Financial Poise
Food Scarcity and Agriculture

Food Scarcity Despair Creates a Need for Investment

The Water Crisis, Biofuels and a Growing Global Population Are Affecting the Agricultural Economy

Agriculture is still in its infancy as an investment sector. It accounts for 3.5% percent of all global economic activity and many investors are either ignoring or overlooking its longer-term potential.

Food Scarcity and Investment Opportunities

The world is trying to feed more people with less arable land per capita. The global population is growing by about 80 million people per year, which is almost the same as Germany’s population. The average person eats almost one ton of food per year. The United Nations predicts global food production will need to increase by 70% to meet global demand by the year 2050.

Meanwhile, arable land has decreased by a third due to urbanization, water scarcity and pollution. Today, most available arable land is only marginally productive because of overfarming. The land doesn’t have enough nutrients to sustain plant growth. Other available arable lands are too far from infrastructure and are too expensive to bring online.

Major innovation must dominate agriculture. Experts in the industry offer two solutions:

  • Advanced biotechnology
  • Implementing successful farming techniques in developing countries

There is global opposition to the use of genetically modified organisms (GMOs), although experts support biotechnology. Even places affected by food scarcity, like regions of Africa, set strict use of GMO items. Despite public outcry over the safety of GMOs, the World Health Organization has said that “individual GM foods and their safety should be assessed on a case-by-case basis.”

New Frontiers for Agriculture

Ecological and political concerns impede the most attractive sites for arable land. Organizations focused on the alleviation of global poverty proposed investing in small-scale farming to bypass problems in acquiring large swaths of arable land.

Growing Global Middle Class Demands More Meat

The global middle class, already 3.2 billion in 2016, will grow by 160 million annually within the next five years, according to the Brookings Institution. Asia will be responsible for most of this growth.

As families get richer, they consume more protein-dense food. There are three main reasons why people seek animal proteins when they can afford them:

  • Nutrient density
  • Satiety, or more appetite satisfaction
  • Energy, or more calories

It takes a considerable more amount of grain to produce the equivalent amount of animal protein. For example, it takes about seven pounds of grain to add one pound of beef to a conventionally-raised cow.

Even diet trends in the Western world have moved toward a protein-focused diet. Paleo, Atkins and the Mediterranean Diet are a few popular diets in recent years.s.

The Water Crisis Threatens the Food Supply

Water scarcity directly affects food scarcity. About 700 million people worldwide are affected by water scarcity, according to the UN, with many more at risk. “By 2025, 1.8 billion people will be living in countries or regions with absolute water scarcity, and two-thirds of the world’s population could be living under water stressed conditions.”

Agriculture and water are inseparable. Today, 70% of freshwater is used for farming. Water is irreplaceable and can’t be financially valued.

Water is free to most consumers because of political reasons. If we believe ‘free’ is mispriced and expect markets to correct that, expect a future full of localized water scarcity. Let’s also not forget about the Flint, Michigan water crisis, which rendered the city’s water undrinkable for two years. The imminence of wider-scale private water markets could add to the cost of producing every commodity in the not-too-distant future.

Biofuels Add to the Problem

Ethanol accounts for 10% of the fuel we put into our cars. Ethanol usage prevents corn reaching humans and animals and drives up the price of corn. Increase in interest and production of biofuels increases demands for all-grain products and feedstock commodities.

Many countries passed biofuel and ethanol mandates. The push for biofuels created more competition over  arable land and water, which has diverted resources away from food production. Growing political support for biofuels may contribute to food price inflation and food scarcity in the future.

Investing in Agriculture

Agriculture is not the most investor-friendly sector, but there are a few ways to participate. Agricultural investments generally fall into one of three categories:

  • Land ownership
  • Production
  • Post-production

Ownership, or farmland leasing, is a basic type of exposure to the sector. The production category includes management services and investing in agricultural inputs and equipment. Post-production businesses include grain processors, marketing and retail branding.

Within those three categories, investors should look for the following:

  • Unique business models—Most farmers operate on less than a 4% profit margin. This leaves little room for investors to make money. Agricultural businesses must offer innovative ways to produce higher margins.
  • High margin assets—Potash and phosphate deposits offer attractive returns if proven to be economic-mining operations. Attractive attributes include high-deposit grades, low all-in sustaining costs and easy access to infrastructure. Why potash and phosphate? Because both provide primary macronutrients needed for industrial fertilizers.
  • Compelling valuations—Good businesses can still be poor investments. Use certain methods, like net present value models, to objectively value the business’s future cash flows and factor in a margin of safety.
  • Favorable return potential for inherent risk—Seek to take a suitable risk for the corresponding stage, size and potential future rate of return of the investment.

The world needs more resource-intensive food using less water for more people. This potential crisis carries a seed of opportunity for investors willing to fund solutions.

[Editor’s Note: To learn more about this and related topics, you may want to attend the following webinars: Zoning & Land Use 101-2020 and Cannabis Investment: Successes, Failures, & Strategies for the Future 2021. This is an updated version of an article originally published on November 2, 2018.]

©All Rights Reserved. April, 2021.  DailyDACTM, LLC d/b/a/ Financial PoiseTM

About Jason Stevens

Jason J. Stevens is an Investment Advisor Representative with Sprott Asset Management USA and an Investment Executive with Sprott Global Resource Investments Ltd.  Mr. Stevens also acts as Portfolio Manager of the Sprott Real Asset Value+ Strategy. Mr. Stevens began his career with Global Resource Investments Ltd., the predecessor of Sprott Global, in 2002.  Originally hired…

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