A Special Announcement From The Daily Reckoning Australia
The February Edition of Diggers & Drillers is Now Online
Diggers and Drillers
How to Make 50% Per Year from the Upcoming Grain Shortage By Al Robinson
Dear Reader,
You might feel apprehensive about investing after what you’ve seen in share markets recently. That’s not a bad thing. Now is the time to be choosy. Only the best investments deserve a place in your portfolio this year, and timing will be very important. This month’s investment has both long-term business quality, and good timing.
Inside this Issue A Two-Pronged Revenue Offence By Al Robinson Page 3 The Risk of a Wheat Shortage By Gabriel André Page 5 Share Tip Updates Page 6 It’s an agricultural company with a global focus. It currently trades on the ASX at a 14% discount to its 2007 high. There are a number of reasons why I feel it’ll make up that gap this year, plus a lot more in the future.
Expensive food prices, for example, increase its earnings. Mandates for higher alternative energy use in the US increase its earnings. Even population growth alone adds to earnings.
Obviously, if it’s really so good, you probably don’t have long before it makes up that 17%. That’s why you’ve received February’s letter a little ahead of schedule. But before you dive into the company story, here’s a little background on what makes it so appealing.
A Universal Profit Trend
A grain shortfall is one broad trend that encompasses the entire human race. It's been a long time coming, as you may already know.
The International Grains Council estimates that in 2008, the residents of our fine planet will require 1.676 billion tonnes of grain, mostly for food and energy. The problem, as you can see below, is that we’ll probably only harvest 1.657 billion tonnes.
Grains Producers Playing Catch-Up
That brown worm is still languishing in the black worm’s dust. That means prices will have to adjust, in an upward motion. They’ll keep doing it as long as there’s a gap between brown and black.
That gap may look like it’s narrowing. But further down, we’ll explain a couple of factors that seem to be inevitably hoisting the brown worm out of the black worm’s reach.
Right now, the forecast inequality doesn’t mean that people will necessarily starve, or be forced to modify their cars into Flintstone-style running machines to avoid buying fuel. Institutional consumers have stocks on hand to cover the grain shortfall.
But the International Grains Council say those stocks will be at a five-year low in 2008. See the chart on page 3 for a visual. As these inventories fall, grain consumers will become more desperate to get their hands on soybeans, wheat and corn. They’ll be willing to offer higher prices to do it.
That’s the word from the professionals. But, like we said, resource investing is a long-term thing. It pays to look a little deeper than analysts’ one-year forecasts, to gain insight that others have glossed over. Indeed, the long-term trend is even more menacing.
Asia – The Hungriest Continent
According to London-based Standard Chartered Bank, pretty soon China's grain output just won't cut it. Within the next couple of years, China will probably become a net importer of grains. This has a lot to do with the population dynamic.
China occupies only 7% of the world map, but houses 20% of its inhabitants. That's another gap that just keeps widening. One block of land does not fall in love with another block, court it, marry, settle down, and raise a family. But Chinese people do exactly that. The stock of agricultural farmland is fixed, while the population it must support continues to explode.
Interestingly, higher incomes are directly affecting Chinese population growth. There, after you've had your first child, you have to fork out cash for the second. The government has historically used this as a form of population control. Safe sex pays more in China than anywhere else.
Traditionally, this restriction has worked, to a degree. But these days, the Big Red Machine is running at 11.5% growth per year. Now that people are making more money, people can afford to make more people. So they are. That's putting strain on the food supply, which is limited by the finite stock of land. Pretty soon, the rest of the world will be feeding China.
That's not even the biggest part of the problem. The United Nations expects India to pass China in the population stakes by 2030. Asia's population is growing rapidly, and higher populations means less arable land to farm on. More people... more housing... less area to grow food.
A New Investment for an Old Idea
The British economist Thomas Malthus phrased this problem formally over 200 hundred years ago. He was a pretty gloomy guy. Here's an extract from his Essay on the Principle of Population:
"The power of population is so superior to the power of the earth to produce subsistence for man that premature death must in some shape or other visit the human race. The vices of mankind are active and able ministers of depopulation. They are the precursors in the great army of destruction, and often finish the dreadful work themselves. But should they fail in this war of extermination, sickly seasons, epidemics, pestilence, and plague advance in terrific array, and sweep off their thousands and tens of thousands. Should success be still incomplete, gigantic inevitable famine stalks in the rear and with one mighty blow levels the population with the food of the world."
Ouch. So much for mankind.
But hold on...so far, we're still here...and the world's two largest nations are growing, not subsiding from horrific wars, pestilence or plague. What, then, is keeping us afloat in Malthus' treacherous sea of doom?
One common answer is innovation. We have our land. To get the best results out of it, human beings have slipped into the very commendable habit of innovating new technologies. Chemicals and new machines have vastly improved farming efficiency. Thus far, we've avoided that "one mighty blow".
The individuals or businesses that come up with the best of these technologies have a fair chance of ending up wealthy. Your objective this month is to book a financial ticket for a seat at the receiving end of some of that wealth.
Your Diggers and Drillers February stock tip specialises in adding to agricultural efficiency. They offer customers better crop yields, through chemical solutions. This business of agricultural value-adding stands to hold a massive premium in years to come...
