Right now, the market is urgently trying to tell us something. In fact it’s been trying to tell us something for the last few years.
In the last decade or so we’ve seen regular bouts of record-busting food prices. This is the market’s way of warning us that our supply of the stuff is running low.
And as the global population grows and also becomes wealthier, demand for food will only keep rising.
Clearly, rising prices are bad news for consumers, and particularly for the world’s poor. But these price spikes aren’t entirely bad. In the long run, higher prices encourage farmers and food processors around the world to raise food production.
In turn, that’s going to mean a lot more money will be invested in boosting farm productivity. One region in particular looks likely to capture the lion’s share of the extra investment – Latin America.
Latin America: the perfect farmyard
My colleague Merryn Somerset Webb covered the reasons behind booming food prices in a recent Money Morning so I won’t repeat the argument here.
Suffice to say that growing populations and richer diets mean the world’s farmers will need to produce a lot more food in the future. And Latin America is the perfect place to do it.
The first essential in farming is that you need the right conditions to grow crops. Latin America has these in abundance.
Take South America. It’s divided between mountains, jungle, flatlands and coastal regions. This diversity is good for farmers because – aside from extremes such as Chile’s arid Atacama Desert or the frozen southern tip of Argentina – it means that almost anything can be grown there.
To the south, the cool slopes of the Andes provide the perfect conditions for wine production. To the east of the mountains, the temperate prairie-like pampas give Argentina, Brazil and Paraguay excellent land for rearing cattle and growing grains. Indeed, thanks to the pampas, Argentina and Brazil are two of the world’s ‘big six’ grain growers, and major livestock producers.
As you move north, towards the equator, the four seasons merge into two. This means farmers in Ecuador, Colombia, Venezuela and northern Brazil can plant two harvests per year.
Meanwhile, countries on the west coast benefit from the warm waters of the Pacific and have strong fisheries. Chile and Peru are both in the world’s top ten fish producers.
Once you reach Central America, the tropical climate provides the perfect conditions for sugar cane, coffee and tobacco.
Latin America’s farmers are still in second gear
Of course, Latin America isn’t the only place in the world with good farming conditions. The US, Eastern Europe, and Australasia are all major food exporters that help keep more densely populated areas – ie Asia – well stocked with food. The reason Latin America stands out is its potential to crank up production.
Victor M. Villalobos of the Inter-American Institute for Cooperation on Agriculture (IICA), says that Latin America has 42% of the world’s potential for agricultural production.
That’s a rather specific number, and I don’t see how anyone could work it out so exactly, but the IICA certainly comes out with strong reasons to back its view.
Firstly, Latin America still isn’t using all of its farmland. For example, the UN’s Food and Agriculture Organisation reckons that Brazil has the most ‘spare farmland’ in the world. The country has 350 million hectares of potential arable land, which isn’t currently being used to produce food.
In total, the World Bank estimates that about a third of the world’s spare farmland is in Latin America. Putting all that into production won’t be easy, but the region has the necessary resources to do it. Latin America also has just under a third of the world’s freshwater resources; more than any other region.
Moreover, as Villalobos notes, Latin American farmers have suffered “a great lag in the increase of yields” over the last 50 years. There are some highly productive farms in Argentina, Uruguay and Brazil, but many of the region’s farms rely on out-dated techniques and machinery.
The problem is that Latin American countries “invest little in R&D in agriculture”, says the IICA. But now, thanks to the generous prices on offer, and a more investor-friendly political atmosphere, that’s changing.
Farmers realise that “the rise in food prices will create opportunities for exporting countries”. For example, Latin America now supplies around a third of China’s agricultural imports. China’s economy may be slowing, but its population – and therefore appetite for agricultural imports – should continue to grow.
The winners in the Latin American agriculture boom
According to the IICA “the sectors that will benefit most are those that produce grains, oilseeds, dairy products [and] meat”. But what’s the best way for a British-based investor to profit?
Many unregulated firms offer the chance to buy a direct stake in Latin American farmland. But we’d steer clear. There are too many potential risks, from outright fraud to expropriation.
Fortunately there are other ‘direct’ ways to own land in Latin America. There are several large listed landowners, including Argentinian landowner Cresud (NASDAQ: CRESY). The firm’s holdings in Paraguay, Brazil and Argentina give it exposure to the wider regional story.
However, I’d be wary of the stock right now. For starters, Argentina’s current government picks fights with farmers when it thinks they’re making too much money. Cresud also has a big stake in a local real estate company that may struggle if the Argentinian economy heads into the recession that some predict.
A better way to get a stake in Latin American farmland would be Adecoagro (NYSE: AGRO) or BrasilAgro (US OTC: BRCPY). Both are well-run Brazilian grain producers that give foreign investors a rare ‘way in’ to Brazil’s growing agriculture sector. I’ll be taking a closer look at both in our New World email (formerly known as MoneyWeek Asia) – you can sign up for it free here.
But the best way in is through Chilean fertiliser-maker Sociedad Quimica y Minera de Chile (NYSE: SQM). Translated literally as Chemical and Mining Company of Chile, the firm mines for potassium in the plains of the Atacama Desert – the driest place on earth. It turns about 60% of what it digs up into types of fertiliser that get shipped around the world. The rest is used for lithium ion batteries or industrial chemicals.
At present only around 30% of sales go to Latin America, but that should rise as the region’s farmers start investing more in production. It’s JP Morgan analyst Lucas Ferreira’s “top pick” in the sector. As a way to play the agricultural boom across the whole region, it offers wider exposure than the land-based investments.
• This article is taken from the free investment email Money Morning. Sign up to Money Morning here .
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