Feeding China – MoneyWeek

ThiseconomicawakeningofChinahashadnowwell-known,butstillquiteextraordinary,effectsontheworldeconomy,andinparticularondemandforandhencethepricesofhardcommodities。

AsChinaurbanises,buildingfactories,infrastructureandhousing,itsconsumptionofsteelissoaring:evenin2003Chinaused258milliontonsofsteel。

Americausedlessthanhalfthat。

Thenthereisoil。

TheUSstillconsumesthreetimesasmuchoilasChina,butChinesedemandhasdoubledinthelastdecadeandiscreditedforthefactthattheoilpricehasnowsettledinthe$40-$50abarrelrangeagood$20abovewhereanalystsforecastittobeonlytwoyearsago。

Thenlookatcoal。

Whowouldeverhavethoughttherewouldbeasupply-and-demandmismatchforsomethingsofilthyandoldfashioned?

Wellthereis。

In2002,ChinadefinitivelyovertooktheUnitedStatesintermsofcoalconsumption,andnowuses800milliontonsofoilequivalentannuallytotheUS’s574million。

Theresult?

Lastyearpricesdoubled。

Today,thepricesofprettymucheverymetalorenergy-relatedcommodityyoucanthinkofistradingat,ornear,20-yearhighs。

China’snewlyvoraciousconsumersarealsogoingafterretailgoodswithavengeance。

LuxurygoodsfirmLVMHismakingakillingsellingoverpricedhandbagstothe25millionstrongmiddleclass,andtherearemoremobilephonesinChinathanintheUS(269millionto159million)。

ThesamegoesforTVsets(374millionto243million)。

Noneofthisshouldcomeasasurprise:associetiesgetwealthier,theyobviouslyupgradetheirconsumptionofthiskindofthing。

Butitisn’tjusthomeentertainmentsystemsthenewlyrichupgrade。

There’ssomethingelsetheChinesewant,whichyoumightnothaveheardsomuchabout:food。

Everyonewantsmoretoeat

Asacountry’swealthgrows,sotoodoesitsdemandformore,andforbetter,food。

“Whenpeoplehavemoremoneytospend,theyaddmorevarietyandmoreexpensiveandhigh-endfoodstotheirdiets,”saystheUnitedNationsFoodandAgricultureOrganisation。

“Thesechangesarereflectedinboththevolumeandthecompositionofworldtradeinagriculturalcommodities。

”Thisinturnaffectstheworldwidemarketsforsoftcommodities。

Toproduceonekilogramofbeeftakessevenkilogramsofgrain。

Soasaneconomyshiftsupthefoodscale,increasingitsper-capitaconsumptionofprotein,theamountsofrawmaterialsrequiredtosatisfydemandincreaseexponentially。

Today,Chinaistheworld’slargestconsumerofbothmeatandgrain。

ItalsouseduptwiceasmuchfertiliserastheUSin2004。

AndrisingdemandforfoodisnotjustaboutChina。

AccordingtothePopulationReferenceBureau(PRB),thepopulationsoftheworld’spoorestcountriesaresettogrowby55%inthenext50years。

IndiawillpassChinaastheworld’smostpopulouscountryandtheendresultwillbethataroundtheworldtherewillbeanextrathreebillionmouthstofeed。

That’salotofadditionaldemand,andmoredemandmeanshigherprices,unlesssupplyincreasesatthesamerate,oratlowercostsomethingthatreallydoesn’tlookverylikely。

Farmingisatoughbusiness

Chinamaybedemandingmorefood,buttheunfortunatetruthisthatitisproducinglessandless:itsgrainproductionhasfallen10%inthelastdecade。

Thisistheresultofanumberoffactors,notleasttheveryurbanisationthatisfuellingthedemand。

Asworkersmoveawayfromthefields,therearefewerworkerstogrowcrops,andwhilethemechanisationofagricultureisincreasing,itisnotmovingfastenough。

Sofarithasmanagedtoincreaseproductivityperheadsignificantly,butthefoodproducedperacreisstilllowerthanitwaspre-mechanisation。

Atthesametime,peasantsaremigratingandturningwhatwasoncefarminglandintosprawlingurbanareas。

Lessacreagethatislessefficientmeanslessfoodproduction。

LandisalsobeinglosttotheGobiDesertandbadorganisationinthenorthofthecountrythemainwheatgrowingareahasmeantthattheirrigationplansinplacearenotsufficienttokeepthelandfertile。

Last-minuteplansfordamshavecometoolatetopreventthecreepofdesertintowhatwasoncelushpastures。

Afinalfactoraffectingthenationalsupplyofcropsistheopeningupofinternationaltrade。

AlargenumberofChinesefarmershaverealisedthatmoreexpensivecrops,suchasapples,whichareexported,generatebetterprofitsthancheapcrops,suchaswheat,whicharesoldinternally。

Inthe1980s,theUSwastheworld’slargestproducerofapples。

Notanymore:ChinanowgrowsfourtimesasmanyastheUS。

Depressingly,itisn’tonlyChinathathasrecentlybeenexperiencingfallingfoodsupply。

EnvironmentalfactorshavemeantthatVietnam,PakistanandmostofthePacificRimhavewitnessedlower-than-expectedcropsrecently。

Pricesarealreadyonthemove

Likehardcommodities,softcommoditieshavespentmuchofthelast20yearsinanastybearmarket。

Buttherecentshiftinthesupply-and-demandsituationappearsfinallytohavekickedsomeofthemoutofit。

Sugarpriceshaverisen50%inthelastyear,livecattleprices10%sinceMarch2004,andthisweekcoffeepricesreachedfour-and-a-half-yearhighsinNewYork,andtwo-yearpeaksinLondon。

However,notallpriceshavemadetheirmoveyet。

Wheatisdown25%onthistimelastyear;corn,havingsoaredinmid-2004,hasnowfallenbackto10%belowlastyear’slevels;andsoybeanpriceshavefallenbyathirdfromlastMarch’shighs(thankstooverplantinginBrazil),withaslightrecoverythismonth。

Thegoodnewshereisthatsoft-commoditiesarestillcheap。

Takewheat。

Lastyear’scropof609millionwasthesecondlargestonrecord。

Butwheatstocksthesurplusamountofwheatinstorageareactuallyat30-yearlows。

ArecentUSDepartmentofAgriculturereportsuggestedthatpricepressureswillsoonstartbuilding,becausewheatstockshavenotbeendramaticallyrebuilt。

Grainconsumptionisexceedingproduction:inallofthelastfouryears,worldgrainproductionhasfallenshortofconsumption,forcingadrawdownofstocksnotonlyinwheat,butalsoincornandrice。

Andevenatprices50%abovelastyear’slevels,sugarisstillcheaporsosayscommoditiesguruJimRogers,inhisnewbookHotCommodities。

WorldsugarconsumptionhasbeenrisingsteadilyforadecadeChinaimportedmorethanamilliontonnesin2004,andthat’ssuretokeeprising。

WhywouldtheChinesemiddleclassturnouttobelesssusceptibleto“sodapop,icedtea,candycakesandotherpastries”thananyother,asksRogers。

Notetoothatyoucanturnsugarintoethanol,aperfectlygoodfuelsoaslongasoilpricesstayhigh,sugarpriceswillkeeprising。

Rogersisalsoagreatfanofcoffee。

Itspricehasbeen“inthecellar”foryearsandproductionhasfalleninresponse。

Thatmeansthatasdemandrises,whichitsurelywill(therearealreadyover100StarbucksoutletsinChina),thesupplywon’tbetheretomeetit。

That’sarecipeforaclassicbullmarket。

Makingmoneyoutoffood

NoneofthisistosuggestthatweareheadedforaMalthusianfamine,withrisingpopulationsandstarvation。

Technologywillprovide,asitusuallydoes。

Butitdoessuggestrisingpricesandtremendousopportunitiesforfoodproducersandbusinessesthatfeedintofoodproduction。

Sohowcanweinvest?

Thefirstanswerisbylookingtothefoodproducers,bothintermsofcountriesandindividualfirms。

Australiaisalreadyasubstantialexporterofcommoditiesofallkinds,andincreasinglyoffoodtoChina,andit’slikelyafreetradeagreementwillbesignedbetweenthetwocountrieslaterthisyear。

NewZealand,alongwithBrazilandArgentina,hasalreadysignedsuchanagreement,openingtheChinesemarket。

Brazil(theworld’slargestproducerofsugar)andArgentinaareplacestowatchbothhaveextensiveandextraordinarilyfertilefarmland。

Anotherareaforinvestorstoconsiderisfertiliser,aproductdirectlyaffectedbyworld-fooddemand。

Inordertomaximiselandproductivity,fertilisermustbeapplied,andbecausethereisafixedamountofarablelandandincreasingdemandforfood,eachacreisgoingtohavetoproducehigheryieldshencethebasicneedforfertilisers。

One-thirdofglobalgrainproductionisdirectlyattributabletofertiliseralready,butthatcaneasilygohigher:notethatin2003ChinauseddoubletheamountoffertiliserusedbytheUSAinanefforttogetgrainyieldsup。

Athirdoptionmightbetogetinatthemanufacturingendofthefoodchain。

Tocultivateland,heavymachineryisrequired。

Mostofthelargeagriculturalareasoftheworldarerapidlyupgradingtheirtechnologyinordertoincreaseproductivityandreducecosts。

TheSouthAmericanandAsianmarketsarebuyingtractorsandothermachineryassociatedwithfoodproductionandrefining,creatingnewmarketsforcompaniesthatmanufacturethesegoods,andboostingtheirlong-termshare-priceprospects。

Next,takealookatthelikesofKFCandPizzaHut:theyhavecaughttheimaginationoftheaspirationalmiddleclassesandnowsharethenumber-oneslotfor“casualdiningbrand”inChina。

Thishasbeenachievedbyexactlytailoringtheirproducttothelocalmarket。

Forexample,KFC,China’sbiggestchain,hasexpandedonitsfried-chickenstapleandconverted40%ofitsmenuitemstoChineseflavours。

FavouritemenuoptionsincludeSichuandicedchicken,completewithtinybitsofbone。

BothPizzaHutandKFCareownedbyNewYork-listedYum!

Brands(YUM)。

Overall,therearemanywaystotakeadvantageofthecomingboominfoodprices,butbelowwe’vetakenalookattheeightbestwaystogetinviatheequitymarket。

Theyshouldallbereasonablelong-termbets。

Howtoplaytheboominfoodprices

BungeIfyouwanttoinvestintheChinafoodstory,thereisnoeasierwaythantobuysharesinNewYork-listedBunge(BG),saysDanDenninginStrategicInvestment。

“Bungeisengagedinaneasy-to-understandbusiness:ithelpsfeedtheworld,andmakesaprofitatdoingit。

”Itisaglobalagribusinessandfoodfirmwithintegratedoperations(dividedintothreedivisionsagribusiness,fertiliser,andfoodproducts)that“stretchfromthefarmfieldtotheretailshelfandcircletheglobe”,capturing,inthefirm’sownwords,“valuewhereveritappearsonthefoodproductionchain。



Bungeistheworld’slargestoilseed-processingcompany,thelargestproducerandsupplieroffertiliserstofarmersinSouthAmerica,andtheworld’sleadingsellerofbottledvegetableoiltoconsumers。

Ithasastrongpositionineverymarketitoperatesinandcannotfailtobenefitfromrisingdemandforfood。

Sipef

Anotherwaytobuyintothefoodmarketistodosoviacompaniesthatownplantationsandotheragriculturalland,saysSvenLorenzinTheSovereignSociety。

Sipef(SIFB。

BR),listedontheBrusselsstockexchange,isafineexample。

ItsfullnameisSocieteInternationaledePlantationsetdeFinance,anditwassetupwiththeprincipalaimofpromotingandmanagingplantationcompaniesthatwouldoperateinbothtropicalandsub-tropicalareas。

Sincethen,thecompanyhasdevelopedintoasmallagro-conglomeratewithplantationsinAfrica,Asia,Oceania,andSouthAmerica。

Uptothe1970s,ithadmostlybeenharvestingrubber。

Sincethen,thefirmhasdiversifiedintooilpalm,tea,bananas,pineapples,ornamentalplants,guava,palmhearts,andpepper。

Thecompany’sestatescurrentlystandat62,000hectares。

ItalsoownssomerealestateintheUSanditoperatesasmallinsurancecompany,butbasicallythefirmisaplayontherisingpriceoffoodcommodities,andagoodoneatthat。

Between2001and2003,Sipefgrewitsrevenuesfrome91。

6mtoe127m,cashflowwentfrom-e7。

04mtoe6。

91m,whileprofitsrosefrom-e0。

5mtoe8。

15m。

Earningspersharerosefrom-e0。

70toahealthy-soundinge11。

51。

Pricesforpalmoilhaverisensubstantially,andSipefreportedstrongdemandfromChina,aswellasfromIndiaandPakistan。

Whenpriceswererunninghigh,thecompanymadeadvancesalesofagoodportionoftheharvestexpecteduptomid-2004,anditisthereforelikelythat2004willprovetohavebeenanotherbumperyearforthecompany。

Withap/eofjustoverten,theshareslookcheap。

Cresud

Cresud(CRESY)is“theverybestinvestmentontheplanetrightnow,”saysSteveSjuggerudinStansberryAssociates’TrueWealth。

ThefirmisanArgentinereal-estateconglomerate,publiclytradedonNasdaq,whichholds“incrediblereal-estateassetsatverycheapprices,withwhatamountstozerodebt,tradingforasmallfractionofwhatitwilllikelybeworthsoon”:itisthelargestrurallandownerinArgentina,andwellplacedtobenefitfromtheChinastory。

Thereisawordofcautionthough:thestockishardtobuyasitisonlyvaluedat$150manditdoesn’ttrademuch。

Sjuggerudsaysthat,“whenyoubuy,usealimitorder。

Donotuseamarketorderwhoknowswhatpriceyou’llget。

Buyupto$15pershare。

”Butthendon’tbegreedy。

Whenthepricegetsto$25,sell。

Agrium

Themoreproteinpeopleeat,themorefertilisertheworldisgoingtoneed,saystheUSeditionoftheFleetStreetLetter。

AccordingtotheUnitedStatesDepartmentofAgriculture(USDA),“every$1spentonfertilisersreturnsalmost$3incrops”。

ThatmakesAgrium(NYSE:AGU)agoodbuy。

Thefirmisaglobalproduceroffertilisers,operating14productionfacilitiesinNorthAmericaandoneinArgentina(viaajointventure)。

About70%ofitsproductionisforuseintheNorthAmericanmarketandtheremainderisproducedforinternationalmarkets,inparticularAsia,Australia,SouthAmericaandSouthAfrica。

Inadditiontoitsfertiliserbusiness,Agriumistheonlycompanyofitskindthatalsorunsaretailoperation。

ItisoneofthelargestintheUS,with206farmcentresthereandanother18inArgentina。

Thebulkofthecompany’sbusinessisbasedonfertilisers,buttheretailsectorsmakeupabout40%ofbothsalesandprofits。

Agrium’scurrentp/eis11-12,whichisrightatthebottomendofitshistoricrange,andmakesthecompanylookunusuallycheap。

Pilgrim’sPrideandTysonTwostraightfoodplaysthatcouldmakegainsfromrisingglobaldemandforfoodarePilgrim’sPride(NYSE:PPC)andTyson(NYSE:TSN)。

Lastyear,Pilgrim’sPridegrappledwithaloss-makingacquisition,butnowappearstohavesortedthingsout。

Sharesinthispoultryprocessorhaverisen39%inthelastninemonthsand“havefurthertoclimb”,saysSmartMoneymagazine。

AnotherfoodstocklistedintheUSisTyson,which,initsownwords,“offersadeliciousvarietyofqualitychicken,beefandporkproductsthatarepackedwiththeproteinyouneedtokeepyougoingstrong”。

Bothtradeonp/esof15。

DeereCompanyandCaterpillar

TotakeadvantageoftheChinese-foodphenomenonfromitsearlieststages,considerinvestinginthemachinerythatfarmstheland。

TwopossiblestocksareDeereCompany(NYSE:DE)andCaterpillar(NYSE:CAT)。

Earlierthismonth,Dailyreckoning。

co。

ukarguedthat,“whilestocksformostcompaniesgodownduringacommoditybullmarket,companiesconnectedtothecommoditiesbusinesssuchasmanufacturersofheavymachineryusedinagriculture,suchasJohnDeereandCaterpillararelikelytodowell”。

JohnDeerehasalreadyseena30%increaseinearnings,withan18%increaseinrevenueinthefirstquarter。

Itssharepricehasseenfluctuationsoverthelastyear,butasdemandforfoodincreasesandefficiencycomesintoplay,moremachinerywillberequired,andDeereareinapositiontoprovideit。

FundsandspreadbetFinally,thosewhowantdirectexposuretosoftcommoditiesandarepreparedtotakemoreriskthantheywouldwiththeequitiesmentionedabovecanspreadbetonthepricesofeverythingfromsugartoporkbellieswithfirmssuchasIGIndex(www。

igindex。

co。

uk)andFinspreads(www。

finspreads。

com)。

Thoselookingtodiversifyacrossarangeofcommoditiescouldconsiderafund。

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