Most investors are well aware of the existing bull market in precious metals, raw materials, and energy. But there is another aspect of the natural resources bull market that has just begun ... and has gone virtually unnoticed.
I’m talking about the bull market in food and agriculture. This bull market is being driven by the most fundamental concept of economics: supply and demand. Quite simply, the demand for agricultural products is overwhelming the supply. And this imbalance should continue for years to come, regardless of what happens in the broader economy.
For decades, food prices have been declining as scientists developed high-yield plant varieties and farmers implemented the latest improvements in equipment, pest management, and growth-promoting fertilizers. But the days of declining food prices appear to be over.
According to the International Food Policy Research Institute, the world has consumed more grain than we have harvested in seven of the last eight years. Currently, there is only 12 weeks worth of the world’s consumption of wheat and only eight weeks of corn remaining in stockpiles. And demand for these grains is rising by more than 30 million tons per year!
Predictably, this has had an impact on prices. In the past 12 months, corn and wheat prices are both up more than 50 percent, while soybeans, dairy, meat, and poultry are also on the rise. For the three months ending in October 2007, the price of food rose at roughly three times the rate of overall inflation.
Why Demand is Outstripping Supply
There are several key reasons why the demand for food and agricultural products is soaring.
First, the world’s population is exploding. There are simply more mouths to feed. It is estimated that the world’s daily caloric intake will increase from 17 trillion calories per day today to nearly 25 trillion in the next two decades.
But it is not just the number of people that counts. Even more important is what people are eating. As the economies of developing countries grow, the personal wealth of billions of people is also growing. In China, for example, the middle class is expected to grow from 100 million to 700 million people by 2020.
And as living standards improve, one of the first things to change is diet. With the money to buy more than just a plate of rice and cabbage, the populations in developing countries are putting more eggs, dairy, poultry and meat on the table.
So not only is the demand for protein going up, but so is the demand for grain, because more protein consumption requires more grains to feed the animals. In fact, it takes five to seven pounds of grain to produce just one pound of beef or pork.
The World Bank estimates that global grain production will have to climb by 50 percent and meat production by 85 percent to meet the projected global demand in the next 20 years.
Food vs. Fuel
But the increased demand for agricultural products does not just come from the dinner table. The emergence of biofuels has also caused a significant boom in demand.
In the U.S., there are currently more than 130 ethanol refineries that consume 27 percent of the U.S. corn crop, according to the USDA. An additional 80 plants are currently under construction. When all of these facilities are operating, ethanol will account for half of the U.S. corn harvest!
Now combine that number with the 43 percent of the crop that goes to feed livestock. That leaves just seven percent for food products. Talk about a squeeze play.
To add to the supply and demand imbalance, consider that changes in climate and inclement weather have severely decreased crop yields in crucial places. Drought in Canada, China, Europe, and Australia (suffering the worst drought in 1,000 years!) has also put significant pressure on world food supplies.

So what does this all mean?
Well, it means that over the long term, food prices are going up, up, up. That presents an investment opportunity and inflation hedge in itself. But it also means that any companies that help farmers produce more food, and do so more efficiently, will be very profitable investments in the coming decades.
And that will stand, no matter what happens to the global economy. After all, people may cut back on clothes and cars and gadgets, but they won’t stop eating.
And in most countries, with declines in soil fertility, dropping water tables, and competition from urban development, it is proving difficult to increase the amount of land suitable for farming. That means the best solution to the coming food crisis is for farmers to increase the yield they get from their existing land.
All of this translates into substantial long-term opportunities for the companies that grow, harvest, distribute; and service the global food supply.
Continued Tomorrow