It might be a good time to invest in agricultural supply companies.
This is not obvious because the shares of many companies making fertilizer, herbicides and seed have already doubled or tripled in the last year.
But there could yet be more share appreciation.
That’s because the world’s growing food, feed, fibre and fuel needs will increasingly come from rising crop yields based on technology, not increased acreage.
Paul Schickler, president of Pioneer Hi-Bred, a DuPont company, in a speech to the U.S. Department of Agriculture Outlook Conference last week said that over the past decade there has been a 13 percent increase in world population, a 25 percent increase in meat consumption, a 59 percent increase in soybean consumption and a 62 percent increase in corn consumption, but only a four percent increase in area harvested.
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USDA’s August corn yield estimates are bearish
The yield estimates for wheat and soybeans were neutral to bullish, but these were largely a sideshow when compared with corn.
Clearly, yield increases based largely on improved seed have taken the place of acreage increases.
The trend must intensify if predictions come true of increasing grain demand for biofuel and to feed livestock for rising global meat consumption. To rely on acreage expansion would mean more farming on environmentally sensitive land and fierce competition for land between expanding urbanization and food production.
Vincent Andrews, head of agricultural products and packaged food for Morgan Stanley, one of the world’s largest investment banks, told the same USDA conference that there is an enormous potential to increase global yields.
Take corn, for example. The U.S. is the world leader in corn yield, producing a whopping 151 bushels per acre on average, thanks to hybrids, herbicide tolerance and insect resistance. Argentina is agriculturally advanced, but its average corn yield is only 111 bu. per acre. China, the world’s largest corn producer, averages 82.6 bu. South Africa, the largest producer in Africa, averages only 55 bu. per acre and India, expected to pass China as the world’s most populous country in about 25 years, averages 30 bu. per acre, about what the U.S. produced in the early 1940s.
If the world were at parity with current U.S. yield, there would be no worry about food inflation.
And U.S. corn yield is not a stationary target.
Rick Tolman of the U.S. National Corn Growers Association told the USDA conference that with molecular marking guiding breeding and new biotechnology traits, the trend of increasing yield is set to tilt higher, reaching a potential 300 bu. per acre by 2030, double today’s U.S. average.
All of this yield gain will be made possible by the innovation of companies such as Monsanto, Dow, Bayer and Syngenta while fertilizer companies like Potash Corp., Mosaic and Agrium will be there to provide the needed nutrients.
Many developing countries have been suspicious of biotechnology, but that wariness will likely weaken as the need to increase food production becomes a government priority.
That means more markets and more profits for the big seed and plant protection and nutrition companies.
The strong rally in grain prices early this week was fueled in part by worries over more bad weather in China.
Another series of blizzards with cold and snow was forecast for central regions this week, the same rapeseed production area hit hard a month ago.
In northern and northeastern China, a spring wheat production area, drought is the problem with rainfall 20 to 70 percent of normal this winter.
