How to profit from 'smart farming'

Here's a good statistic for you: there are more obese people in the world than there are malnourished people 1.5 billion versus 925 millionaccording to the International Federation of Red Cross and Red Crescent Societies(IFRC).

Why is it good? It is interesting in itself but it also tells us that malnutrition isn't necessary the world produces enough food for everyone to have the calories they need to get by.

The problem is just that we haven't got the political and logistical skills to distribute it properly.

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The resulting pressure on food supplies is creating some interesting developments in global agriculture. And also some opportunities for investors.

Where does all the food go?

We waste vast amounts of food much of India's grain is stored outside for example, so it spoils long before it gets to market.

We also distort the prices of food with silly initiatives such as price caps (which encourage farmers to horde, not sell) and the US Renewable Fuel Standard rules that require all petrol to be blended with corn ethanol. Some 40% of US corn (more than the total combined output of India and Africa) is now used as fuel, which, given that the price of corn hit a high in June, surely doesn't seem as good an idea as it once did. Why should the biofuel industry effectively get to eat before the global population?

As we get richer, we also insist on having more of it both in volume and variety. And of course our governments refuse to recognise the problem.

That's why food prices are so vulnerable to the weather - according to the United Nations, the three years in the pasttwo decades in which food prices have been highest have coincided with droughts (as an aside, I might point out that they've also coincided withquantitative easing (QE),but that is another subject).

It is also why, as the global population grows, there is likely to be ongoing pressure on food supplies despite the apparent plenty. The World Bank estimates that total demand for food will rise by 50% by 2030, partly thanks to the rising population and partly thanks to what analysts at Fidelity call the "meat multiplier".

As people get richer, they want to eat more meat and meat is one of the biggest resource gobblers there is: for every 1kg of beef you want to produce, you have to feed a cow around 7kg of grain. I suspect that supply won't have to rise the full 50% some logistical improvement has to be possible and the World Bank's population forecasts aren't exactly infallible. But it is still a big ask for the agricultural industry.

Four ways to improve food production

Regular Moneyweek readers will know a reasonable amount about this producing more food isn't as easy as it should be. Industrialisation, urbanisation and desertification have all combined to reduce the amount of land available to farmers. And the failure of the Chinese to properly reform land ownership rules have prevented the rise of the kinds of agribusinesses that can create leaps in yield in their hungry country.

The key point is that more food from less land means that yields will have to go up. And what makes yields go up? The obvious answer is fertiliser the prices of the likes of potash rose ten-fold during the 2007/8 food crisis.

But Fidelity also points to other areas of interest. There is also machinery rising farm incomes and farm sizes mean that mechanisation rates will keep rising and so will tractor sales.

There is "precision agriculture" the "integration of satellite observations, on the ground instruments and sophisticated farm machinery to apply the optimum amounts of seed, fertiliser and water for maximum efficiency".

Then there are GM advances and biotechnology think "metabolically engineered fish that mature more quickly" (this isn't as an attractive idea as precision agriculture, but you get the idea) and artificial meat advances which offer "the potential to feed millions of people in the future in a resource efficient manner". And without killing any pigs.

The best 'smart farming' stocks

The good news at the moment is that it looks like this year isn't going to produce the food crisis many have been worrying about. According to Capital Economics, the US Department of Agriculture numbers tell us that global harvests of wheat and corn will be "ample", while the soybean harvest is on course to "recover to the high seen in the 2010/11 season".

Browning Newsletter also suggests that we might be about to go through a period of relatively benign weather. Many models are pointing to a weaker El Nio than expected.

Winter in the US is unlikely to be colder than usual. Meanwhile, although north-eastern Brazil might be going to get more rain than it would like, "Argentina and southern Brazil should have good growing conditions", something that should "provide a good enough grain and oilseed harvest to help bring down prices in the coming season".

That would be nice but it might also provide a good opportunity for investors to get into what Mirabaud calls "smart farming stocks" companies that capture "the drive towards higher crop yields in the emerging world and the growing food safety paranoia of consumers and regulators worldwide". You can find a list of the ones Mirabaud likes on our blog: Profit from 'smart farmers'.

Otherwise Fidelity, inits note Food: From Crisis to Crisis, suggests looking at fertiliser companies such as Potash Corp (NYSE:POT), Uralkali (LI:URKA) and Mosaic (NYSE:MOS) as well as Industries Qatar (QATAR:IQCD) (which among many other things manufactures ammonia and urea for use as fertiliser) when their prices are reasonable.

You might also look at my colleague Bengt's ideas on Agriterra (LSE:AGTA) in The Right Side or Chris Mayer's enthusiasm for Alliance Grains Traders: Feed the world, make money.

Here's another shocker of a stat for you - courtesy of Ecclesiastical Investment. North America has 6% of the world's population. But thanks to the fact that so many of its residents are fat, it has 34% of the world's body mass.

This article is taken from the free investment email Money Morning. Sign up to Money Morning here .

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