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Farming equipment and grain silos are silhouetted against a setting sun near Farmingdale, Ill. (AP Photo/Seth Perlman, File/AP Photo/Seth Perlman, File)
Farming equipment and grain silos are silhouetted against a setting sun near Farmingdale, Ill. (AP Photo/Seth Perlman, File/AP Photo/Seth Perlman, File)

Investing

Agricultural innovation: where the money is Add to ...

This story starts with big numbers: 32% is how much larger Earth's population will be in 2050; 70% is how much more food we'll need to produce annually to feed everyone; 52 is the average number of kilograms of meat each human will eat annually by 2050; eight is the number of kilograms of grain it takes to produce one kilogram of beef; 14% is the average yearly return over the past decade of one index that tracks investments in U.S. farmland.

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By now, you're getting the picture: Investing in agriculture seems like a great idea. There are lots of ways to do it, but my thesis is that they're not all created equal. The best bet, I'll wager, is science.

Let's start, however, with the simplest option: You could buy your own farmland and rent it to a farmer. The trouble is, that's a cumbersome and illiquid investment. Vehicles such as the Regina-based Assiniboia Farmland Limited Partnership, highlighted in this column a few years ago, are more convenient. The LP invests in Saskatchewan farmland, and has paid nice distributions to investors every six months. There's also the prospect of capital gains if land prices rise.

One drawback of Assiniboia is that LP units aren't traded on exchanges. Another is that buyers are spending billions, in total, on farmland these days, which is driving up prices.

Slightly higher up the investment food chain are fertilizer makers such as Potash Corp., the subject of a ferocious and ultimately failed takeover bid by BHP Billiton last fall. Improved fertilizers will be indispensable as the pressure to increase crop yields climbs. Corn yields in the U.S. rose from 1.6 tonnes to 8.5 tonnes per hectare between 1930 and 2001, but increases have now slowed to a crawl. Potash and BHP, as well as Mosaic Co., Agrium Inc. and other manufacturers, will likely do well. The problem is that investing in fertilizer is now hardly a secret.

How about tractors and the like? Farm equipment makers and vendors, such as John Deere, might also thrive. But they're a derivative investment further beyond actual farming than fertilizer. Ditto for crop processors, like Viterra Inc., the grain handler, which will churn out more cash as grain prices rise.

If you can handle a little more risk in the hope of reaping more reward, the best long-term bet is companies that are deploying technology to raise crop yields. We'll need to grow more food on less total farmland worldwide to feed an expanded population. Only improved technology-whether it's considered natural or artificial-will solve the problem.

Giant multinationals such as Monsanto and Syngenta are obvious possible investments, but also controversial ones. However, there are many smaller options, too. A couple of years ago, I looked at a private company that makes absorbent polymers that could retain moisture in soil. These materials absorb water and slowly release it, and are used in diapers and sanitary napkins. Given the forecasts of global water shortages, the intellectual property alone could be very valuable.

Apart from being risky, investments in small companies are never easy to make. But they illustrate the point: Only powerful technologies will solve the food problem, and they will deliver the biggest rewards to the most risk-tolerant investors.

 

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