Five ways to profit from the new agriculture revolution
In the 1960s, new agricultural technology tripled crop yields. Now there is a second green revolution going on. Eoin Gleeson looks at the latest developments – and tips the five best ways to profit.
There is a second green revolution going on in agriculture. Eoin Gleeson looks at the latest developments and how to buy a stake in their future.
On 26 February last year, the Svalbard Global Seed Vault opened for business. Built by the Norwegian government on a remote outcrop of the Svalbard Archipelago, the underground complex was designed to preserve hundreds of thousands of seed types from across the globe. For months, ships from more than 100 countries docked to unload millions of seeds of remarkable diversity more than 200,000 strains of wheat and 30,000 of corn are locked in a chamber deep beneath the Arctic tundra.
The Svalbard vault is a last line of defence for international seed banks. It's a sort of central bank for crops one built to withstand a nuclear attack. The idea is that as national seed banks are run down in the wake of crop-destroying events, such as typhoons and mudslides, governments can rely on having their reserves replenished.
Try 6 free issues of MoneyWeek today
Get unparalleled financial insight, analysis and expert opinion you can profit from.
Sign up for MoneyWeek’s free twice-daily newsletter.
Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.
Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.
The Doomsday vault
But the vault is also a testament to the problems global agriculture faces. The US Census Bureau estimates that the global population is growing by 75 million people a year. In the early 20th century, farmers could keep pace with population growth by clearing vast tracts of forest and prairie to use as farmland. When the world began running short of new arable land, farmers found ways to increase harvests. In the 1960s, crop yields tripled with the adoption of new crop varieties, irrigation, fertiliser and pesticides, unleashing a 'green revolution'.
That revolution is over. The world population has doubled to seven billion since the 1960s. But from 1990 to 2007, global agricultural productivity fell by around 1.1% a year. In India's wheat-growing regions, pesticides and fertiliser run-off have polluted up to 40% of the available water supply. In China, over-use of fertiliser has turned half the country into a dustbowl. In 2007, this pressure on the food chain reached breaking point. As a mania for developing ethanol as biofuel took hold, the price of corn was driven to $8 a bushel, sparking food riots from Haiti to Bangladesh.
But hard lessons are being learned. The Svalbard vault is a start. The seeds kept there will be used to genetically engineer new crop varieties that can prosper in the most abject drought and pest-ridden environments. The already widespread adoption of genetically modified (GM) crops in the US has helped alleviate fears of a peak in crop yield. Meanwhile, governments in developing countries are funding huge irrigation projects to improve farming quality. Burned by their experiment with ethanol, governments and big oil are developing a new generation of biofuels that won't tip the world into mayhem when mass manufactured. What we are seeing now is the start of a second green revolution.
Genetically modified crops
Last month, many people celebrated the life of Norman Borlaug. The Iowa-born plant scientist, who led the green revolution, died at the age of 95 on 12 September. His career as a globe-trotting crop scientist began in 1944, when he left a steady job at Dupont to develop new strains of wheat that might stave off famine in poverty-stricken Mexico. After ten years stooped in baking Mexican grain fields, Borlaug developed a strain of wheat that, when properly charged with water and fertiliser, tripled crop yields. By 1956, Borlaug's short- and strong-stemmed wheat had helped Mexico double production, making it self-sufficient. His wheat later swept across India, raising yields from 12 million tonnes in 1965 to 20 million by 1970, according to The Economist.
It's a romantic story a lone scientist, tirelessly moving between poor countries to bring hope to impoverished farmers. And the advances in farming techniques he inspired saved many from famine. But there are serious limits to this type of farming. It has made farmers in much of the world dependent on fertiliser, pesticides and costly equipment. As the price of these has risen, small farmers have been edged out by big agribusinesses. These produce tracts of monoculture crops that are horribly prone to pests and diseases unless sprayed with vast amounts of pesticide.
Borlaug had a solution a 'gene revolution'. He recognised that GM seeds could achieve in weeks what had taken him a decade of hard toil. And we are well past the stage of experimentation with GM crops 95% of US sugar beet is now engineered to resist herbicide, notes Paul Voosen in The New York Times. GM pioneer Monsanto predicts that the yield from maize grown in the US, which has doubled since 1970, can double again by 2030. Cropnosis, an industry consultant, says the market for agricultural biotech grew from about $3bn in 2001 to over $6bn in 2006, and is expected to hit $8.4bn by 2011.
In the West, the biggest obstacle to the spread of GM crops is legislation. Europe continues to rebuff efforts by biotech firms to boost yields because of concerns that they may contaminate nearby crops, or lead to a reduction in biodiversity. Borlaug dismissed such fears, believing the risks were unproven by science.
But even if GM crops are given free rein in the developing world, farmers may struggle to pay for the seeds. Pest-resistant GM cotton is already grown across India and China. But farmers struggling for credit have been cutting back even on the bare essentials. Fertiliser demand underwent a 50-year slump in the year to June. When demand for crops begins to recover, it will be potash and phosphate fertilisers (see below), rather than GM crops, that farmers buy first.
Irrigation
All farmers are to some extent hostages to the weather, but India's 235 million farmers are more vulnerable than most. Without proper irrigation, 60% of the country's cropland is entirely dependent on rainfall, and monsoon rains are vital. In May, the Meteorological Department forecast that rainfall this year would be 93% of normal levels. But when a major storm hit the Bay of Bengal in June, it disrupted monsoon season 44% less rain fell than usual. More than half of the country's 600 districts are struggling with drought, says The Economist.
Meanwhile, decades of over-pumping from underground supplies have left many rural wells dry. In the 1970s, affordable water pumps allowed farmers to pump water from local boreholes to water their crops. India is now the world's biggest user of groundwater, with 20 million boreholes providing for 60% of its irrigated land. But without expensive maintenance to prevent siltation in reservoirs and leakage from canals, dams and irrigation wells, a huge amount of scarce water is being wasted. India loses the equivalent of two-thirds of the new storage it builds each year.
It's the same story in China. Humidity in the Bay of Bengal is the major rain source for China too and the storm this year has spread drought across the country this year. Groundwater provides irrigation for some 40% of China's agricultural land, according to Nina Brooks of the Arlington Institute. Underground acquifiers are especially important in the arid North. But less than half of this water reaches the intended soil. The rest disappears via evaporation and leaks in the neglected water system. And 53% of China's arable land lacks basic irrigation facilities, according to Xinhua News Agency. There's a real need for Asian governments to spend billions of dollars modernising irrigation systems, reckons the UN.
The good news is this is now happening. While spending on irrigation fell last year as credit tightened, governments and power groups have stepped in to fund huge water diversion projects. China is continuing its $62bn scheme to divert billions of tons of water from its central and southern regions to the northern provinces. Beijing has also promised $12.6bn in aid for its struggling farmers and will spend $2.9bn on rural water conservation under its stimulus plan, says the Associated Press.
Meanwhile, India-focused Jain Irrigation Systems, the world's second-largest irrigation firm, expects profits to double this year as a result of a 30%-50% jump in sales of its drip-irrigation products. These 'micro-irrigation' systems conserve water by letting it drip slowly from shallow tubes to the roots of plants, rather than flooding fields.
Irrigation isn't a long-term fix. You can't irrigate huge regions of farmland if you don't have the water to begin with. But it's the kind of medium-term fix that governments can really get behind, says Jim Jubak on MSN Money. We have a look at two interesting plays below.
Sustainable biofuels
Sometimes it pays to sit and watch. As George Bush was heralding ethanol as the cure for America's oil addiction, a sceptical Chinese government chose to wait. Beijing watched as scores of Midwest farmers diverted crops to ethanol production and paid particular attention when the price of corn quadrupled to $8 a bushel. That's when they decided that this was not the alternative fuel for them. So they started developing methanol instead a clear, liquid alcohol made from coal. Already taxi and bus fleets in China's major cities run on methanol blends, with demand growing at a pace of 15%-20% a year, according to Dave McCaskill of Chemical Market Associates.
The ethanol craze illustrates that a biofuel is only as good as its feedstock. The use of corn and sugar in fuels drove up the cost of food by 75% worldwide, says the World Bank. In the aftermath, scientists have rushed to test a bewildering range of feedstocks so as not to repeat the mistake. Experts think the 300,000 acres of poppies in Afghanistan, for instance, could produce 100,000 tons of biodiesel a poppy seed biodiesel plant is already running in Tasmania. And several garbage-to-ethanol facilities have already been approved in Canada and America.
In fact, we've already seen three generations of feedstock used for biofuels. The first generation consisted of other food crops, which disrupted the global food supply. The second generation solved the food problem, but used up too much precious arable land these included switchgrass and miscanthus. Scaling up these feedstocks is problematic because of high water and fertiliser inputs.
Third-generation biofuels address both of these problems. Most promising is pond scum. Algae's photosynthetic cells produce an oily goo that can be converted into advanced biofuels. They have several key traits that make them a desirable energy source, according to Amanda Leigh Mascarelli in the science journal Nature. They can be grown on non-agricultural land in a fraction of the area needed by conventional crops, such as corn and soybeans. The algae also capture carbon dioxide and can thrive in domestic waste or salt water.
The economic downturn has thwarted a number of firms that were close to building their first algae processing plants. But earlier this year ExxonMobil announced a $600m foray into the sector. The partnership with Exxon and, more recently, Dow Chemical, will go a long way to supporting a select group of algae firms. "This is the equivalent of the Queen's blessing," as Nick Hodge of Green Chip Review puts it. According to a recent report by Pick Research, algae-based biodiesel should be commercially viable by 2012. Investments in advanced biofuel processing plants will have reached $3.2bn by then, say Pick. We look at one algae newcomer below.
The most promising plays
It's been a gut-wrenching year for farmers amid falling profits, a total lack of credit and grim weather. That has hurt GM seed groups as farmers cut back on buying their seeds. Monsanto has just reported an overall quarterly loss of $233m. And its rival, Syngenta (NYSE: SYT), has fallen with it. But these pressures are easing. Grain prices have stabilised and farm profits are rising again as input costs have fallen. Syngenta's largest source of income is in crop protection from herbicides to insecticides. But it is also the third-biggest seed producer, with a 10% share of the market. Syngenta's proprietary triple stack corn seed (seeds with three favourable traits built in) has just got approval from the US Environmental Protection Agency and could be a huge revenue earner. With volumes of its herbicides picking up, it looks a good bet on a forward p/e of 13.7.
But when it comes to boosting yield in the short term, we prefer fertiliser stocks. Potash Corp (NYSE: POT) remains a favourite play on recovering fertiliser demand. It's up 40% since we tipped it in March, but has a stranglehold on the supply of this critical fertiliser and still looks worth buying.
Another key ingredient for fertiliser is phosphate. Aim-listed Sunkar Resources (Aim: SKR) plans to source this raw material from the 800 million tonne Chilisai phosphate project in Kazakhstan. The stock jumped recently after reporting that pilot plant tests support commercial development of the project. Chilisai should be able to produce phosphate for $120 a tonne and sell it for more than $300, says James Crux in Growth Company Investor. Phosphate sold for $1,200 in the boom years. Sunkar is set to produce 1.2 million tonnes of raw material this year, yielding 600,000 tonnes of phosphate. Crux notes that revenues of $8m this year are expected to hit $67m next year and $228m in 2012, with a $10.5m profit seen next year.
Amiad Filtration (LSE: AFS) makes water filtration products for municipal water-treatment plants and for irrigation. The group is benefiting from government spending on infrastructure pre-tax profits came in at $5.7m for the first six months of this year, despite weakness in its irrigation unit. Amiad is targeting India as its main area of growth for the year ahead and will rebound strongly once Indian, Japanese and Chinese farmers secure credit for irrigation systems. The £30m company is valued on a forward p/e of 7.7 and pays a 3.2% dividend.
There is still much work to be done before algae biofuel is viable on a commercial scale. But OriginOil (OTC BB: OOIL) could play a big part in getting there, says Nick Hodge of Green Chip Review. Most processes rely on harvesting the algae for their oil and waiting for a fresh batch to grow. Origin instead uses electrical pulses to get at oil inside algae without killing them, leaving them alive to produce more oil. This low-tech solution is cheaper than growing genetically engineered algae and could save 90% of the energy used in traditional methods. There's no doubt that it's highly speculative. But it looks a good play on what is currently the most viable-looking biofuel in development.
This article was originally published in MoneyWeek magazine issue number 457 on 16 October 2009, and was available exclusively to magazine subscribers. To read more articles like this, ensure you don't miss a thing, and get instant access to all our premium content, subscribe to MoneyWeek magazine now and get your first three issues free.
Join more than 165,000 subscribers and keep yourself informed with the latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.
Eoin came to MoneyWeek in 2006 having graduated with a MLitt in economics from Trinity College, Dublin. He taught economic history for two years at Trinity, while researching a thesis on how herd behaviour destroys financial markets.