Food-crunch 'fix' won't work

These subsidies helped produce the current crisis. Governments kept food prices artificially low in order to buy political stability, but those low prices discouraged farmers in these countries from expanding production. At the same time, the cost of these subsidies was so great that it soaked up much of the money that these governments might have otherwise invested in agriculture. In Indonesia, for example, about 40% of the government's spending on agriculture went to subsidies.

Not that these governments felt an urgent need to invest in expanding agricultural production. The Green Revolution of the 1960s and 1970s, which employed improved varieties of seed and an increase in the application of agricultural chemicals to increase food production, had made countries such as India self-sufficient in grain production. Many of these developing economies used that agricultural success as a springboard to rapid industrial development, and attracting new manufacturing industries became the goal of economic-development plans. Agriculture was neglected.

You can see the results in a slowdown in the growth of agricultural productivity. In the Asian and Pacific regions, labor productivity on farms grew by an annual 2.5% in the 1980s and 2.2% in the 1990s, according to the United Nations. From 2000 to 2002, the growth rate dropped to 1%.

The current crisis is slowly refocusing developing countries' governments on the need to increase agricultural productivity again. There's nothing like having to pay $700 a ton for rice, as the Philippine government has had to do recently to meet domestic demand, to focus the mind. The government has said investments in the rice-farming sector will enable the country to increase rice production by 7% in 2008.

Quick fixes, long-term headaches

In the short run, these countries know what to do -- and that what they have to do isn't all that difficult. They have to increase the amount of credit available to farmers so they can buy more fertilizer, better seeds and better equipment. In its March 2008 budget, for example, India's government promised to "forgive" $15 billion in loans taken out by small farmers. The United Nations projects that measures already under way will raise global rice production by about 2% in 2008.

So in the short run -- we're talking about a decade or so -- the world will need more and more fertilizer. Investors should make sure they own shares of Potash, Mosaic (MOS, news, msgs), CF Industries Holdings (CF, news, msgs), Agrium (AGU, news, msgs), Terra Industries (TRA, news, msgs) and its majority-owned limited partnership Terra Nitrogen (TNH, news, msgs), and Yara International (YARIY, news, msgs). Soybean processing giant Bunge (BG, news, msgs) also has a substantial fertilizer business in South America.

In the longer run, the challenge is much tougher because the limits of current agricultural technology are already in sight. China, for example, uses about three times as much fertilizer per acre as the global average. Applying more to Chinese farms won't produce bigger crops but merely add to the country's appalling water pollution. The rest of the developed world can increase fertilizer use toward Chinese levels, of course, but this isn't a permanent solution for a world where God isn't making more farmland and yet men and women continue to make new mouths to feed, creating a demand for more and better food.

• Counterpoint: Beware the next bubble

It just buys time for a long-run solution that will require a new green revolution. The technology for that -- improved conventional plant breeding and new genetic techniques that enable scientists to insert desirable traits into plants -- is already at work at companies such as Monsanto, Syngenta (SYT, news, msgs) and DuPont (DD, news, msgs). Recent announcements from Monsanto and DuPont put higher-yielding seeds for critical crops such as soybeans on the market in 2012 -- if everything works as projected. Getting these new varieties into global production wouldn't happen overnight, of course.

For make no mistake, some of what comes out of the labs at a Monsanto or a DuPont is and will be controversial. The European Union, for example, has taken a strict stance against genetically modified organisms, and there's no telling where other governments will come down on seeds that don't yet exist outside the lab in the midst of a food crisis that is still unfolding.

And there's a good possibility that the current system of industrial agriculture as practiced in the developed world isn't sustainable as oil prices climb and oil supplies dwindle. It takes about 4,600 calories of fossil fuel to grow, chill, wash, package and ship a 1-pound box of salad greens -- about 80 calories of food -- from California to New York, for example. Asking how long that can go on is a legitimate question.

For more on the energy costs of industrial agriculture, see Michael Pollan's book "The Omnivore's Dilemma." For information on the heavy-handed way that Monsanto uses the legal system to intimidate farmers to enforce its intellectual-property rights, see "Monsanto's Harvest of Fear" by Donald L. Barlett and James B. Steele in the May 2008 issue of Vanity Fair. (As always in Jubak's Journal, I assume that investors are adults able to decide the ethics of putting money into a specific stock or company on their own.)

Seed money

Maybe an agriculture based on chemical fertilizers and genetic manipulation of plants isn't a long-term solution either. Maybe all it will do is buy time to find a better solution a decade or more from now. Fair enough. A decade's worth of gains is enough for most investors, I'd guess.

From a purely investing angle, the problem with these stocks is that they haven't dipped with the rest of the market. In fact, they've been the strongest group during the pullback from the October 2007 highs. That either makes them a great investment -- they'll go up if the rest of the market retreats again -- or a risky bet in the short term, because if this market does experience another major down leg before bottoming, they might be among those stocks that investors sell off most strongly.

I have spent the past three months looking for a break in these stocks, a dip no matter how short-lived, to use as a buying opportunity. I saw a brief one last week in Monsanto when the stock sold off for two days after the company announced spectacularly good earnings. I guess some investors decided to sell because the best news was out there. But the dip didn't last long. Apparently there were plenty of investors just waiting, like me, to buy on any weakness, and the stock bounced back before I could get this column posted.

I'm going to keep waiting because I believe that the current rally is a temporary interruption in a longer downtrend in the broader market. If you see Monsanto drop $7 in a day again, though, you might want to pick up some shares.

I'll forgive you if you don't wait for me.

Continued: Developments on a past column 

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