The world is facing a global food crunch. Recently, The United Nations' Food and Agriculture Organization held an emergency meeting to discuss the possibility of a near-term global food crisis. Rising bread prices have led to riots in Mozambique. Poor weather in Russia has lead to a wheat shortage. The planet's population is expected to grow from 6.8 billion to 9.1 billion by 2050 and the U.N. estimates that, in order to keep up with this exponential demand, the world's food producers will have to increase food output by nearly 70%. This estimate doesn't even factor in that a growing worldwide middle class is expected to create an increased demand for more varieties of food. Long term, feeding the growing world population represents a great investment theme.
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A Growing Portfolio
The global demand for agricultural products has been helped by fast-growing economies in the emerging world. Exponential population growth and increasing global incomes are having a dramatic effect on the demand for food. American farmers will export nearly $107.5 billion in agricultural products this year. Just short of the record $115.3 billion in exports shipped in 2008. Exports are expected to total $113 billion in 2011. Grain demand is estimated to reach three billion tons by 2050; livestock will hit 470 billion tons.
Economists at the USDA predict that all of this increasing demand for food will impact our wallets as well. The consumer price index for food is projected to increase 2-3% from 2010 to 2011, with retail food prices in the United States expected to rise faster than overall inflation through 2012. This fact hasn't been ignored by institutional investors. (For related reading, please see Economic Indicators: Consumer Price Index.)
Sowing the Seeds
Ninety percent of the growth in crop production is slated to come from higher yields and increased cropping intensity. With BHP Billiton's (NYSE:BHP) recent quest to take over Potash of Saskatchewan (NYSE:POT), the fertilizer market has been fire. Many firms within the sector are trading at near 52 week highs. Some analysts now predict that this segment of the Ag-complex is getting a little too frothy. Gains in crop production will also come from better irrigation, seed varieties and new advances in equipment. Due to the general industrial slowdown of the last recession, many of these equipment makers may offer better buys.
As we continue to drain our natural aquifers at alarming rates, water efficiency is quickly becoming increasingly important. While most people will recognize Toro's (NYSE:TTC) bright red lawn movers at their local golf course, the company also has a very profitable micro-irrigation unit. These systems allow for less water to evaporate and enable farmers to grow crops in less than ideal dry conditions (the Middle East and Africa). Lindsay (NYSE:LNN) has created the standard for large-scale central-pivot irrigation systems. New technologies, such as GPS monitoring and sensors that test soil moisture are key features on many of Lindsay's new products enabling for increased water conservation.
John Deere (NYSE:DE) is the poster child for agricultural equipment. However, it's not the only game in town. Moving quickly into emerging markets, Dutch firm CNH Global NV (NYSE:CNH) sold more than $10.7 billion tractors, combines and harvesting equipment in 2009. Similarly AGCO (Nasdaq:AGCO) has been implementing high-tech solutions into its tractors, including soil data collection systems and automatic steering.
Finally small cap, Art's-Way Manufacturing (Nasdaq:ARTW) produces equipment for the raising of livestock, including grain elevators, hay and forage gear, as well as mixers and mills. The company has market cap of less than $25 million, making it a possible acquisition target down the road.
The Bottom Line
As our population continues to grow, more pressure will be placed on our resources. Feeding the developing planet is quickly becoming the greatest challenge. New advances in technology with regards to agricultural equipment will help enhance crop yields. Investors can take advantage in this long-term trend by either investing in the previously mentioned stocks or an exchange traded fund ,such as the PowerShares Global Agriculture (Nasdaq:PAGG) to track the theme.
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