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It takes about 5 to 7 pounds of grain to produce one pound of pork. Already, 70% of China's corn and soybean crops and 50% of its sweet-potato production go into feeding livestock. China's production of animal feeds has grown by an average of 18% a year since 1990.
No wonder China is on the verge of becoming a net importer of corn for the first time in a decade. China already accounts for 40% of global soybean imports. Half of the world's hogs live in China.
Crops for fuel, too
But this trend isn't limited to China. The World Bank estimates that global grain production will have to climb by nearly 50% and meat output by 85% between 2000 and 2030 to meet the projected global demand for food.That's a big enough challenge, but the world isn't just demanding grain for food. There's also the demand for corn for ethanol and soybeans for biodiesel. An energy bill recently passed by the U.S. House, for example, calls for an increase in ethanol production to 35 billion gallons by 2022 from 5 billion gallons a year today. The bill doesn't assume that all that ethanol would come from corn, but certainly the bulk would. A May 2007 report from the Iowa State University Center for Agricultural and Rural Development estimated that producing just 14 billion gallons of ethanol from corn a year would consume about 5 billion bushels of corn, or about 40% of the 2007-08 U.S. corn harvest.
My guess is that the world will somehow find a way to meet that projected demand. After all, it would require only a 1%-a-year increase in grain production over that 30-year period. But it certainly wouldn't be easy. As is the case with oil, where shortages of engineers, higher drilling costs, and political maneuvering have kept supply increases to a relative minimum, there are major constraints on increasing global grain supply.
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Adding to the net total of the world's arable land, for example, is likely to be extremely challenging. China feeds 22% of the world's population on just 7% of its farmland, but China has almost no way of expanding the area devoted to agriculture. Instead, the country is fighting to keep the farmland it has. Pollution, the rapid growth of China's cities and the country's growing deserts -- a result of attempts to farm marginal land -- are all reducing available farmland.
China isn't the only country facing a struggle to expand, or preserve, its acreage devoted to farming. In India, the states of Punjab and Haryana, which produce about 40% of India's wheat, are facing big declines in soil fertility and a sharply dropping water table.
Weather-related volatility
All this means tight supplies of grain for the foreseeable future. And tight supplies, we know from watching the behavior of oil prices over the past few years, result in increased volatility whenever a bit of bad news threatens supply.In the case of grain, that bad news usually comes in the form of weather. This year a bad wheat harvest in Australia, resulting from a drought that farmers have called the worst in 100 years, drove wheat prices to $9.61 a bushel in September. For context, wheat prices were about $3 a bushel in November 1998.
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Jubak's Journal: Bank on big grocery billsFood prices are booming as grain consumption outpaces production. One key way to increase agricultural supply and reduce prices is by improving seed technology. So if you want to profit from rising prices, notes MSN Money's Jim Jubak, your best bets may be seed companies.
Here's how I recommend that you invest in this long-term trend of rising prices and increased volatility in the agriculture and food-commodities sector:
- Pick five stocks that represent a core portfolio.
- Buy them when temporary volatility drives down the price of food commodities -- in the same way that you'd buy an oil stock when oil prices slumped for a few weeks or months.
- Hold on to your position as prices rise again.
- Buy more when prices slump again.
That is what you do with oil stocks, right?
I would recommend these five stocks as a core portfolio in this sector: Deere, Monsanto (MO, news, msgs), Potash of Saskatchewan (POT, news, msgs), DuPont (DD, news, msgs) and Syngenta (SYT, news, msgs).
Right now, the sector is closer to a peak than a slump, so I'd suggest waiting for weakness to build or add to positions.
Continued: Developments on past columns
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