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A National Food Authority (NFA) worker carries a sack of rice inside a warehouse in Manila. (JES AZNAR/AFP/Getty Images)
A National Food Authority (NFA) worker carries a sack of rice inside a warehouse in Manila. (JES AZNAR/AFP/Getty Images)

Globe Investor Magazine

Hungry investors eye agriculture again Add to ...

With the world's population on the rise and a nascent economic recovery taking hold, analysts and industry insiders are once again turning their attention to the global food supply.

"A year ago at this time, we were [hearing about]a global food crisis. And what I would tell you is that that really hasn't gone away," William Doyle, chief executive officer of Potash Corp. of Saskatchewan Inc. , said during his fertilizer company's recent conference call.

"It's been overshadowed by the economic crisis and we can't seem to focus in on more than one thing at a time … the pressure on the food supply is just enormous."

It's a situation that investors should be paying close attention to, says National Bank Financial analyst Pierre Fournier, provided they are thinking long term.

"While recession-proof businesses do not exist, the agriculture sector has resisted much better than most," he said. "The long-term trend of growing demand for agriculture commodities, coupled with the pullback in prices from their 2008 highs, presents many opportunities for investors."

The drivers of growth

Mr. Fournier said there are five main trends driving growth in agriculture: The population is expected to stabilize around nine billion people by 2050, from the current 6.8 billion. Over all, the World Bank projects food demand to increase by 50 per cent by 2030. Meanwhile, the demand for biofuels has more than tripled to 77 billion litres. This is expected to hit 127 billion litres by 2017, according to the Food and Agriculture Organization of the United Nations.

The amount of farmland is decreasing. In 1950, there were 0.5 hectares of arable land per person. Today, the number is closer to .25 hectares. Fresh water is also under pressure. The UN estimates that groundwater is being used at a rate 4 per cent higher than it can be replenished. Grain reserves are low. In 2000, the world had enough stockpiled to last 111 days. Today, there is enough for about 54 days.

"The current slowdown will at best provide the world only a short respite from the challenge of having to meet growing demand for food with less farmland and water," he said.

"Investors should not only consider this downturn and market decline as an opportunity to increase their exposure to the agriculture sector on the cheap, but also reconfigure their general portfolios in order to take into account the new winners and losers created by the long-term trend of growing demand for agricultural commodities."

Input, output

Mr. Fournier recommends investors consider taking long positions in fertilizer companies and companies such as Monsanto Co. that provide hardier, genetically modified seeds.

"Using more fertilizer, GM seeds, farm equipment and agrichemicals are all crucial to improving crop yields, especially in the more crowded and more affluent developing world," he said.

Canada has some of the world's largest fertilizer companies for investors to consider, including Potash Corp. and Agrium Inc.

Bet the farm

With land a limited resource, there are opportunities to own property around the world that will produce valuable commodities. But the higher crop prices rise, Mr. Fournier warned, the more likely an investor is to lose the land to governments desperate to rein in costs. That's why he recommends sticking with stable countries, such as Canada and Australia.

"Investors could reduce their exposure to expropriation risk by purchasing a range of publicly listed companies involved in operating huge tracts of farmland, while excluding exposure to those operating in the poorer countries," he said.

Examples include Black Earth (a Swedish company that owns land in Ukraine and Russia) and Asian Bamboo (which owns land in China).

Canadian investors are also able to buy funds that are only open to Canadian citizens, which buy vast tracks of land in the prairies which they then lease back to farmers. Agcapita Partners LP, Assiniboia Capital Corp., Sprott Resources and Bonnefield Financial all offer exposure to farmland.

"When we started this whole thing it was an appreciation play," said Doug Emsley, president of Assiniboia Capital which owns the equivalent of Prince Edward Island in Saskatchewan farmland. "But then we started throwing off a nice yield as well, so in 2008 for example if you take the combined appreciation of the price plus the cash we're throwing off, it's 30 to 35 per cent that people are making on their investment."

Think outside the field

Producing food is one thing, producing safe food is another. That's why Mr. Fournier also suggests investors consider companies that monitor the food chain and ensure disease and contamination aren't introduced to consumers. The average number of food-borne disease outbreaks in the United States was 100 in the early 1990s, but that is now closer to 350.

"All this has focused attention on electronic tracking systems that can better assist with finding where a particular food originated and thus permitting authorities to organize quicker recalls of contaminated foods."

IBM Corp., Accenture Corp. and Motorola Inc. are all companies that are working on this technology, he said. Sysco Corp. is also a way to take advantage of food technology, he said, because it's sophisticated tracking systems are well developed.

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