Cash in on the Growing Demand for Food

Monday, 15 Aug 2011 04:55 PM

By Tom Hutchinson

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Much is said about the tremendous perils that exist in today's rapidly changing world. But, far less attention is paid to the enormous opportunities.

Perhaps the greatest challenge and opportunity of all is the most basic – feeding ourselves.

Food production and demand is a powerful megatrend unfolding on the world stage. The premise is simple – growth in the demand for food around the world is eclipsing the growth in food supply. And, people can't live without food.

Populations throughout the world are rising and living standards continue to rise in the world's most populated areas like China and India. These rising populations demand more and better food and put a strain on the world's food supply.

The United Nation estimates world population will grow by 1.2 billion people by 2020 at the same time caloric intake per average person is steeply rising.

As a result, the World Bank is projecting that worldwide demand for food will increase by 50 percent from current levels by 2030. At the same time, fresh water and arable land are becoming increasingly scarce.

All this has led to upward pressure on food prices as well as the urgent necessity to develop technological advances that will produce more and better food supplies.

These unmistakable trends underscore the tremendous opportunity available in agricultural stocks and commodities. But, the Daxglobal Agribusiness Index (a worldwide index of agriculture stocks) is currently priced well below its pre-financial crisis high.

Here are a few factors that should drive prices higher in the months and years ahead.

Inflation

Food and agricultural inputs (including seeds and fertilizer) are tangible goods that should maintain value during times of inflation. In addition to all the other dynamics in agriculture's favor, the sector is also an excellent hedge against inflation and falling dollar values.

Emerging Markets

Growing emerging market populations with increasingly Westernized appetites are the primary driver of worldwide food demand. Consider this, an increasing percentage of world food consumption is meat, which exponentially increases grain demand (It requires at least seven pounds of grain to produce one pound of beef protein). The World Bank estimates that worldwide meat demand will increase by 85 percent from current levels in the next 10 years alone, putting enormous pressure on the world's grain supply.

Biofuels

Biofuel production (which can include corn, maize, sugar cane or vegetable oil) has increased in recent years. This use of food to produce energy had gobbled up precious farmland desperately needed to produce food. In fact,

The World Bank recently sited bio fuel production as the primary reason for the steep rise in food prices.

Agriculture can be played as either an investment in commodities or stocks.

The PowerShares DB Agriculture Fund (NYSE: DBA) buys futures contracts on agricultural commodities (including corn, wheat, sugar and soybeans) and the Market Vectors Agribusiness ETF (NYSE: MOO) invests in stocks of some of the largest agricultural companies in the world.

Top positions include Canadian fertilizer and feed producer Potash Corp of Saskatchewan (NYSE: POT), seed and pesticide giant Monsanto (NYSE: MON), and farming equipment maker Deere and Co. (NYSE: DE).

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