I have been buying natural resources since 2001. Back then, commodity prices were the cheapest ever in the history of capitalism and tangibles were not on the radar screen of many investors (they still are not). Fast forward to early 2008, where prices of resources are heading to the heavens, money is starting to pour into the sector and investors are beginning to take notice of the boom. So, where do we go from here? It is my observation that the current bull-market is still in its early days and fundamentals indicate that we have a long way to go. Whether you look at food, water, energy or metals; the same story appears. Supply is failing to keep up with rising demand.
Food - Back in the summer of 2005, I recommended agriculture as a great opportunity. Since then, prices have risen but now we are beginning to see signs that agriculture production may have also peaked (Peak Food). There is mounting evidence that food production peaked in the 1990’s in several world regions. For example, South Asia has lost roughly 50% of its arable land due to soil degradation and China has seen a 27% irreversible loss of farmland. The Asian giant continues to lose roughly 2,500 square kilometers of arable land every year due to environmental issues and urbanization!
According to the UN’s Food and Agriculture Organization, currently 36 countries face food crisis and millions are at risk of starvation. As food becomes scarce, nations are scrambling to ensure supplies and they are trying their best to protect their populations from rising prices. Traditional food exporters such as Argentina, Russia, China, India, Egypt, Vietnam and Kazakhstan have imposed export limits or introduced heavy export taxes in order to prevent domestic inflation and social unrest. Already, we have seen riots over food in Mexico (Tortilla crisis), China, Indonesia, Haiti and the Philippines. If my assessment is correct, I suspect this is simply an appetizer with the main course to follow in the months ahead.
One of the reasons why food prices are rising is due to the changing diet in China. Today, the average Chinese eats a lot more meat and raising cattle is a lot more water intensive than growing grains (Figure 1). So, as more water is used up by the livestock industry, there is less available for agriculture production.
Source: FAO
Those of you who feel that food output will be increased easily should take note of the fact that agriculture is amongst the world’s greatest consumers of water, which is facing its own crisis. A fascinating recent report observes that worldwide, 70% of water is consumed by agriculture.
