.

Agriculture's Demand

By 2050, the planet's population is estimated to reach nearly 9.1 billion residents, which is nearly 2.3 billion more than our population now. To keep up, food producers will need to grow nearly 70 percent more food in 2050 than today. Grains alone will account for a large portion of that; according to a 2009 United Nations Food and Agriculture study:

Demand for cereals (for both food and animal feed) is projected to reach some 3 billion tonnes by 2050.

Unlike fossil fuels, where alternatives do exist, or metals, where recycling is common, in agriculture, the impacts will be substantial. After all, we can forgo driving a giant SUV, but we all have to eat.

And these impacts are already being felt. This month, the United Nations' International Panel for Sustainable Resource Management released a new report titled "Assessing the Environmental Impacts of Consumption and Production." The research paper weighed the overall effects of production of various commodities against global environmental concerns, and when it came to food production, the results were quite shocking.

Achim Steiner, head of the UN's Environment Programme, told Reuters:

Agricultural production accounts for a staggering 70 percent of the global freshwater consumption, 38 percent of the total land use and 14 percent of the world's greenhouse gas emissions.

Focusing on Water and Farmland

Given such staggering numbers, the current agricultural model bodes well for investors in the water space. After all, while the Earth is covered by water, only an extremely small portion is fresh water, and a smaller portion of that is still freely available to end-users.

Water becomes even more of an interesting play when you look at where that population expansion is expected to occur. Sub-Saharan Africa, for example, one of the driest places on Earth, is expected to experience 108 percent population growth through 2050. The population of Southeast Asia — already so large — will grow another 11 percent over the same time period. Naturally, agricultural water usage will also grow 11-12 percent to keep pace. This means that by 2030, 47 percent of the world's population will be living in "high water stress" areas, according to the Stockholm International Water Institute.

But water issues are already having their effect today without the added population stress. About 60 percent of India's crop land is wholly dependent on rainfall. Last year's devastating droughts affected 246 of the country's 600 districts, and 235 million Indian farmers saw their yields on staple crops, such as rice and sugar, plummet.

The tough times aren't just in India. In China, 13 percent of its total farmlands experience some sort of droughtlike conditions each year. Even the developed world faces similar prospects, with Australia suffering from cycles of severe drought and floods.

Despite modern genetically modified seeds accounting for 90 percent of the growth in crop production, arable land will need to expand by nearly 300 million acres in emerging nations, and by 125 million in the developed world to keep pace with the coming population boom. Yet several countries, particularly in North Africa and Southern Asia, are nearing, or have already reached, the limits of their available arable land.

Opportunities for Investors

So how can investors take advantage of this theme?

ETFs such as the PowerShares Global Water (NASDAQ:PIO) or the First Trust ISE Water (NYSEARCA:FIW) make ideal broad-based investments. But in light of the coming freshwater crisis, it may make more sense to zero in on water efficiency — particularly with regard to irrigation, as a play on the "threat" agriculture poses to global water supplies.

There are a few US firms devoted to water efficiency and irrigation, albeit in some instances tucked inside other firms. Take John Deere (NYSE:DE), an obvious general ag play. But what many investors fail to notice behind the bright green and yellow tractors is that John Deere is world's third-largest irrigation company. The company has recently added to its arsenal new systems that use specialized drip methods to increase crop yields in hot and dry climates while reducing water usage.

Another American play is Toro (NYSE:TTC), which also has a very interesting and profitable micro irrigation unit. The company also functions in large-scale irrigation markets as well, and even provided the systems used for the Beijing Olympics.

There's also the Lindsay Corporation (NYSE:LNN), which receives about 80 percent of its revenue from its pivot-arm irrigation systems. These GPS and computer-guided systems are ideal for large-scale and developed market farms in the United States, Canada and Australia. While the company doesn't have any micro-drip exposure, Lindsay's efficiency products do help improve efficiency in water management in places such as California, where the Sierra Nevada snowpack and the Shasta Lake reservoir are 57 percent and 42 percent below their normal ranges, respectively.

As for the investor looking to play rising food prices with a direct investment in farmland, the Argentinean company Cresud (NASDAQ:CRESY) offers one such opportunity. Cresud operates 17 farms and 100,000 heads of cattle, and it has been purchasing land in other Latin America countries, including Bolivia, Brazil and Paraguay.

Unavoidable Outcome

The United Nations' global projections for population growth and pressures caused by agriculture suggest we'll need to invest significant dollars to augment how we produce food. According to the previously cited 2009 UN study, if agriculture doesn't become more efficient, as many as 370 million people could go hungry in 2050 — or nearly 5 percent of the estimated emerging population.

That's why water efficiency investment on a micro-irrigation scale could be a saving grace for the world's ever-growing populace. Investors with long enough timelines may want to position themselves accordingly, to take advantage of the unavoidable.

Disclosure: No positions