Contributor Since 2009
Crises can make investors fortunes. Some of the most profitable investments are found in times when human needs are at stake and desperation is involved.
We’ve seen an oil crisis (and will likely see another very soon) which made billions for hedge funds, investment banks and retail investors when it ran to nearly $150 per barrel. We will see a water crisis in the future creating a similar profitable scenario. We are witnessing the start of a debt crisis that is making speculative lenders billions in returns on interest alone. But, the biggest and most worrisome near-term crisis of all, is a food crisis; and you will have the opportunity to make a ton of money from it.
Anytime there is a crisis, opportunity to profit is inevitable for those with the foresight to see it coming. Speculators love crises as well, and only add fuel to the fire, which multiplies your gains.
The writing is already all over the wall for a pending food crisis; the west just hasn’t seen it on a domestic level yet, but believe me, we will. It’s time to get ahead of this trade.
Did You know wholesale food prices have doubled since 2004?
Did you know there has been a major global movement from many leading nations to acquire foreign farmland in an attempt to attain food security?
The world’s population is now at 7 billion people. It has doubled since 1968.
40% of the world’s population is under the age of 25. This is a very critical statistic as over the next 15 to 20 years, 2.8 billion people will be entering their peak earning years. Most of these 2.8 billion people (particularly in China and India) will grow up much richer than their parents as they are what we call ‘the rising middle class in developing nations’. And with a rising middle class in developing nations, comes a demand for higher-end foods such as meats and dairy that we in the west take for granted. This will put a significant strain on world supply (it is already happening, we just haven’t felt it YET). Couple that with the fact that the world is adding 80 million people per year to its population total (that’s more than double the population of Canada) and a food crisis is imminent.
People in Canada and the US are already complaining about higher prices at the grocery store thanks to inflation. The price hikes we have seen this past year will pale in comparison to what is in store for the next few years. Countries are starting to compete (by bidding up) for food. This is going to drive costs to unthinkable levels. Get ready to pay $8 for a gallon of milk. It is inevitable and will happen this decade (milk is just one example).
There is a reason Jim Rogers said farmers will be driving Lamborghinis before long. While we all can’t become farmers, we can certainly invest in agricultural and farming stocks to get in on the big money that awaits this sector.
ForeignPolicy.com reported that “beyond population growth, there are now some 3 billion people moving up the food chain, eating greater quantities of grain-intensive livestock and poultry products. The rise in meat, milk, and egg consumption in fast-growing developing countries has no precedent. Total meat consumption in China today is already nearly double that in the United States.”
It’s only a matter of time until it is triple that of the United States...or more.
The Crisis Is Right Around The Corner
The world population is expected to be over 9 billion by 2050, which basically guarantees a food crisis by that point. However, it is my belief, backed by extensive research, that with a growing worldwide middle-class and higher energy prices, we are destined for a food crisis (within 5 years) if we simply maintained this level of population.
Food prices will rise tremendously over the next few years. And they will rise because of bidding wars, not just inflation. Countries who lack substantial farmland to support their own population will be driving food prices through the roof. This means companies within the agricultural and food sector will see profit margins grow rapidly. I have never found a safer commodity sector to invest in than agriculture.
One Crisis Triggers Another
When oil prices rise, the demand for biofuels increases. Biofuels are, in large part, believed to be one of the three main causes for the shortfall in food supply globally. It is a nasty cycle we find ourselves in. We try and escape higher oil prices only to find a looming food crisis because of it.
ForeignPolicy.com reports that “the third major source of demand growth is the use of crops to produce fuel for cars. In the United States, which harvested 416 million tons of grain in 2009, 119 million tons went to ethanol distilleries to produce fuel for cars. That's enough to feed 350 million people for a year. The massive U.S. investment in ethanol distilleries sets the stage for direct competition between cars and people for the world grain harvest. In Europe, where much of the auto fleet runs on diesel fuel, there is growing demand for plant-based diesel oil, principally from rapeseed and palm oil. This demand for oil-bearing crops is not only reducing the land available to produce food crops in Europe, it is also driving the clearing of rainforests in Indonesia and Malaysia for palm oil plantations.”
Some argue that the use of biofuels is the only culprit for food shortages. While I don’t agree with that (I believe it is three things: growing population and urbanization, rising middle-class and increased use of biofuels), they make a strong case. Since 2004, biofuels have caused demand to double for grain and sugar and nearly triple for vegetable oil.
As mentioned, one crisis triggers another - even within the same sector. What I mean by that is there is only so much farmland on the globe (and it is depleting thanks to urbanization - read past weekly volume by clicking here). When one particular product, such as grain, experiences increased demand, farmers must turn a past cabbage field (for example) into a grain field. This quells the grain shortage problem (albeit temporarily), but triggers a future cabbage crisis. It’s a viscous cycle that pretty much guarantees rising food prices for the rest of our lives.
Supply Side Issues
I’ve explained some of the demand side pressure the agriculture/food industry is facing, but let me touch on the supply side issues as well.
*The agriculture/food sector will make for a perfect case study in explaining why prices go skyward quickly. Pressure on its supply and demand are coming from all angles.
As we explained in a previous Weekly Volume (click here to read), urbanization is playing a large part in destroying fertile farming land and it has disrupted supply flow. For example, on the west coast of Canada, certain land once deemed strictly for farming purposes only, as it was rated to have some of the richest and most ideal farming soil in the world, is now home to highways and neighborhoods. This is happening all over the world.
Other issues effecting supply shortages are soil erosion, which lowers crop yields, other non-farm uses taking over farmland and climate issues such as heat waves and severe cold snaps.
There are so many forces setting the stage for global food shortages and bidding wars in the future.
Food shortages create severe consequences wherever they happen. We haven’t experienced rioting in North America because of food shortages, but that doesn’t mean it won’t happen. If consumers aren’t willing to pay the hefty premiums on food that awaits us this decade, you can bet we will see riots in our streets (hard to imagine, I know). It happened and is happening in several African and Asian countries. The Mexican government has been purchasing corn futures to avoid potential rioting and civil unrest as tortilla prices skyrocket.
Certain developing nations are experiencing a large portion of their citizens spending up to 75% of their annual dispensable income on food. Here in North America, we are spending roughly 10%, but I predict that number to increase to 20% within the next 5 years.
The price wars and competition for food between nations is only going to intensify, which will further drive up prices. Farmland is already skyrocketing in value across the globe which backs-up this prediction.
Certain agricultural products will eventually have export bans put on them as governments will deem them ‘strategic’, much like China has done with rare earths. And we all saw what that did to the price of rare earth elements and rear earth stocks. Fortunes were made last year in the rare earth run-up. I believe food and agriculture stocks will see similar price increases as rare earth stocks did, but it will be longer-lasting and more sustainable.
I expect governments to subsidize part of the expense for certain food products. Prices will become too expensive for many consumers and they will have no choice.
'The food system is buckling under intense pressure from climate change, ecological degradation, population growth, rising energy prices, rising demand for meat and dairy products and competition for land for biofuels, industry and urbanization.'—Oxfam report
There is more money to be made investing in food/agriculture than any other commodity sector...
And it is a safer, more predictable commodity space to be in than perhaps any other.
The profits in the food/agriculture sector are astounding, yet no one is talking about it. We can thank all of the world’s financial problems for that (as they have distracted investors) and use it as an opportunity to get in the trade before it becomes ‘in-vogue’.
The Profits Are Amazing
According to the UK’s Guardian, there are a handful of players dominating the agriculture and food manufacturing and retailing sector. They’ve been cleaning up for years, mostly under the radar of many investors.
This group of companies is known as the ABCD group.
The Guardian states “US-based Cargill with the highest revenues, is the largest private company in the world – and famous for its secrecy. Its headquarters is a mock-Tudor meets mock-French chateau in Minnetonka in the US mid-west, where the company was founded by a family of grain traders in 1865. Today, it is still majority-owned by descendents of the family. Its main commodity trading operation is run out of the tax haven of Switzerland. Its sales were $108bn in 2010, and $115bn in 2009, and its net earnings were nearly $6bn for those two years.
As well as being a leading player in the trading, processing and transporting of the most important agricultural commodities, fertiliser and meats, it is one of the world largest hedge funds. When Gordon Brown, as prime minister, called a summit in London on the 2008 food crisis, Cargill was invited. When Walker crisps had an image problem with the saturated fats in its crisps, Cargill came to the rescue, having a large acreage of land in eastern Europe planted with a new variety of "Sunseed".
It produces about half of all McDonald's chicken products across Europe. It sells fats to Unilever. When the US needed to appoint someone to lead the reconstruction of agriculture in Iraq, it turned to former Cargill executive Dan Amstutz. In China, where it has a joint venture with Monsanto, to whom it sold its enormous seeds interests a decade ago, it has trained over 2 million farmers in the American way of agriculture.
Over that same decade, Cargill, ADM and Bunge are thought to have acquired about 80% of China's soya processing capacity. More recently, Cargill has been moving up the food chain into high-value, hi-tech additives and what it calls food solutions for the manufacturing industry.
Louis Dreyfus, established in 1851, is also private and still family owned, headquartered in Paris but again trading largely out of Switzerland. It gives no figures and never comments to the media, but its estimated revenues in 2009 were £34bn. It has enormous grain, sugar and energy trading interests around the world, although in recent years it has concentrated on financial aspects of commodity trading.
Bunge, which expanded through the late 19th century as a grain trader in South America, is now incorporated in the tax haven of Bermuda but its headquarters are in the US. Its net revenues in 2010 were $47bn, and net earnings were $2.3bn. It is a leading processor of oilseeds, and producer and trader of grains, sugar and bioenergy. It is also a key player in the global fertiliser market.
ADM, or Archer Daniels Midland, is incorporated in the US tax-haven state of Delaware and headquartered in Illinois. Its revenues in 2010 were $62bn and its earnings were $1.9bn.”
While my approach won’t be to invest solely in the major players in the industry, the revenue figures from some of these giants are astounding - yet most investors have never even heard of these companies.
My strategy in this sector is to invest in mid-tier and small-cap agriculture stocks, as well as ETFs focusing on specific agriculture products such as corn and grain.
The money already being past around in this sector for acquisitions is shocking - that is my reasoning for taking stakes in small-cap and mid-tier producers as they are the most likely takeover candidates.
When this food crisis hits the world, acquisitions in this sector will be something we hear about on a weekly basis. Early bird investors in this sector will be cleaning up.
Now is the time to get in on this trade.
All the best with your investments,
Headline from this past week: Severe crisis grips East Africa
"East Africa is facing the worst food crisis of the last 60 years. Across Ethiopia, Somalia and Kenya, more than 10 million people are in dire need of food, clean water and basic sanitation. Loss of life on a massive scale is a very real risk, and the crisis is set to worsen over the coming weeks. Livestock are dying, markets are empty, food prices are rising dramatically and people are starving."
This article represents solely the opinions of Aaron Hoddinott and not of PinnacleDigest.com nor Maximus Strategic Consulting Inc. Aaron Hoddinott is not an investment advisor and any reference to specific securities in the list referred to in the article does not constitute a recommendation thereof. Readers are encouraged to consult their investment advisors prior to making any investment decisions. The information is of an impersonal nature and should not be construed as individualized advice or investment recommendations.