‘We are five years into a severe global food crisis that is very unlikely to go away. It will threaten poor countries with increased malnutrition and starvation and even collapse. Resource squabbles and waves of food-induced migration will threaten global stability and global growth. This threat is badly underestimated by almost everybody and all institutions with the possible exception of some military establishments.’ – Jeremy Grantham
The fear of a food crisis isn’t a new phenomenon.
For centuries, humans have worried that the world’s food supply can’t sustain a larger population. In 1798 the godfather of the over-population theory, Thomas Malthus wrote:
‘The power of population is so superior to the power of the earth to produce subsistence for man, that premature death must in some shape or other visit the human race. The vices of mankind are active and able ministers of depopulation. They are the precursors in the great army of destruction, and often finish the dreadful work themselves. But should they fail in this war of extermination, sickly seasons, epidemics, pestilence, and plague advance in terrific array, and sweep off their thousands and tens of thousands. Should success be still incomplete, gigantic inevitable famine stalks in the rear, and with one mighty blow levels the population with the food of the world.’
According to Scientific American, the world population in 1798 was about 800 million. Today it’s seven billion…that’s a 775% increase.
Sure, it hasn’t been an easy ride to get an eight-fold increase in the population. There have been famines – natural and man-made. But we’ve got there, from 800 million to seven billion. And it’s happened despite the fears of a global food famine that would almost destroy mankind.
So, how did it happen?
Fears That Never Played Out
The answer is industrialization and technology. Remember, when Malthus wrote his essay in 1798, the world had gone through momentous change – the Industrial Revolution, and the American and French Revolutions.
And the world population had seen a 50% increase in just 100 years. Surely that kind of growth wasn’t sustainable. But it was. And 200 years later, after a 775% increase, the current population is still sustainable.
But humans are worrisome creatures. Recently in Australian Small-Cap Investigator, we wrote about another crisis that until recently was set to bring the world’s biggest economy to a halt.
The crisis was in energy, and the country was the United States.
Yet as much as everyone feared a US energy crisis, it never happened. Why?
Because of technology and entrepreneurialism. Without going into the full story, the high oil price and America’s dependence on imports from the Middle East forced entrepreneurial energy executives to explore for unconventional energy supplies.
And it just so happened that the US had access to what looks set to be the world’s largest supply of shale oil and gas. The technology needed to recover this gas is different to that needed for conventional oil and gas. And that meant entrepreneurs needed to take risks and invest in new technology.
It’s arguable, but there’s a chance that without the high oil price, the discovery and recovery of shale oil and gas may never have happened and the US would be in the middle of an energy crisis.
But it did happen. And according to oil giant, BP, the US is on the way to being energy independent by 2030…less than 20 years from now. That’s a big turnaround.
Other shortages include the fabled housing shortage. From here to London to California, the housing spruikers screamed there was a housing shortage and that more needed to be done to build houses to avoid millions living on the streets.
But when the housing market hit a peak in 2006 in the US and UK (2010 in Australia), suddenly the market was awash with houses. The shortage disappeared overnight. And now, even some mainstream analysts in Australia believe cities such as Melbourne have a major housing glut rather than a shortage.
But let’s get back to the food shortage. Jeremy Grantham is a pretty influential guy. If he says there’s a shortage, you should take him seriously. And because of this, he says agricultural commodities are a buy. And he’s not the only one.
Famous commodities investor, Jim Rogers has a similar view.
They could be on to something. Symptoms of this were on show when corn and wheat hit the headlines recently after big run-ups in price due to the drought in major farming areas of the United States.
It might be a taste of things to come.
Agriculture Got Left Behind
The commodity boom since 2000 has not kicked off in agriculture anywhere near like it has in energy and metals. Agricultural prices are still depressed on a historic basis. So how long before they start to catch up?
Corn, wheat and soybeans have all rallied strongly in the last few months. This is regardless of the fact that the economic news out of Europe, China and the United States has not improved in any way. People need to eat, no matter how their shares are doing.
The global population is getting bigger and bigger and that includes a huge shift to a more protein-heavy diet. This has left existing inventories low and an obvious conclusion: agriculture is going to rise over time.
We won’t argue that commodities are worth buying. If we’ve learned anything over the past few years it’s that the perception of a shortage is more important than the reality.
If enough people think there’s a shortage then prices will start to reflect that. And that could mean higher prices for corn, wheat, sugar, and any other soft commodity you can think of.
And it could also mean high prices for one of the most important commodities you can’t eat – potash. Dr. Alex Cowie has been on the potash bandwagon for some time now. He says that:
‘We could well see another swathe of food riots around the world – mostly in poor countries that bear the brunt of supply shocks – like we did the last time the corn price was at these levels, in 2008.‘Then, after the market is reminded of the tragic human cost of crop failures, the global conversation will focus on food security once again.
‘Part of this conversation will be highlighting the importance of fertilisers to increase production rates.
‘In short – each year the world tries to feed more mouths with less farmland, while enduring more volatile weather. So farmers need to use fertilisers to make every hectare count.’
That makes sense to us. And we can see why he’s tipped an Aussie potash stock.But do we think we’ll see a complete breakdown of the human race as Mr Grantham appears to suggest? No. Technology and human ingenuity will protect us from that.
As we say, that doesn’t mean food prices won’t soar. And it doesn’t mean there won’t be areas of the world that suffer from a food shortage, leading to terrible consequences. But it won’t be the end of the world…time and again humans have proven that we’re too smart to let that happen.
Cheers,
Kris
The Most Important Story This Week…
Iron ore prices fell to a two-year low this week. This is bad news for some of Australia’s biggest miners. They make a lot of money from this one commodity. The lower the iron ore price, the lower their profitability.
Iron ore is also very important for Australia. It makes up a large percentage of our exports. As coal and iron ore prices come off the boil, this will be a real problem for a lot of investors. Dan Denning explains why and the steps to take to protect your wealth in The Mining Boom is Over.
Other Recent Highlights…
Kris Sayce on Why the Doc Should Have Flown Further West: “This month he’s put Africa back on the buy list, tipping a stock that’s in the driving seat as the African energy sector gets set to boom. It’s a story we’ve backed too, getting in on the act last December. And the one area of most interest is the East African coastline.”
Keith Fitz-Gerald on Sorry, Facebook is Still Only Worth $7.50 a Share: “I also posited the assumption that Facebook would be unable to maintain the 100% plus growth that many investors believed was baked into the proverbial cake. Google couldn’t. Apple couldn’t. And both of them are real businesses. That’s the key…real businesses.”
John Stepek on How to Defeat Your Worst Enemy in Investing: Yourself: “When the same stock is plunging days later, it’s your gut that will tell you to ignore it, because it’s bound to rebound. When it fails to do so, it’s your gut that will panic and tell you to sell it just at the point of maximum loss. In short, your gut is the enemy. How do you beat it?”
Kris Sayce on Have You Tried the ‘Two-Hand’ Portfolio Asset?: “As you may know, we’re not a big fan of the idea that you should diversify your investments. That’s not to say you should stick all your money into one thing. Rather, we mean it’s important you don’t over-diversify. The last thing you want in a volatile market is to have investments all over the place.”
