The current letter from Jeremy Grantham addresses shortages in things like water, potash and topsoil. The title is Separating the Dangerous from the Merely Serious. To the extent that supply and demand matters (I think it does) it makes sense to invest in spaces where there is visibility for growing demand and questions about whether or not supply can keep up with demand.
This subject points to investing long term in things like water, food, infrastructure and the resources that provide all these things. This is a theme I've been writing about and more importantly implementing for clients for a long time.The key to this, and stated in the previous paragraph, is thinking long term. We have owned the PowerShares Water Portfolio since that fund started. It is a boring hold yet over it's life time it is up 28% versus 6% for the S&P 500 (neither figure included dividends). Market Vectors Agribusiness ETF (MOO), which is also a client holding, is up 25% since it's inception in 2007 versus an almost 12% decline for the S&P 500. You may draw a different conclusion but I believe these spaces have done better than the market because of the visibility for growing demand and the questions of supply constraints.
Back to the Grantham letter, I had a thought that I am still trying to sort out. Many of the shortages Grantham writes about will come, he believes, from warmer weather and less rain. If countries need rain to grow crops (seed modification and farming efficiencies notwithstanding) then maybe we should invest in places where it rains a lot?
Among other destinations this would include Canada which has a shockingly disproportionate amount of water, New Zealand, several countries in Asia and probably a couple of places in Africa. Here I am focusing on countries where they grow stuff. Does it rain in Tanzania? They grow stuff and just opened a stock market there--that is something to look into. There are of course other places.
If there is anything to this, Canada (for example) won't have to confront the consequences of a meaningful drought, I realize anything this is possible but the idea here is a sort of brainstorming process.
There are obviously plenty of ETFs and individual stocks to express this in a portfolio. Simple country funds would allow for capturing the benefit at the country level for this good fortune, niche funds would be a way to tap more directly into the theme and individual stocks would offer a way in to the narrowest part of the theme that I can think of which is the Asian plantation stocks. I would note that the Global X Farming ETF has at least 10% in small cap Asian plantations.
This is an evolving thought, hopefully more to come.
Congratulations for Cadel Evans for winning the Tour de France.
16 comments:
I read somewhere that only two countries have enough water to last aleast 200 based on population projects; Canada and Brazil. That research note also mentioned that Brazil would pretty much have to drain the amazon river to do it. Water is going to be a big big long term theme going forward.
I love the ag space and always looking for ideas here. You might look at existing farm infrastructure rather than rain in considering destination, Australia is obviously a key country which might get ruled out looking at it from a rain perspective.
Also remember that drought is one problem but too much water is another, just look at North Dakota every other year (or so it seems).
Olam on the Singapore exchange seems like an interesting way into some difficult to access frontier markets, ADR is olmiy.pk
I've started to think about this area to, prompted buy stuff you and Grantham have written. I have not yet decided how I want to attack this, nor what percentage I'd put toward that attack.
That said, a few random thoughts.
Canada may not have a water problem, but they have a temperature problem. Too cool up there for them to be a major crop player as far as I know. Fertilizer is a different story of course.
I thought it interesting that in Grantham's LAST letter, he was positing that when they looked at the risks for this year, there was just NO WAY that the weather could be as big a risk for agriculture this year as it was for last year. As he was saying this, the southern half of IL was buried in rain; some crops have been planted 3 times. Now, any farmer will tell you "this is an el nino year" but I've started to wonder if weather is "permanently" more random. Or something like that.
I like to invest in things I understand. I wonder about John Deere. I see more and more farmers AND more local/state government entities moving toward Deere equipment. It's the most expensive, but the idea is that it lasts longer and is more reliable. I was sitting out in my parents' yard talking farming with a bunch of guys a month ago, one of whom had spent in a year in China. I mentioned that China was a net grain importer now, and I couldn't understand why the Chinese government wasn't bringing in more U.S. farm equipment. There are obvious farm size and/or land ownership issues (average farm size in China is less than an acre) but one of the guys thinks it will happen eventually. He used Russia as an example. Apparently a couple of years ago, you literally could not buy John Deere equipment unless it was sitting on the dealer lot; you had to wait a year for any order. The reason? Russia was apparently on a crazy U.S. farm equipment buying binge.
Random fact, but it was interesting to me. Agriculture is the oldest profession but on the world level it's still a developing story.
Steven Drone,
I read several weeks ago that Monsanto had formed a joint venture with a Chinese firm. As you probably know, Monsanto is a leader in genetically modified crops. I wouldn't be surprised to see crop yields ramp up significantly over the next decade as China adopts modern farming practices. I think it could be a game changer. Maybe from net importer to next exporter? At least less dependent on U.S. crop prodution.
Roger,
You've written many times about holding MOO as a diversified ag play. Do you have any thoughts on SOIL as a pure play on worldwide fertilizer demand?
Here's more on SOIL:
http://seekingalpha.com/article/272650-global-x-debuts-soil-targeting-fertilizer-producers
anon 8:59 yes I have thought about that
well, more random thoughts...
I learned something today WH; thanks for the licensing info.
Most farmers here plant "triple stack" corn; corn that is roundup ready and resistant to corn borers and rootworms. This technology has to be licensed from Monsanto, which is why I've wondered about a side bet in Monsanto many times over the last few years before coming back to the knowledge that I'm a horrible stock picker.
I think China is permanently a net importer, simply because of their population. Did you know China raises 50% of the hogs in the world? I have no idea if their hog operations are as modern as U.S. operations are (modern U.S. hog operations are so clean I've wondered if they could get designated as kosher), but the numbers alone have forced them to import MASSIVE amounts of soybeans. They buy something like 50% of our soybean exports.
But on the corn front, the interesting thing about China is that most (almost all?) farms are these tiny family farms. We're talking 1/3 of an acre. if you're farming 1/3 of an acre, you can't afford to buy a bag of triple stack corn seed at over $100/bag, and you certainly can't buy a quarter-million dollar corn harvester. So the problem for China is, how do they allow people to have bigger farms? Does the government take the land back (they're ones that divvied it up) and parcel it out AGAIN? Do they start buying up land as the current generation dies, then sell it to farming "factories"?
How do they solve the dust bowl problems they are creating?
WH's note on the licensing made me do a google search, and the first link I found noted that china has widespread corn rootworm problems - which would certainly help account for a licensing deal for Monsanto technology.
Steven,
I have news for you, our amigos south of the border do not pay the same for genetic technology as U.S. farmers do. I highly doubt Chinese farmers will pay anything close to what U.S. farmers pay either.
Another interesting article from last week is that foreign buyers are now backing out of purchase contracts since commodity prices have come down. It is hard to make a living when the partner you deal with doesn't pay. By the way, I'm primarily from a cotton background. This is the sort of thing that can bring down farmer's marketing cooperatives (don't ask me how I know...sigh)
As for farm size, a 160 acre homestead was the norm here at one time. Sounds like I don't have to tell you the size of the typical farm now. I believe things will simply evolve.
Check out today's WSJ front page for discussion of farm subsidies. The farmer quoted doesn't want them any more and thinks small farms shouldn't be saved. That's where we are headed I think.
Thanks for contributing to an interesting discussion.
Sorry Stephen, I just realized I mispelled your name.
The section here starting on page 2 about Monsanto in Brazil is fascinating. I can't find info on what they pay, but it's interesting how quickly the technology gets into widespread use.
Sorry to use so much bandwidth today Roger. heheheh
Watching the final stage of the tour as I write. Luckily I know enough about the tour that I knew cadel won it at the time trial. Moving a motor home a lot does not go well with seeing the tour on time. Thank god these are my problems :)
Interesting comments today, but I think the continuing financial crisis will keep my focus. There are many more acts to play from the 2000 stock market bubble that will likely swamp these themes IMO. Although I will admit rogers focus on these themes will help him continue to out perform. Just not my approach.
1.) I'm midway through the Grantham letter and am about ready to jump out my window.
2.) Our host's originally posting was intriguing. Although I'm not sure Canada, for example, is an investment destination just because they have a ton of water. All the water in the world isn't going to help you farm in vast stretches of the Great White North. This type of mismatch among site/region-specific resources might be part of the overall problem.
3.) I've never heard of triple-stack corn, although I have heard of Roundup-ready corn. Overall, it has been several decades since my last stint detasseling seed corn.
4.) Mr. Drone, southern Illinois might be done with the floods. But ahh, you've got to love the sea of humidity there.
BillM
I can't help but wonder if the long-term Chinese strategy is to garner as much knowledge about new technologies (Deere, Apple, Monsanto....) and then in 20-30 years only support national companies. The Chinese seem to be beating the U.S. at capitalism these days but also maintaing enough central control to get things done. Compare that strategy to our debt problem in Washington and our complete lack of solution agreement.
Roger,
off water, into the fire. xle has hone much better than the other S&P sector. This reminds me the financials in 2007 that was doing much better. Would you lighten up energey?
Jeff from Milan, Italy
Jeff your orientation is much shorter than mine, I'd be shocked if I could add any value for you.
My decision to underweight financials stemmed from that sector's weight in the SPX being greater than 20% which is a warning of trouble (i've blogged and disclosed this dozens of times). Future decisions to reduce exposure was based on fundamentals at the time and disclosed along the way not because they outperformed for any short period of time.
Energy is currently 13% of the SPX and I've written about my long term belief in global demand. That XLE is up 10% percentage points better than the index is not by itself a reason for me to lighten up. Anytime an individual holding gets well ahead of itself (16% in seven months is not what I have in mind) I sell or if there is a change in the fundamentals I sell.
As I said, not much value for a trader.
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