Over the last decade there has been a very close correlation between the price of crude oil and the price of food – both are in long term uptrends due to increasing global demand. Western agricultural practices require around 10 calories of oil or natural gas to produce one calorie of food according to studies.
Frank Holmes of U.S. Global Advisors pointed out last month that due to the drought in the U.S., Ukraine, and Russia the USDA’s global stock-to-use ratio for grains is now at a forty year low (see chart at right courtesy U.S. Global Advisors). Holmes’ comments on investment opportunities in the sector as follows:
We think the agricultural sector offers opportunity today. With 7 billion hungry people around the world, yields will need to increase on arable lands, benefitting certain processing, farming and agricultural companies. Feeding a growing global population means we need better fertilizers, mechanization and seed technologies to increase the production of grains on less arable soil.
Take a look at the USDA’s World Grain Supply today compared to previous decades. The stock-to-use ratio is one way of measuring supply and demand. It compares the “leftovers” to the total use of a commodity. You can see that the world grain stock-to-use ratio is at a low that we haven’t seen since the 1970s. In one of its research reports, BCA says that the implication is that the imbalance of supply and demand will “likely get resolved via a reacceleration in grain prices, which will encourage an aggressive planting program.” We believe this provides opportunity for global agricultural companies.
The Financial Times last month also published several striking charts depicting trends in the agricultural sector. The number of bushels per acre for the U.S. corn crop has been reduced to levels not seen in more than a decade as the drought cuts yields. Meanwhile corn, soy, and wheat prices have increased anywhere from 30% to 45% above year ago levels (charts courtesy Financial Times).
Harvest Capital Strategies also published several interesting charts of long term trends that are bullish for the sector. World population growth will drive demand upward, and the shift to higher calorific intakes in India and China and the move to more protein in the diet will keep demand for foodstuffs growing at an elevated rate.
Meanwhile the amount of arable land per person continues to decline, and the growth of crop yields has declined from historical rates. Charts courtesy Harvest Capital Strategies.
Global biofuel use also continues to expand, with roughly 40% of the U.S. corn crop being used as feedstock for ethanol production. Biofuel mandates will continue to drive demand in this sector.
Investment Implications. We continue to believe that long term trends in the global agricultural sector should reward companies and investors. Additional capital and resources will be needed to meet growing demand, and the market is driven by long term trends.
