How you can profit from BHP Billiton's big bet on agriculture

One of the best ways to profit from rising demand for food is to invest in firms that increase crop yields. That fact hasn't escaped mining giant BHP Billiton, which has made a $39bn bid for Canada's Potash Corp. John Stepek explains what's going on, and how you can cash in.

Good news! The value of your savings is shrinking less rapidly than it was a couple of months ago.

At least, that's one way to look at yesterday's inflation data. The consumer price index (CPI) rose at an annual rate of 3.1% in July, down from 3.2% in June. And inflation in the retail price index (RPI) came in at 4.8% rather than 5%.

That's not a huge consolation for anyone whose savings are still being eaten away by inflation.

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But the data did contain some interesting pointers to a profitable sector for investors to take a look at...

Interest rates are staying low - what can savers do?

One thing's for sure. Regardless of what happens to inflation in the UK in the coming months, Bank of England governor Mervyn King has no intention of raising interest rates. As you probably know by now, if CPI keeps coming in above 3%, Mr King has to write to the Chancellor to explain why.

In his letter yesterday, he noted that he had been "surprised" by the strength of inflation. And he added that he'd probably have to write more letters in the next few months. But he's sticking to his guns. He still reckons that prices are being driven higher by temporary factors, such as food price spikes, VAT effects, and last year's sterling weakness.

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And to be fair to him, core inflation fell to 2.6%, from 3.1%. Sure, if you eat food or use petrol or heat your house, that's not a great comfort. But it does mean that unless there's a mass rebellion by the rest of the members of the Monetary Policy Committee, we'll probably see rates stay on hold for the rest of the year at least.

What can savers do about it? The reality is, not a great deal. Keep shopping around for the best savings rates you can find (my colleague Ruth Jackson updates on them regularly here: Best buy savings accounts). And don't neglect your Individual Savings Account (Isa) allowance. Even if you can't find a rate that beats inflation this year, your annual allowance is 'use it or lose it'. So it's worth shielding as much money as you can from tax, as you will almost certainly be able to find an inflation-beating rate at some point in the future.

One thing you shouldn't be tempted to do is to put cash savings that you can't afford to lose into the stock market, or any other sort of risk asset. In other words, if this is your emergency savings stash, or your first-home deposit, then you just have to make the best of it.

How to profit from rising food prices

However, if you are looking to invest, then one aspect of the inflation data provides some useful pointers. Food price inflation was one of the main drivers of rising prices. And this looks like it'll be an ongoing issue.

And there are ways for investors to take advantage of this. The biggest story in the markets yesterday was BHP Billiton's $39bn bid for Canadian fertiliser producer, Potash Corporation of Saskatchewan.

We've been fans of the fertiliser sector for some time, with Potash one of our favourite stocks. If you own it, it looks like it's worth hanging onto the stock to see how it pans out. The $130-a-share offer was rejected, but BHP doesn't look like it plans to give up on this one easily. The mining giant has gone hostile with the bid - in other words, it has approached shareholders directly. But most analysts seem to reckon it will have to sweeten the deal. And beyond that, potash looks an attractive sector to be in just now in any case, as we'll see in a moment.

So why does BHP want to buy the world's largest fertiliser producer? It's pretty straightforward. BHP provides the raw materials for most of the other things the world needs - from coal and oil for fuel to iron ore for construction. So why not the raw resources needed to grow food too?

It's a story we've covered several times in MoneyWeek magazine in the past. As the global population grows, we need to produce more food. And as the global population becomes richer, the food we eat becomes more grain intensive. Serving up a steak dinner requires a lot more resources in terms of food production than a bowl of rice.

All of this demand will tend to drive up the prices of soft commodities, such as the grains and also meat prices. But trading commodities - even through exchange-traded funds - is way too volatile and risky for long-term investors. And to put it bluntly, you can't have rising food prices for too long, because people need to eat. Prices can only rise so high before they have to be brought down, one way or the other.

Buy stocks that help farmers

So a better way to play the long-term food demand story is to buy stocks that can help farmers increase yields, or otherwise make food production more efficient. These include companies developing genetically modified seeds, or those involved in irrigation - and of course, fertiliser companies.

Sales of potash slumped in 2009 as cash-strapped farmers delayed application or used cheaper fertilisers. But they can only do that for a few seasons without hurting yields. And now global demand is recovering. If this continues into 2011, says Robert Cyran on, "the industry would be operating at around 90% capacity even without taking into account the need to restock depleted inventories. Utilisation figures like that should mean fat profits for producers."

Small wonder BHP is keen to get into the sector. For more on the global agriculture story and other ways to invest in it, you can read the most recent MoneyWeek cover story on the topic here: Harvest profits from agricultural growth.

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John Stepek

John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.