Why the world needs grain

A professional investor tells MoneyWeek where he'd put his money now. This week: Mark McLornan, founder of Agro-Terra

The general view among investors is that a balanced portfolio consists of equities, bonds, real estate and a little cash. The trouble is, due to the current high leverage in these markets, they will all move in sync with interest rates. But one asset class can add true diversification yet remains relatively cheap: grain. Prices have been totally uncorrelated to economic activity and hence interest rates for at least the past 50 years. The main price drivers are weather, population growth and productivity gains. Since June 2005, Agro-Terra has been building a portfolio of grain farms in Latin America for investors. I believe the fundamentals make grains a once-in-a-decade opportunity.

Stocks-to-use ratios for corn and wheat, the main global grains, are at record low levels. Global grain stores are near empty in six of the past seven years, corn demand has exceeded supply. At the same time, expansion in China and India is generating huge demand for food. When incomes rise, so does meat consumption growth in beef and chicken consumption in China is running at 20% a year. It takes nine kilograms of grain to produce one of beef; already, 67% of global grains are used as animal feed, so this surge in demand will have a huge impact on the grains market. Demand for biofuels is making matters worse. Corn used in fuel production in America is set to rise from 6.4% of US corn production in 2001 to 30% by 2007/2008. There are now two buying groups in the grains market: food processors and biofuel producers. Supermarkets compete with petrol stations for the same grains.

And as demand rises, it is becoming harder to expand supply. From 1950 to 1990, world grain yields rose by an average 2.1% a year amid increased use of fertilisers and irrigation. But in the past 15 years, yields have only risen on average by 1.2% because the gains to be had by adding more fertiliser are shrinking and irrigation water supplies are limited. Farmers now compete with industry and city populations for water. China needs irrigated land to produce 70% of its grain, but it is a naturally dry country with per-capita water reserves far below the global average. It's the same in India, where the water table has fallen 75% in the past 25 years. This problem will only get worse. Developed countries consume on average ten times more water per head than non-developed countries. China and India will be forced to provide water to their people representing 40% of the world's population rather than to their fields, meaning they will become massive net-importers of grain. The days of plentiful, cheap water supplies are numbered; repricing this vital commodity will have a material effect on all soft commodities. The most efficient way to conserve water is to import grain as it takes 1,000 tons of water to produce just one ton of grain.

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At Agro-Terra, we are buying grain farms because pure plays on grains are hard to find few producers are quoted. But there are a few stocks that will help solve the supply problems and which should benefit as grain prices rise. Monsanto (US:MON), for example, is the leading supplier of genetically modified products to the agricultural sector. GM seeds will be instrumental in solving supply-side problems. Syngenta (SYT) is a global leader in agri-biotech and crop protection. As grain prices rise, the crop-protection products Syngenta offers will be in greater demand. Deere & Co (DE) manufactures agricultural equipment. As farm incomes rise, traditionally this money is spent on buying land and machinery. Deere will be a major beneficiary of this.