AGRI-FOOD THOUGHTS by Ned W. Schmidt, CFA, CEBS Schmidt Management Company October 16, 2007
Imagine owning a company where consumers have no choice but to buy the firm's product. Consumers have no choice but to buy food. The choice is not between a new cell phone or food. Consumers buy their food first, and then consider other products. Despite the nonsense put out by economists at the Federal Reserve and other centers of misinformation, food and energy are the most important components of the consumers' spending basket. And, the wallets of about two billion consumers are being filled by economic growth in China and India. They are spending that money on improving and increasing their consumption of food. That spending is benefiting all in the Agri-Food value chain.
As the chart shows, consumption of all the major grains has increased. In total, global annual consumption of just these four grains increased by 80 million tonnes in five years. Remember, this higher demand must be satisfied by Agri-Food production that is constrained on the supply side. Agri-Food production is not like a factory. We can not just turn a dial and increase production. The ability of the globe to produce Agri-Foods is constrained by the total amount of productive farm land. In the past five years the United States, for example, lost 10 million acres of farm land. Europe has moved to eliminate any farm land set aside, and will be planting essentially all available farm land in the next year. Higher demand up against constrained supply means higher prices and higher profits. Agri-Food industry participants are benefiting and will benefit from a structural investment cycle of more than a decade in duration. Is your portfolio ready for the Agri-Food cycle?
