As Easter approaches, sugary products are going to be high on everyone’s supermarket shopping list. But should a sugar investment or two also make the cut?

Adding a sweetener to your portfolio could diversify it away from the highs and crashes of the stock market. Sugar, in particular, historically has a low level of correlation with equity and bond markets. That’s because the major drivers of sugar prices are supply-side and primarily dependent on weather patterns in the main producers of sugar: Brazil, India and Thailand.

“Supply shocks tend to drive those rapid price surges that we see in sugar,” says Aneeka Gupta, director, macroeconomic research at WisdomTree. “When we look at the broader macro narrative that’s unfolding in the markets, sugar tends to serve as a commodity that offers much lower correlation to these broader assets that an investor would be holding, and hence offers that diversification benefit.”

While that gives sugar a defensive quality, make no mistake: this is a complex commodity, and now is an uncertain time to invest in sugar.

We’ll take you through the investment case for sugar, explaining the main drivers of sugar prices, as well as how the current market dynamics could impact sugar prices going forward and the ways to gain exposure to sugar if you find yourself developing an investing sweet tooth.

What drives sugar prices?

There are three main influences on the price of sugar.

1. Sugar as a foodstuff
Global demand for sugar as a foodstuff is relatively stable. Sugar is a staple ingredient across the world, and as such, demand doesn’t fall much even during economic downturns.

There’s even an argument that recessions increase sugar consumption. When times are tough, households typically shift towards cheaper foodstuffs, which tend to have a higher sugar content. Research from the Institute for Fiscal Studies, for example, found that British households increased their sugar consumption by 0.27g per 100g of food during the course of the Great Recession (2008-2012). That, historically, has given sugar defensive qualities: it can offer protection to portfolios when the rest of the market falls. However, in recent years, this has been complicated by the increasing demand for ethanol to make biofuels.

2. Sugar as a biofuel
Sugar cane is a perfect resource for this, particularly in the countries that produce most of the world’s sugar. That gives sugar prices a degree of correlation with global energy prices: if oil prices rise, that increases the incentive to use biofuel instead, meaning cane farmers are more likely to sell their produce for biofuel than to the food industry – increasing total demand for sugar. In other words, higher energy prices mean higher sugar prices.

Since energy demand is closely correlated with the global economy, this constitutes an increasingly cyclical influence on sugar prices, the opposite of its traditional defensive attribute.

3. Sugar supply
The third influence on sugar prices is supply-side, and forms the core of the investment case for sugar. The biggest driver of sugar supply is the climate, particularly in Brazil, India and Thailand.

“Sugar production tends to be highly vulnerable to weather events like droughts and monsoons – the El Niño and La Niña weather cycles,” explains Gupta. In general, drier La Niña conditions reduce sugar harvests, pushing up prices.

To a large extent, the weather-driven supply dynamic forms the core of sugar’s investment case. While stock and bond markets rise and fall on macroeconomic policy, sugar’s biggest price influence is completely unrelated.

This is a big source of risk, but it’s also the main reason why sugar is worth considering as an investment – particularly when the macroeconomic picture is turbulent.

How will tariffs impact sugar prices?

On the whole, tariffs aren’t great news for sugar. Though it produces some of its own sugar, the US is the world’s largest consumer and a net importer of the stuff. So, a baseline 10% tariff on all imports could be bad news for sugar prices globally.

Add to that the fact that a global slowdown could reduce energy consumption and therefore lower energy prices, and the picture looks gloomy in terms of sugar demand.

However, the full picture is complex and hard to predict. Should the tariffs cause a global recession, then sugar’s more defensive characteristics could come into play.

“The way we’re looking at it is that this uncertainty surrounding current policy is going to increase the price volatility and stimulate a more speculative environment within the sugar market,” says Gupta.

It also bears repeating that the biggest influence on sugar price is the climate. There is upside and downside risk in sugar, but its biggest drivers are separate from those driving stocks and bonds.

How to invest in sugar

If you are thinking of sprinkling a little sugar into your portfolio for diversification, there are several approaches possible.

• One way to invest in sugar is to buy shares in sugar companies.
  Two of the UK’s largest are British Sugar – a subsidiary of Associated British Foods (LON:ABF) – and Tate & Lyle (LON:TATE). Buying commodity stocks like this, though, introduces a level of corporate risk, effectively bringing the macro picture more into the frame.
• Alternatively, for pure play exposure to sugar prices, an exchange-traded commodity (ETC) – effectively an ETF that tracks the price of a single commodity – might be a better approach.
  One option here is WisdomTree Sugar (LON:SUGA). This effectively tracks sugar futures, although Gupta cautions that its returns are impacted by the rolling of those contracts when they reach expiry, meaning its total returns are based both on spot price movements and the roll yield, not just price changes.
• Sugar may also be included as part of a broader commodity index – for example, the S&P GSCI Softs Index, which tracks coffee, sugar, cocoa and cotton prices.

Water is the most important commodity of all. The human race cannot survive without it. Anthropologist and nature science writer Loren Eiseley has said that “if there is magic on this planet, it is contained in water”. Yet in the UK we take for granted a constant and reliable supply of water whenever we turn on the tap. In some ways, that’s no surprise. Seventy-one per cent of the world’s surface is covered by water, according to the US Geological Survey (USGS), with a total volume of a staggering 333 million cubic miles. Yet nearly 97% of the Earth’s aggregate water supply is contained in oceans and seas, meaning it is far too salty for human consumption, crop growing or most industrial uses except cooling. 

Furthermore, more than 25% of the remaining 3% still has saline elements. The upshot is that only about 2.5% of the planet’s overall water stock is freshwater (defined as having low concentrations of dissolved salts and solids). And more than two-thirds of this 2.5% is contained in glaciers and polar ice caps, notes the USGS, and 30% of it is groundwater (under the Earth’s surface in soil and rock pores and fractures as well as in gravel, sand and silt). In other words, only 1% of global freshwater is actually surface water. Almost 70% of the latter is locked in ground ice and permafrost, with merely the remaining 30% – just 0.0075% of the world’s total water supply – to be found in rivers, lakes, swamps, soil and the atmosphere. In short, fresh, accessible and potable (drinkable) water isn’t as plentiful as it might at first seem. 

Pollution and lack of rainfall have squeezed supplies even more. Conditions in the American West, for example, have been “so dry for more than 20 years that we’re no longer speaking of a drought”, says Lis Mullin Bernhardt, an ecosystems expert at the UN Environment Programme. The conditions such as those we see around the Colorado River basin represent more “aridification” and a “new very dry normal”.

We need more fresh water 

With both the quantity and quality of the planet’s surface water under increasing threat, then, groundwater is pivotal. Yet some of this is also highly polluted or is too deep underground to be economically extractable. What’s more, some of the planet’s largest groundwater systems are already under pressure from increasing irrigation requirements, leaving no extra water for storage. Several of the world’s main aquifers (underground layers of water-bearing material) too are now depleting. “Rapid groundwater-level declines (of more than 0.5 metres per year) are widespread in the 21st century, especially in dry regions with extensive croplands,” say researchers in Nature, the international science and technology journal. “Critically… groundwater-level declines have accelerated over the past four decades in 30% of the world’s regional aquifers.” 

The survival of the human race depends on improving water collection, storage, purification and distribution. Yet the United Nations Educational, Scientific and Cultural Organisation (Unesco) spotlights some serious shortfalls. Globally, built reservoir capacity per person is decreasing as reservoir expansion has not been able to keep pace with population growth, but also because the storage capacity of existing reservoirs is decreasing, chiefly due to sedimentation. Distribution infrastructure is creaking: America’s Environmental Protection Agency has estimated that 2.1 trillion gallons of treated drinking water leak from US water main and pipe networks every year. And while supply is progressively imperilled, demand is surging. Global freshwater usage has risen six times over the past 100 years and has grown about 1% a year since the 1980s, says Unesco. Worldwide, agriculture accounts for roughly 70% of freshwater withdrawals, followed by industry (slightly under 20%) and domestic (or municipal) uses (about 12%). The global population – more than eight billion and rising – needs more fresh water.

In particular, there is extra demand from growing urbanisation (more water per person is consumed in cities versus rural areas). “Today, some 56% of the world’s population – 4.4 billion inhabitants – live in cities,” says the World Bank. “This trend is expected to continue, with the urban population more than doubling its current size by 2050, at which point nearly seven out of every ten people will live in cities.” That is set to create more problems. “Roughly half of the world’s population currently experiences severe water scarcity for at least part of the year,” says the UN World Water Development Report 2024. Cape Town, for instance, very nearly ran out of water in 2018. It all boils down to this: “The planet is facing an unprecedented water crisis, with global demand for freshwater predicted to exceed supply by 40% by 2030,” according to Csaba Korosi, president of the 77th United Nations General Assembly. 

How, then, does the human race ensure future adequate and consistent supplies of this most important commodity? Better wastewater processing is one possibility. Eighty per cent of the world’s wastewater is currently left untreated back into nature, says Unesco, yet “safely managed wastewater is an affordable and sustainable source of water, energy, nutrients and other recoverable materials”. Later in this article, we examine three companies involved in wastewater. Yet the real key to boosting global water supply is plumbing into all that salty water in the world’s oceans – in particular as sea levels rise – via desalination. 

Technological advances in semi-permeable membranes that filter out salt and impurities have made seawater desalination a success. The seawater reverse osmosis (SWRO) procedure is relatively energy-efficient and cost-effective. It also needs less maintenance than other desalination methods. Indeed, some Middle Eastern countries already use it for as much as 90% of their drinking water needs. While SWRO works well enough with very saline water, it has been expensive and energy-intensive. However, further progress is in the pipeline as membrane technology improves and the cost of building desalination plants declines. 

The size of the necessary investment in the global water sector is vast. “An estimated $6.7trn for water-related infrastructure will be needed by 2030, reaching $22.6trn by 2050,” says the 2030 Water Resources Group. In addition, “an estimated $150bn is needed each year to deliver universal safe water and sanitation”. Within this, the global water desalination market is projected to be worth €17.5bn this year and to expand at a compound annual growth rate of 8.7% to 2031, by when it is expected to be worth $31.3bn, according to a report by market research group Coherent Market Insights. In other words, opportunities for investors in this particular sector could be huge.

Three water stocks to buy 

1. Consolidated Water (Nasdaq: CWCO) designs, builds, operates and finances SWRO desalination plants and water-distribution systems in several Caribbean countries where drinking water is scarce and the use of such plants is economically feasible. It also develops and operates water treatment and reuse plants, in addition to water distribution systems, in the US and the Caribbean. The company also provides design, engineering, management, equipment manufacturing and operating services for commercial and municipal water production, supply and treatment, as well as for industrial water and wastewater treatment. Second quarter revenues dipped as a couple of major projects were completed. But “looking ahead to the remainder of the year and beyond, we remain very excited about our prospects”, says CEO Frederick McTaggart. 

“Many positive factors – including consistent strong water sales growth in Grand Cayman, the long-term recurring revenues from our Caribbean-based bulk water and US-based operations and maintenance businesses…and the anticipated revenue and earnings from our $147m design-build-operate project in Hawaii – all together provide a very solid base for the company in the coming years,” he says. “The market for design-build projects is also showing no sign of slowing. We recently signed master design-build service agreements with two major national clients for a number of projects they are contemplating. We anticipate this will positively impact revenue and earnings in future periods.” 

Down 30% from its November 2023 peak, the shares trade on a prospective 2025 price/earnings ratio (p/e) of 15.7, according to average analyst estimates compiled by MarketWatch. With its super-strong balance sheet (holding $96m of net cash compared with a £416m market cap), Consolidated Water is a long-term buy. 

2. Energy Recovery (Nasdaq: ERII) doesn’t actually build desalination plants, but most of its sales come from producing equipment that makes SWRO and other water-purification processes more cost-effective. The company is expanding into water treatment solutions and refrigeration and has a market capitalisation of $1bn. Commenting on the firm’s latest financial results, president and CEO David Moon says that second-quarter revenue of $27m “exceeded the top-end of our guidance of $20m-$25m”. He “reaffirmed” full-year revenue guidance of $140m-$150m. 

Again, the balance sheet is strong. There is no debt, the company is flush with cash and cash equivalents of $138m. Having dipped some 45% from their July 2023 peak on fears of a slowdown in capital expenditure, the stock price is set to benefit from doubled earnings per share over the next two years, say average analyst estimates compiled by MarketWatch. That would put the shares on a prospective 2026 p/e of just over 20, quite reasonable considering the firm’s long-term earnings growth potential. It’s worth tucking away. 

3. Veolia Environnement (Paris: VIE), the French water, waste and energy business, designs, installs, operates and maintains water networks. Last year the group served 113 million people with drinking water while managing 3,809 drinking-water production plants. It also supplied 103 million with wastewater services and 35% of sales are derived from wastewater. Although Veolia isn’t a pure desalination play (40% of sales come from the group’s water activities), it is the leading global player in the sector. It has world-leading subsidiaries in both SWRO and thermal desalination ranging from design and construction to operation and maintenance. Veolia also offers portable desalination units as well as mobile water solutions. 

The firm’s market capitalisation is €24.5bn and its shares trade on a 2025 p/e of 14.4, says MarketWatch, with a multiple of 13.2 forecast for the following year. One caveat is that net debt was €20bn at the end of July 2024. The historic yield is 4.2%, though, which should improve as the firm says dividends will move in line with earnings growth. It’s another long-term buy.

This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.

Russia’s invasion of Ukraine in the early hours of Thursday reverberated across energy markets, drove oil past $105 a barrel to a-seven year high and sent global stockmarkets crashing. But that is not all.

The price of wheat climbed to a nine-year high, with experts warning food prices are likely to be the next casualty.

Russian troops launched attacks on Ukraine from three sides – from its northern border with Belarus, its eastern border with Russia, and in the south from Crimea, reports the Financial Times.

What has Russia’s invasion got to do with food prices?

Food prices have been rising sharply already

Food prices have been on the rise for some time as inflation soars, and agricultural commodities are no exception.

UK consumer price inflation hit an annual rate of 5.5% in January. Food prices rose by 2.7%, but the price of some staple products such as bread, eggs and peas rose by more than 10%, exacerbating a cost of living crisis.

John Allan, chairman of Tesco – the UK’s biggest supermarket chain – warned earlier this month that the “worst is yet to come” and he expects food price inflation to hit 5%.

On Thursday, the National Federation of Fish Friers, an official body that represents the UK’s fish and chip shops warned that a fish supper may soon cost £10 (on a side note, we know how much Britons love their fish and chips), as cod is are now 75% more expensive than it was in October.

Why does Russia’s invasion affect food prices?

So why would Russia’s invasion further exert pressure on food prices?

Ukraine and Russia are, respectively, the third and eighth largest wheat producers in the world, says the United Nations Food and Agriculture Organisation.

“If the situation escalates, it could impact the export of food from Russia. Russia and Ukraine make up 29% of wheat exports, 19% of exported corn and 80% of sunflower oil exports, says Sarah Coles, senior personal finance analyst at platform Hargreaves Lansdown.

The tensions between the two countries pushed wheat prices at the Chicago Board of Trade to levels not seen since 2012 on Thursday – $9.35 a bushel. The price of corn, soybeans and palm oil also surged in value.

There are concerns that Russia’s invasion may worsen existing food shortages. A drought in South America has already reduced soy supplies, while labour shortages in Malaysia are already limiting the production of palm oil. Palm oil is a key ingredient in the production of several consumer goods including chocolate, shampoo and biscuits.

Rising costs of fertilisers will also hit food supply and drive inflation higher, says Bloomberg. “The market is already feeling the pinch due to reduced potash supplies from Belarus after US sanctions, and any reduction of crop-nutrient exports from Russia will fuel the squeeze.”

Food prices may also rise due to disruption at ships in the Black Sea, says the Daily Mail: “A war could lead to significant disruption to ship movements around the Black Sea, which would fuel higher food inflation given that Ukraine, Russia, Kazakhstan and Romania all ship grain from ports in the area.”

While the UK isn’t among the main markets for these exports, food prices will rise here too: lower exports will drive global food prices higher.

The UK also imports Russian chemicals for fertilisers “which could hit UK harvest,” says Coles, “and the rising cost of energy is going to make every step in food processing and transportation more expensive”.

In July 2000 Country Life ran an editorial headlined “What happens to the farmland that nobody wants?”

Farming, it said, was in crisis. Milk prices were so low that dairy herds were being dispersed and various experts predicted that “within the next couple of years” it was entirely possible that “large areas of the familiar West Country landscape of hedgerows and small fields might be abandoned”

The same would eventually happen in much of the rest of the country, it said. It was “possible to imagine” that some beef and sheep farming might continue if costs could be slashed. It was also possible to imagine that land in the south with pretty houses on it might be attractive to urban buyers. But elsewhere? No chance.

Land prices in counties such as Lincolnshire, which had long acted as a bellwether for farmland prices nationally, were already falling. It was time for politicians to get thinking about what on earth should happen to land “for which there is no economic use” and which was soon to become “impossible to sell or to let”.

Oh, for a time machine. In 2000, the average price of an acre of prime arable land in the UK was around £3,000. By 2015 that had leapt to over £9,000.

There was a post-Brexit wobble as the UK exited the EU’s Common Agricultural Policy. But prices rose just over 6 per cent last year and are now back to near their £9,000-plus peaks.

You can buy land for less, of course: Savills, the estate agent, still shows land classed as “poor livestock” priced at £4,000 an acre. The question is whether you should.

The price of UK land has long been divorced from the yields you actually get from farming. It is as much a function of the subsidy regime and the ability to use it as a way of avoiding inheritance tax as anything else.

Add an overlay of low interest rates; the wind and hydro booms; a fast-rising super-rich sector of the population mad for the status that comes with hobby farming (nothing says “I’m rich” in this decade more than saying “I’m rewilding”); and the pandemic rush to the country and it is perfectly obvious that the price of barley makes no odds to the price of land.

But this might be just the beginning for the nation’s lucky landowners: there’s a new and very deep-pocketed purchaser about — the environmental buyer. There isn’t a company left in the UK not under pressure to reduce its environmental impact and its path to net zero. Farmland is part of the answer. It is no longer about food production, Savills says. Instead — thanks to the shift in global regulatory accountability for environmental impacts — it “presents a real asset opportunity that is high in ESG values”.

Imagine you own a big office building in London. You want it to be a net zero building. What do you do? You mitigate what you can first, with energy efficiency measures, insulation and so on. But that won’t do the whole job — you are always going to need carbon credits from somewhere.

You could buy in those credits, as most do. But you could also, suggests Etienne Prongué of BNP Paribas Real Estate, build your own. Buy land. Plant trees. Have your own long-term carbon capture scheme and in the process protect your building from any future rise in the price of carbon credits (something of a given) as well as (possibly) giving its price a “green premium” when you come to sell it.

The same goes for pretty much any business looking to cut their net carbon footprint — you can create credits or you can buy in. Tree planting is already pretty popular. It is about as close to a mature sequestration market as we have at the moment — as anyone attempting to buy land in Scotland will have noticed, with prices up 31 per cent in 2021.

But there are less obvious opportunities for landowners, too. There is peat restoration. Peatlands dried out to create grazing land can be restored (perhaps to offset the peat disrupted by the building of wind farms and the like). Farming methods can be changed. “No till” farming keeps carbon in the soil. Switching land from arable to grazing could create carbon negatives as well, since pasture-raised meat farming can be carbon neutral in itself.

There is also potential in the more general development and protection of what is now known as “natural capital”, which includes everything from water quality to biodiversity.

One example: all developers in the UK now have to demonstrate that they create at least a 10 per cent “net gain” in biodiversity. That’s not easy when you are cramming a pile of ugly, low-quality housing on to a series of minute footprints. So it needs to contract out to landowners who can deliver the goods off-site.

All of this comes with endless regulatory novelty and uncertainty, to say nothing of land user conflicts. But two things are not so uncertain. The first is that one way or another, via a series of marketplaces that facilitate the trade of various environmental credits, the private sector is in the process of creating solutions to every regulatory demand. Look, for example, to BNP’s ClimateSeed platform or EnTrade, a business based in the south-west, which connects businesses needing a little environmental do-goodery with farmers who can sell it to them.

The second is that the emergence of these new income streams adds value to land — and, given that the credits are all about change for the better, in particular to land previously considered poor.

That’s why the price of poor quality livestock land rose at more than double the rate of prime arable land last year. It’s also why non-farming buyers took 38 per cent of land sales last year and why institutional and corporate buyers made up 16 per cent of land buyers last year, against a ten-year average of 10%.

“We may start to see a decline in the value of farmland as farmland,” said Country Life, all that time ago. On this at least, they were right.

Everyone wants an ESG overlay on their investments these days. But the gravy train isn’t delivering quite as it was. Last year saw ESG portfolios underperform oil and gas, for example, as the renewable bubble began to deflate and the exuberance disappeared from the low profit tech world. That doesn’t look like a trend that is turning this year.

Farmland offers something of an alternative for the genuinely environmentally minded. There isn’t much of it. Everyone wants it — needs it, even. So prices seem likely to rise — and rise the most on the kind of uninteresting land with no pretty houses on it that Country Life was once so worried about.

But how do you get in? Here’s the tricky bit. You can of course just buy land — though this is not for everyone.There are also various forestry funds you can look at. The recently listed Foresight Sustainable Forestry Company PLC is interesting — it is looking to buy low-quality grazing land in the UK with a view to both growing trees for timber and taking advantage of the emerging carbon/biodiversity market.

Otherwise, there is the Standard Life Investments Property Income Trust. It’s a perfectly good investment as a property income fund but its manager also recently bought 1,447 hectares of upland rough grazing land in the Cairngorms. The plan is to reforest some, use some for peatland restoration and work on biodiversity on the rest. Very ESG.

Just how the money will be made isn’t completely clear, of course, and the land only makes up a tiny bit of the portfolio. But you have to like the way the trust is thinking.

If you haven't already, you can buy Merryn's book, Share Power: How ordinary people can change the way that capitalism works — and make money too for £9.99

• This article was first published in the Financial Times

The Dish of the Day at the Restaurant at the End of the Universe, as fans of Douglas Adams’ Hitchhiker’s Guide to the Galaxy will know, was a prime cut from the Ameglian Major cow, an artificially created, speaking bovine quadruped, which was bred to actually want to be eaten. The beast unconcernedly offers diners its shoulder braised in white wine sauce. When the animal goes off to shoot itself, it winks at the more squeamish customers, telling them not to worry as “I’ll be very humane”.

Advances in modern technology have got us used to life imitating art. So you will probably not be surprised to hear that today Ameglian Major steaks – or at least, cuts of meat that have involved no cruelty to the animal or harm to the environment, having been cultured from harvested animal cells in a laboratory – are already on the menu. Whether such grub will win broad acceptance by consumers, or profits for investors, however, remains to be seen.

A solution in search of a problem?

You might wonder what the point of growing meat in a laboratory is when nature has been doing it for us since before our expulsion from Eden. If your inclinations or beliefs are against the slaughter of animals, as they are for an increasing number of vegetarians, vegans and “flexitarians”, it’s not as if we have ever been short of other options. Asian Buddhists who eschew flesh have been making mock meat from wheat gluten for more than 1,500 years, as Jon Fasman points out in The Economist. “Milk” made from soy beans has been drunk in China for centuries.

Still, the fact is that our modern diets represent historically unprecedented feats of incredible economic and technological complexity. The result, for those of us in the rich world at least, is an abundance of food and a plethora of choice from all the cultures of the world at low prices, but at an increasingly burdensome environmental cost.

As Fasman says, “Such a diet has only become possible in a very particular world, one in which a large proportion of the planet’s surface is given over to farms and pasture, food production is energy-intensive, pesticides abundant, intercontinental shipping cheap and food processing an advanced industrial undertaking. It is only possible, that is to say, at a time when human desires, and the economies built around them, rank among the planet-shaping forces of nature: a period that has come to be known as the Anthropocene.”

The trouble with the Anthropocene economy is that it is fuelled by fossils and burning them is warming the planet dangerously. As no vegan will ever tire of telling you, meat is a big part of that problem, not least because “meat isn’t just about meat”, as Harry de Quetteville puts it in The Daily Telegraph. It’s also about crops –almost half of global production is used to feed livestock; about water – animals consume a third of the planet’s increasingly scarce fresh water that is used in farming; about drugs – the industrial use of antibiotics as animal medicines and growth promoters gives rise to antibiotic-resistant strains of bugs, “accelerating a potential catastrophe that would make Covid-19 look like a sideshow”; about land – meat is the biggest driver of deforestation; about the seas – a third of fish stocks are overexploited; and about the climate – meat is responsible for a disproportionate amount of the greenhouse-gas emissions involved in feeding the planet, which themselves make up almost 40% of the global total. In short, the problem is bad enough as it is – it is only going to get worse as the world’s population grows, and as the poor get richer and start demanding the kind of diets we in the West take for granted.

If all this is the result of our building industrial economies around human desires, then there are two obvious options if the outcome is a problem – deal with our desires, or come up with some kind of technological fix to change the outcome. The zeitgeist is clearly with the latter kind of thinking. “We think of our [food] as a tech product,” the president of Impossible Foods, a plant-based alternative burger maker, told Fasman.

One of the technological challenges is to create plant-based alternatives to meat since growing plants and eating them directly is more energetically efficient than feeding them to livestock first. Another is to create meat in a laboratory without going through the intermediary stage of growing it on a sentient being – this might be more appealing to those who worry about cruelty and be more environmentally friendly, assuming the energy the processes consume is produced sustainably, and the technology can reach the necessary scale. The race is on to become the first Google of the griddle.

A taste for meat

Impossible Foods, like its better-known rival Beyond Meat, spends much of its time in the laboratory figuring out how to make its processed, but entirely plant-based, foods taste more like meat. The present writer can attest that Beyond’s products when cooked fill the house with the right greasy smells and feel much like meat in the mouth. They don’t taste much like meat, nor do they taste like freshly prepared natural food, but then they don’t taste at all bad either. Such processed foods have already found their niche, in the supermarkets and in the fast-food chains, and growth and profits seem likely.

There is, however, no avoiding the fact that a great many people do not want to eat processed pea protein, or not just that, no matter how good its mimicry. They want meat and will want it in increasing numbers as the ranks of the global middle class swell. That’s why some environmentalists, including The Guardian’s George Monbiot, are enthusiastic about the prospects for laboratory-based meat. “It might seem odd for someone who has spent his life calling for political change to enthuse about a technological shift,” Monbiot has written. But the political and other changes that might save the planet need to take place more rapidly than seems likely, he argues. Lab-grown, farm-free food “offers hope where hope was missing”.

Monbiot will presumably be encouraged by the pace of change. Nearly 100 firms are scrambling to be the first to bring cultured meat to market, says Fasman. Those with deep pockets can buy it already in select locations, including a private club in Singapore and a test kitchen in Tel Aviv. The strategy seems to be to follow Tesla – if you want to get customers excited about electric cars, introducing weird-looking, badly performing milk floats isn’t going to get pulses racing; you have to start with the desirable, aspirational models and make your alternative as good as, or better than, the “real” thing.

You will, in other words, probably be able to pay through the nose for a lab-grown steak in a fancy-pants restaurant before you’ll see it on the shelves in Sainsbury’s. True, no cultured-meat company has yet produced anything likely to make diners trade their Porsche-like dining experience for the prototype Teslas currently in development. But great strides are being made. Optimists think it’s only a matter of time before technological barriers are broken (going from animal-cell slurry to something that looks and feels and tastes like a rib of beef is easier said than done and, as in nature, demands the timely and coordinated input of raw materials and energy) and costs come down (prototype chicken nuggets from Just Inc in the US currently cost $50 a pop).

Take some cold water first

Optimism is exactly what you’ll need to fill up on before buying in. A detailed debunking exercise by US news site The Counter pours much cold water on the hype in the industry. Just like self-driving cars, flying taxis, drone deliveries, hydrogen-powered economies and tourist trips to Mars, such exciting technology is always promised to be right around the corner – and perhaps it always will be. The inconvenient truth, says Joe Fassler in The Counter, is that if lab-made meat is to live up to the hype and do anything at all for the climate, a “sequence of as-yet-unforeseen breakthroughs will still be necessary”, including the knowledge of how to train cells to behave in ways not yet accomplished and make bioreactors that “defy widely accepted principles of chemistry and physics”. Cultured cells tend, awkwardly, to be fed by a broth made from slaughtered cows, and replacing that with cost-effective alternatives will be a challenge. Then all this will need to be scaled up. Investors are going to have to “care less about money”, in short. They will also need to be optimistic about the prospects of these products gaining public acceptance and regulatory approval – far from a given.

Still, it takes more than a bucket of cold water to keep the optimists down and it’s not hard to think of examples in the history of the development of new technologies where they have had the last laugh. And there seems to be no shortage of optimists in the food-technology sector. The alternative-protein industry – comprising those made from plants, from cultivation or fermentation – raised $3.1bn in investment in 2020, according to the Good Food Institute, three times more than in any other year in the industry’s history. Cultured meat products are forecast to take a growing slice of the total meat market, eating into perhaps a third or more of the total meat market of $1.8trn by 2040, according to the Meat Atlas report.

The hopefuls with their eyes on that prize are as yet unlisted, venture-capital-backed start-ups, but investors can get in on the action through investment vehicles such as Agronomics (LSE: ANIC), co-founded by Anthony Chow and Jim Mellon. It has a portfolio of 16 leading businesses in the industry, including BlueNalu, which specialises in lab-created seafood, and Mosa Meat, which is aiming to produce a beefburger in the next couple of years. Agronomics trades at a lofty valuation of £221.5m, and there’s no denying the high levels of risk, but the firm is on a strong financial footing and “has the potential to explode over the long term”, says Zaven Boyrazian for Motley Fool. Indeed, Chow and Mellon told MoneyWeek earlier this year that they estimate the total addressable market for the foods, seafood and materials they are investing in to be around $5trn – about twice the size of the UK economy. “You can see why we’re excited about this opportunity.”

An alternative to consider is Canadian-based Eat Beyond Global (Toronto: EATS). MoneyWeek’s David Stevenson runs a news blog on the industry, covering the broader food and agricultural technology sector, at futurefoodfinance.com.

Soaring gas and electricity prices in the UK (and beyond) mean that consumers and businesses are facing much higher bills.

But it’s not just our energy we’ll be paying more for – rising food prices are the next big threat posed by the energy crisis, partly due to a knock-on shortage of ammonium nitrate.

So what is going on and what may it mean for investors?

What is going on

UK gas prices and electricity prices are trading at record highs for reasons outlined here. Our electricity prices have become the most expensive in Europe.

As a result, two fertiliser plants in the north of England have been closed down simply because they were not economically viable to run. CF Industries, which runs both plants in Teesside and Cheshire, did not say when operations would resume.

Where does ammonium nitrate feature in this?

Ammonium nitrate is one of the most commonly used fertilisers globally. It’s produced with ammonia derived from natural gas. Unfortunately, prices of the fuel have risen faster than fertiliser producers can pass increases on to their customers. The plants shuttered by CF Industries account for 40% of the UK's fertiliser market.

Worse still, Norway’s Yara, another leading fertiliser producer, announced on Friday that it is temporarily cutting its ammonia production due to soaring natural gas prices hitting profit margins: “Yara will by next week have curtailed around 40% of its European ammonia production capacity”.

Industry analysts are now sounding the alarm on how this will affect the fertiliser market and feed into higher food prices. Farmers now face the prospect of having to buy fertiliser at very high prices. That in turn implies less usage of fertiliser, meaning weaker crop yields, which could dent food supply.

What effect will higher food inflation have?

Higher food prices are the last thing the UK and many countries need. Even before our energy woes erupted into the public eye, food prices were already at the highest levels for decades, according to a recent report by the UN’s Food and Agriculture Organisation. In August, for example, global food prices were a third higher than at the same time last year.

And in the UK, inflation hit an annual rate of 3.2% in August, up from 2% in July, marking the biggest rise since 1997, when the UK began measuring inflation using the current method (the consumer prices index – CPI). The main culprit was higher food costs, said the Office for National Statistics.

For consumers the effect is clear – higher food prices, like higher energy prices, and higher taxes, shrink disposable incomes.

But what is the effect on investors?

The big question remains, how long will fertiliser plants remain offline? If plants remained shuttered for significant amounts of time, lost output might offset any gain due to higher prices. But if any shutdowns are only temporary, it is likely that consumers and farmers, rather than companies, will bear the brunt of the crunch in both fertiliser markets, especially if the price of fertilisers shoots up and is in greater demand.

So it may well be worth having exposure to these firms, either directly or via a fund, because as volatile as they are, they stand to benefit from any prolonged rise in gas prices – which may help serve as a hedge against the hit to growth that rising energy and food prices may well cause.

In 1931 Winston Churchill was asked by The Strand Magazine to imagine the world 50 years hence. “We shall escape the absurdity of growing a whole chicken in order to eat the breast or wing, by growing these parts separately,” he wrote. Churchill might have got his timing wrong, but a future where the meat on our plates has been cultured rather than butchered is finally coming into view.

A new wave of alternative meat start-ups in California, Europe and Israel is intent on disrupting the $1trn global meat industry. Today 77% of farmland worldwide is dedicated to raising and feeding livestock. Mike Selden of Finless Foods, a fishmeat-replacement start-up, envisions the day when meat production moves off the farm and into gigantic “1,000-litre bioreactors” that churn out new batches of cell-cultured products. It would be, as Jessica Glenza in The Guardian puts it, “like a brewery for meat”.

If it bleeds, it leads

Meat alternatives are hardly new. Quorn, a British invention, dates back to the 1980s. Seitan, a protein-rich wheat gluten product that has recently become popular online, has roots in sixth-century China. Tofu, made from coagulated soy milk, is more ancient still.

Yet in recent years new technology, changing eating habits and sheer market exuberance have turbocharged the sector. Shares in Beyond Meat, the US maker of a burger that “bleeds” a beetroot juice extract, have doubled since listing in 2019. Impossible Foods, another American burger maker, has found a way to ferment soybeans to produce heme, a compound responsible for the characteristic “meaty” taste of a burger. It is reportedly set to float soon.

The number of retailers selling Impossible Food’s products has risen 113-fold over the last year. Plant-based alternatives are being marketed to meat eaters. They are even being sold alongside chicken breasts and pork chops. Fast food is next. The firm is working on a new “McPlant” line of plant-based burgers with McDonald’s. Greggs’ best-selling vegan sausage roll uses Quorn.

These businesses are tapping into a genuine trend. UK sales of meat substitutes shot up by 40% in the five years to 2019 and are forecast to top £1.1bn in 2024, says consumption-research firm Mintel. Pollster Ipsos MORI reports that the number of vegans in Britain quadrupled in the four years up to 2018, but they still make up just 1% of the adult population.

Far more significant has been the rise of “flexitarianism”. A shopper browsing the meat aisle might sometimes opt for a plant-based burger without forswearing steak altogether. Mintel says that 41% of Britons are reducing the amount of meat they eat. That number has fallen from 51% before the virus; lockdowns have made people reach for comfort foods, with bacon sales up by 18% last year.

Yet that should prove a “temporary setback” as attitudes are changing fast. In 2018, 25% of Britons said they thought that “eating less meat is better for the environment”. By 2020, 42% agreed. Health is the most common reason given for reducing meat consumption. Yet among younger people environmental concerns also loom large. Around 23% of meat-reducing Americans aged 18-29 cited the climate as a reason to cut back, says The Economist. Just 5% cited animal welfare.

The steaks are high

Meat alternatives are still a niche industry. US grocery store sales of plant-based products totalled $475m last year, a fraction of the $82.5bn market for refrigerated meat, says Jordan Strickler in Forbes. But Barclays predicts 1,000% growth over ten years, with the global market worth $140bn in 2029. Management consultancy AT Kearney projects that by 2040 cultured and plant-based foods will have a 60% market share, surpassing meat produced the traditional way.

Prices for meat substitutes are coming down as economies of scale kick in. Impossible Foods recently slashed its suggested retail price by 20%, reports Amelia Lucas for CNBC. In America a shopper can now expect to pay about $6.99 for a 0.35kg, or 0.75lb, pack of Impossible “meat”, still more than twice as much as conventional equivalents. Yet while Western markets have passed “peak meat”, global meat consumption is still rising as populations increase and emerging markets grow. In the 1960s the average Chinese person consumed 5kg, or 11lb, of meat annually, notes Crystal Reid in The Guardian. By 2015 that number had hit 48kg (105 lbs). Today the country accounts for half of all global pork consumption. Yet, in the home of tofu, plant-based alternatives are also “slowly carving” out a place for themselves, with sales hitting £675m in 2018 and forecast to grow by 20%-25% annually.

The UN’s Food and Agriculture Organisation projects that global demand for animal products will increase by 45% by 2050, putting huge pressure on the world’s farmland. A more efficient food-production method is needed and plant-based alternatives seem to offer a way forward – by cutting out animals altogether. For many environmental, social and governance (ESG) investors, a sector that says it can help us lower carbon emissions while eradicating factory farming is an opportunity too good to miss.

The result has been a mini-boom in meat-replacement and vegan-product start-ups. Beyond Meat’s frothy stockmarket valuation may have grabbed the headlines, but behind the scenes much venture capital is being deployed too. Funding hit $3.1bn last year, a 200% rise on the previous year, says America’s the Good Food Institute, which promotes meat alternatives. Almost $300m of that went to Oatly, the Swedish oat-drink maker. The firm is eyeing an initial public offering (IPO) with a $5bn valuation. Plant-based and cultivated meat firms have raised $6bn over the past decade. As Emiko Terazono puts it in the Financial Times, the race is on for “the new Tesla of food tech”.

The meat alternatives currently on offer are plant-based. The Beyond Burger, for example, is a mixture of (among other things) peas, rice and mung-bean protein plus coconut oil. Yet an entirely different approach – cell-cultured meat – could take us much closer to Churchill’s vision of real animal flesh grown in a lab.

The recipe is deceptively simple, writes Chase Purdy in his book, Billion Dollar Burger. You need three things: animal cells, a “nutrient-dense liquid medium to feed the cells; and a sterile bioreactor that provides the right conditions to grow them”. The cell part doesn’t require any animal slaughter – you can take a biopsy from a living one. The tricky part is the liquid medium, which must be what Purdy calls a “witch’s brew of macromolecular ‘growth factors’ such as amino acids, sugars, lipids and hormones” to get the cells to grow.

A pretty penny for a patty

The method first made headlines in 2013 when Dutch food-tech business Mosa Meat unveiled a lab-grown hamburger. The snag was that it cost €250,000 per burger. Since then, economies of scale and cheaper growth fluid have seen prices fall sharply. Mosa says its burgers could cost €9 each in a couple of years’ time.

US start-up Future Meat Technologies has vowed to offer lab meat for $10/lb by next year. The creators of such products argue that they are not making alternative meat at all. What comes out of their bioreactors is simply meat, just made more efficiently than the traditional method.

While plant-based products such as the Beyond Burger are likely to dominate in the near-term, AT Kearney thinks that the more authentic taste of cultured meat will eventually bring it to the fore. By 2040 it could account for some 35% of all meat consumed, compared with 25% for “vegan replacements”. But not everyone is convinced by such bold predictions. Some think the technology is not ready for prime time, says Elie Dolgin in Nature. It’s one thing to make a “splashy demonstration” of a very pricey piece of lab-grown meat, quite another to scale up production enough to offer it affordably to the mass market. By the time the Silicon Valley tech industry got going it had decades of university expertise and research into computer science to draw on.

Yet there is little such “basic science” about how to grow meat at scale. We still don’t know much about how to source the best animal cells, what makes a good nutrient medium, or how to build bioreactors on an industrial scale. That may leave these start-ups facing an insurmountable – and prohibitively expensive –- learning curve.

Another issue is moving from burgers to steak. Current technologies tend to yield “unstructured products” that resemble mince. Finding a decent way to imitate a real steak’s complex structure of fat and muscle is another ball game. But maybe we shouldn’t bet against the boffins.

Israel’s Aleph Farms start-up recently premiered a 3D-printed rib-eye steak complete with imitation blood vessels. Pictures of the product show that it does indeed resemble a steak, although with a shiny finish that makes it look a bit like a novelty plastic dog-chew.

The product got rave reviews from Benjamin Netanyahu, reports Richard Spencer in The Times. The Israeli prime minister declared it to be “delicious and guilt-free, I can’t taste the difference”. That said, his government does have a vested interest. Israel has a thriving alternative meat-tech scene, with Netanyahu vowing to turn the country into “a powerhouse for alternative meat and alternative protein”. Others have raised questions about whether “labriculture” would really be any more environmentally friendly than the current method. Research by the Oxford Martin School notes that if bioreactors draw power from fossil fuel-based sources then their long-run climate impact could end up being worse. Methane, which cows produce in large quantities, is an especially potent greenhouse gas, but it persists for a far shorter time in the atmosphere than carbon-dioxide emissions from fossil fuels.

That doesn’t mean lab-grown meat can’t be greener, but it will require a much cleaner grid and energy-efficient bioreactors to get there. Cell-culture meat faces more than merely technical hurdles. Will consumers accept it? Genetically-modified (GM) foods still provoke hostility from consumers despite regulatory approval, says Harry de Quetteville in The Daily Telegraph. Others warn that “a rushed launch” or “a safety scare could set the entire field back by decades”.

The pandemic has also delivered a stark reminder that raising millions of animals in close quarters is a zoological time bomb. As the industry scales up it should eventually become cheaper than traditional meat too. That will make it difficult to resist as an ingredient for fast food, sausages and the like. “Meat as we know it” would become a “rare luxury… like a great bottle of wine”. Most importantly, these new products will face a stiff regulatory test. The traditional farming lobby has powerful friends and there is already a battle under way about whether cell-cultured meat can be called “meat” at all. Critics prefer “frankenmeat”.

Yet not all nations feel the same way. It is not an accident that Israel, which imports 85% of its beef, is so keen to start growing food in labs. For small countries without lots of farmland a shift to cell-cultured meat is a matter of national security. Nowhere is that more true than in Singapore, a city-state where 5.7 million people live on an area of land that is less than half the size of Hertfordshire. The country became the first place in the world to approve the sale of cell-cultured meat at the end of last year. US start-up Eat Just can now sell its cultured chicken nuggets in the city. The nuggets contain 70% cultured chicken. A set meal costs $17.

Farming animals for food is a very old technology. Neolithic humans first domesticated sheep about 10,000 years ago, followed by cattle and pigs about 2,000 years later. The farmer who first decided it was a good idea to keep a wild boar on the premises must have been a brave soul. But advocates of “no-kill” meat don’t merely argue that our system of food production is cruel and environmentally damaging. They also say it is hopelessly inefficient. Why waste so much energy growing a whole cow if you can just get a machine to produce the bits you actually want? If they can pull it off then they will deliver, as Barry Estabrook puts in The Wall Street Journal, “the biggest revolution in how humans feed themselves since our Neolithic ancestors” began farming. Before then expect plenty more thrills and spills. This is a market full of bold visions, ambitious promises and big risks.

The stocks to buy now

Any discussion of plant-based investing must begin with Beyond Meat (Nasdaq: BYND). The shares soared after listing in the spring of 2019, but have slipped by 40% since hitting an all-time high in July of that year. Rodney Hobson on Interactive Investor says the share price today is more “realistic” than it once was, but he still suggests “caution”.

Restaurant closures mean that recent earnings performance has been a “serious disappointment” and Beyond Meat may have to wait for next year to turn a profit. Hobson prefers Tattooed Chef (Nasdaq: TTCF), a smaller plant-based foods business whose grocery-store sales have held up better during the pandemic.

Many traditional retailers and food manufacturers are muscling into the plant-based sector as a hedge against the decline of their existing food businesses. Industry behemoths Nestlé and Unilever recently launched their own lines of plant-based burgers (the former was forced to rebrand its “Incredible Burger” line after Impossible Foods sued, arguing that the name was too similar to its own).

However, these are such large and diversified players that they do not yet offer much direct exposure to new eating trends.

A better bet among the established food giants may be Danone (Paris: BN), Credit Suisse analyst Robert Moskow tells Teresa Rivas in Barron’s. The group “dominates” the plant-based beverage market through its Alpro division and also owns Activia, “the leading brand” in probiotic yoghurts.

Moskow also thinks that frozen-vegetable sellers stand to gain if the pandemic leads to a durable rise in home cooking. In the US he likes Conagra Brands (NYSE: CAG) and B&G Foods (NYSE: BGS). In Europe the equivalent play is Nomad Foods (LSE: ORMO).

Makers of ingredients also stand to gain. Joshua Warner of broker IG highlights AAK (Stockholm: AAK), the world’s top producer of speciality oils and fats. Traditionally a supplier to the chocolate and confectionary industries, it has begun to work with plant-based firms on the intimidating lists of ingredients that often go into vegan processed foods. In the US, Ingredion (NYSE: INGR) and Bunge (NYSE: BG) play a comparable role.

Closer to home, says James Crux in Shares, Irish firm Kerry (LSE: KYGA) boasts “technological capabilities” that could prove invaluable as food chains shift to more plant-based options, according to a note from UBS. As both an ingredients business and a consumer-foods firm (it sells meat-free sausages) it has its fingers in plenty of vegan pies.

None of the cultured-meat start-ups, such as Dutch Mosa Meat or US Eat Just are listed on public markets. Instead, they rely on venture capital. Mosa recently concluded a funding round that raised another $85m.

However, investment firm Agronomics (Aim: ANIC) offers retail investors exposure to many early stage businesses, including Mosa Meat, LiveKindly and BlueNalu. Co-founder Anthony Chow tells Oliver Telling of the Investors’ Chronicle that the firm is for those who want to bet big on cultured meat.

“If you have a strong view that [cell agriculture] is never getting to scale, then this is not the investment vehicle for you… We see [Agronomics] as a bet on the rising tide of cellular agriculture,” he says. Agronomics’s other co-founder is long-time MoneyWeek contributor Jim Mellon. They explain their investment case in more detail here.

About three years ago, we became interested in prospects for what’s known as “cellular agriculture”, and the two of us founded Agronomics, via a listed Aim shell company. The shares have done very well, as investors have learned more about the prospects for making food and materials in laboratories and factories, without animal cruelty and slaughter. However, the industry is still nascent. We’d consider it as perhaps being at the equivalent of the dial-up phase of the internet, which means that prospects for super-charged growth are excellent.

Here are some “back of an envelope” predictions. The dairy industry as we know it today (with cows in sheds being milked almost continuously and generally in abject circumstances) will be gone in 15 years. Alternative milks, such as almond, soya and oat milks – Swedish company Oatly is about to go public with a rumoured $10bn valuation – are already gobbling up market share from traditional producers.

These plant-based milks are not necessarily better for either human health or for the environment. For example, almond production uses prodigious amounts of water. But these plant-based milks are just the vanguard of what will be the main disrupting force in the production of dairy products (milk, cheese, yoghurts and infant formula). This will come from precision fermentation, where casein and whey are replicated in laboratory-like conditions, by companies such as Perfect Day, Legendairy and NoQuo. These companies’ products will be effectively replicas of “normal” dairy products. And they will be in widespread use within three years.

Going beyond Beyond Meat

Then take meat and fish – any meat, any fish, any species. All of the companies we have in our Agronomics portfolio have prototypes that you can eat or, in the case of materials, feel. Some of these companies will be selling their products to consumers within a year or so. This is despite lobbying from what we call “the agro Luddites”, who are resisting the progress of lab-grown meat and fish. We are confident that half of all meat in the world will be plant-based or cellular-agriculture-based within ten years, and in the case of fish, possibly sooner.

MoneyWeek readers will be familiar with the march of plant-based meats in recent years. Beyond Meat has already gone public in the US, with a valuation of more than $9bn and it is rumoured that its great rival, Impossible, will shortly be going public via a special purpose acquisition company (SPAC) at a valuation of about $10bn. In the UK, home-grown companies such as Meatless Farms and Quorn are seeing rapid growth. In Europe, one of our favourites, LiveKindly, is doing well with its chicken substitutes.

But the really exciting opportunity for us is in lab-grown foods and materials, and not so much in plant-based ones. Why? For one thing, the cellular-agriculture companies typically have more intellectual property than the plant-based companies. For another, ultimately, we believe that at scale the products of the cellular-agriculture companies can be priced more cheaply than conventional foods (hence the title of Jim’s recent book, Moo’s Law, a riff on Moore’s Law, which refers to the process by which computers become more powerful even as costs decrease). Jim calls the point at which the price of alternative foods falls to that of conventional foods “griddle parity” (another riff, this time on “grid parity” in the energy industry). For plant-based foods, this might be as soon as next year in some cases, and in cellular-agriculture-based foods, maybe in five years’ time.

The power of griddle parity

“Griddle parity” is key. Some informed and committed consumers are influenced by the environmental destruction wrought by intensive farming and fishing, by the pandemic risks posed by animal husbandry (80% of all antibiotics go into animals), and by animal cruelty. But the reality is that most consumers care about four things: taste, texture, convenience and price. As far as the first three go, there is already no difference between cellular-agriculture products and those from conventional seafood or meat companies. But when it comes to price, cellular-agriculture processes are currently expensive because they use biotech inputs.

However, that is changing. The costs of the bioreactors, the “media” (the feedstock to grow the cells needed to produce the meat, seafood and materials) and growth factors needed to fast track the production of the foods and products, are coming down. There are remarkable investment opportunities in this field, but as yet nothing is public in the sector apart from Agronomics in London.

Its investments include BlueNalu, a cellular-agriculture seafood company, which will be in the US market by the end of this year. Then there is VitroLabs, which produces and sells leather of the highest quality, none of which comes from a cow (except for the progenitor stem cells). Meanwhile, Legendairy will shortly be producing mozzarella, again without resort to animals. The list goes on. We estimate that the total addressable market for the foods, seafood, and materials that we are investing in is around $5trn – about twice the size of the UK economy. You can see why we’re excited about this opportunity.

The problem with many traditional funds, be they actively-managed unit trusts or investment trusts, is that they tend to be rather staid and mainstream. That does not mean that they ignore unusual ideas – quite the opposite, in fact. Niches such as infrastructure or music royalties have become respectable over the past few years.

But once we move out of these relatively safe areas, active managers tend to run a mile, especially if they think they might be investing in something remotely legally dubious. That brings us to cannabis, the great investment taboo.

It’s a growing sector rapidly becoming legitimate in some major jurisdictions, such as Canada and a number of US states. But most fund managers in the UK are acutely aware that under our law they might be falling foul of the UK’s Proceeds of Crime Act if they invest in a company whose main activity is deemed illegal here.

So if you invest in businesses in the US or Canada that trade in recreational cannabis, you might be breaking the law in Britain. That even theoretically applies to British investors buying US cannabis stocks available on big online platforms. The law hasn’t been tested and no individual investor is likely to be had up for investing in a US supplier, but you can understand why many fund managers tend to avoid the subject entirely.

Where others fear to tread

Nonetheless, that has not stopped specialist exchange-traded fund (ETF) managers in the UK from offering ETFs that give you diversified exposure to the global cannabis business.

But there is a clever twist: they focus on businesses selling medicinal products that are not illegal in the UK. In practical terms that might mean investing in everything from a well known name such as GW Pharmaceuticals (UK-based but listed in the US), which patents therapies using cannabis-derived ingredients, to businesses that supply the “picks and shovels” of the cannabis sector: the basic infrastructure it needs, such as greenhouses. I would also argue that despite the ups and downs of the cannabis merry-go-round, now is not a bad time to look afresh at this space.

A positive political backdrop

GW has just been on the receiving end of a huge takeover bid and momentum is building in the American market, in particular, where the political backdrop is changing. Matt Bottomley is an analyst who works for Canadian investment bank Canaccord Genuity and has been tracking the listed North American funds for years. Following Joe Biden’s US presidential election win, sentiment – and legislative action – is picking up speed as various states are deciding to decriminalise.

Bottomley points out that 2021 has seen the Democrats effectively gaining control of the US Senate and pushing legislative reform; Arizona commencing recreational sales; the official signing of adult-use cannabis into law in New Jersey and Virginia; a joint statement from Democratic Senators (including Senate majority leader Chuck Schumer) pledging the party’s intention to move comprehensive cannabis reform through the necessary political and legal channels; and more than $1bn of capital raised “as US operators look to take advantage of what appears to be an industry that is growing at an accelerated pace”.

Expect strong earnings

Crucially, Bottomley says that many of the leading US multi-state operators (MSOs) are soon to report earnings for the fourth quarter of 2020, “which we believe will cap off what was largely a banner year for many US operators”. Canadian cannabis stocks, by contrast, have tended to promise a huge amount but have disappointed on earnings growth. The US pot sector now looks ideally positioned. Canaccord Genuity’s own US Cannabis Index (CGUSCI) is up by nearly 40% so far this year and the positive momentum should flow through into the wider cannabis sector, including the businesses focused more on medicinal products.

Where to look in London

This brings us to the two main UK-listed ETFs that focus on the sector. They are the Medical Cannabis and Wellness UCITS ETF (LSE: CBDX), operated by HANetf, and the Rize Medical Cannabis and Life Sciences UCITS ETF (LSE: FLWR). Both issuers go to great lengths to say that their approach is differentiated and superior. The former skews more towards small companies and the agricultural technology sector, for instance, while the latter has more of an emphasis on large caps and biotech groups. It is also a tad cheaper, with a total expense ratio (TER) of 0.65%; the HANetf product costs 0.8%.

Many stocks in common

Nevertheless, the two ETFs share many of the same stocks. These include names such as GrowGeneration Corp, Scotts Miracle-Gro, Amyris, Arena Pharma and Cara Therapeutics.The Rize ETF makes more of its global focus, pointing out that more than 50 countries now allow cannabis for medicinal use.

It also concentrates on the underlying liquidity of the stocks in its fund. The managers consider liquidity crucial, and they build the index with a keen eye on the volume weighting of each stock. By contrast, the HanETF tracker fund is market cap-weighted and more North America-focused, especially in the US. It also has less exposure to large well-known names such as Teva and Novartis.

It also helps that the HANetf operates a 15% maximum exposure to one stock and is a more concentrated portfolio. Last but by no means least, I noticed that the HANetf fund recently rebalanced its portfolio and has some new US names in there such as HydroFarm (NASDAQ: HYFM), a large wholesaler of hydroponics equipment, which is helping to extend cannabis cultivation in the US.

There is also Agrify (NASDAQ: AGFY), an engineering and planning company that helps the largest cannabis operators in the US grow pot indoors, as well as Silver Spike (Nasdaq: SSPK), which is a special purpose acquisition company (SPAC) that has just completed its qualifying transaction to take public a cannabis marketing company called WeedMaps.

I make no comment on the overall relative appeal of either ETF. Both will help you gain some exposure to cannabis, which I maintain will be one of the key investment themes of 2021.

Everyone has certain expressions they particularly dislike. One of mine is “they’re not making it any more”. It is used by egregiously dim City sales people when promoting various asset classes, including commodities, property and especially land. For making it or not, all asset classes are cyclical.

Yet it is in farmland that the irritating saying is most alluring. How do you feed a global population that has risen from 2.5 billion in 1950 to 7.9 billion today and is projected to reach ten billion in 2050? Especially given that, as incomes and living standards have risen steadily in most countries, the result has always been that people eat more (usually more than they need) and better, switching from staples to dairy products and expensive meat.

Moreover, farmland has been one of the best and least cyclical investments for decades, beating most other investments with the current exception of gold. In the UK, for example, bare land prices over the last 20 and 50 years have risen by a factor of four and 25 respectively. Similar or even greater increases have occurred in other countries.

An unsustainable business model

There has been much pontificating about the enormous changes that must result from the pandemic. But my guess is that the trends in place beforehand will simply accelerate and perhaps nowhere more so than in farming, where the business model is utterly hopeless and unsustainable. The hopeless part is that in every developed country farming is a marginally profitable and low value-added business, kept afloat by subsidies and owned and managed by old men (the average age of farmers in the UK is now 61). Much of what is grown is not essential or can be produced more efficiently elsewhere, but the lure of subsidies dictates land use.

As for sustainability, land degradation is a major problem; the United Nations Food and Agriculture Organisation estimates that a third of global farmland has suffered meaningful degradation. Many farm chemicals and pesticides are both hazardous to health and environmentally damaging. Then there is waste. Between a quarter and a third of all food production is thrown away or rots. Finally, consider simple economics. There has been a surplus of food every year since 1980. Any famine since then has been a function of poor distribution, incompetence or corruption – usually all three.

Eye-watering subsidies

The level of subsidies is eye-watering. No one knows the total globally, but a World Bank estimate suggests a figure of $700bn a year, or just under $2bn every day. That is four times the aid rich countries give to the poorer nations who often need support because they are barred by tariffs from exporting food.

While the EU has rightly been criticised for its farming subsidies – they comprise a third of its annual budget and a basic payment of €260 per hectare (2.5 acres) – it is not the worst offender. Countries such as Norway, Switzerland and Korea pay farmers far more. In Japan subsidies can be as high as the equivalent of $800 per 0.1 of a single acre. America last year decided to bail out its soya bean farmers because China had briefly halted soya imports from the US during the trade war. That cost more than the rescue of the entire US car industry in 2008/2009: the respective figures are around $28bn and $17bn.

The consequences of these subsidies have been universally bad. They include tariffs to prevent food imports from cheaper, more efficient producers, leading to higher domestic food prices; land prices soaring to uneconomic levels; corruption, and the suppression of development and food production in third world countries. Estimates vary, but the approximate cost of subsidies in the UK for a family of four is about £500 per annum.

Even with subsidies, farming is barely profitable. In England, subsidies account for over half of farm income across all sectors (the figure is higher in the other parts of the UK), with livestock and cereals being the most dependent, horticulture the least. The median farmer earns slightly less than the national average for longer working hours and sometimes awful conditions.

So why do they do it? Lifestyle and conservatism play a part, but there are hidden benefits: generous VAT rules, other subsidies (costs such as a car can be put on the farm account) and exemption from inheritance tax. What’s more, even poor farmers are sitting on a valuable asset where the tax rate on a sale is not onerous.

New Zealand blazes a trail

New Zealand is often cited as an alternative to those developed countries addicted to farm subsidies. In 1985 it was effectively bust because of widespread subsidies across many industries. Farm subsidies were abolished. Until then the sector had been unproductive and inefficient. Land prices tumbled and then the recovery began. Better pasture management and improved animal breeding turned New Zealand into the world’s largest exporter of powdered milk. Meanwhile, the 70-million-strong sheep flock was slashed to less than 30 million – yet exports have not changed. Productivity, in other words, has more than doubled.

Great leaps forward in productivity

There has been impressive progress on the global scale too. From the 1950s, farming made huge leaps to meet the demands of population growth and rising wealth. Since 1960 the world’s population has increased by about 150%, but cereal yields have increased by 200% and overall production by 250%. All this was achieved with only a tiny increase in the amount of land farmed.

Moreover, there is still scope for another surge in productivity. In 1945 UK farmers were producing what was then seen as a dizzying 2.5 tonnes of wheat per hectare (tph). At the local pub today you’re a loser below 7.5tph. Major potential agricultural producers such as Russia are still stuck at the 2.5 level. Rice is another important staple. China has increased its output per hectare fivefold since 1960 to 5.5 tonnes, but other rice growers in Asia, such as Thailand, have seen their output rise to a mere 2.2 tonnes. Large gains can therefore be made even before we consider better seed dressings against disease and new seed strains.

I have said I think the pandemic will accelerate pre-existing trends. For farming two of these matter: the level of subsidies and environmental concerns. The latter has gone mainstream. Before the last general election the three UK nationwide parties developed competitive tree planting fever (Labour one billion by 2030, Conservative 30,000 and Liberal 40,000 per year to 2025). All developed countries have slowly woken up to increasing public concern about pollution (from nuclear to sewage), poisons in the food chain, waste disposal and climate change – all lumped together under the term “environmentalism”.

EU leads the green charge

The champion in this context is the EU, driven by the ever-greater success of “green” parties in elections. The EU has banned a range of pesticides, including one that has many organophosphate compounds – a useful herbicide and pesticide, but very harmful to humans and the environment. This lead is slowly being followed by other major food producers, including Brazil and China. Because the EU is such a large food importer its rules run beyond its borders. The US is fighting such changes (the farm lobby is very powerful), but will lose.

Modern farming practices also look increasingly old-fashioned with their reliance on a single crop or a lack of sensible diversity. Around 90% of the world’s banana crop is under threat because of a lack of genetic diversity and a rapidly spreading fungus. The paucity of pig strains (swine fever is rampant in China) or varieties of apple leaves them open to the same risk.

Dabbling in farming

Although by trade a city type, I also own a farm in the UK (we were young and land was then cheap) and a much larger one in the Baltics (where land and drink were cheaper still). More recently I acquired a small share in an operation in Uruguay (nice warm winters). I am definitely not a professional farmer, but after 30 years you get an idea of what works.

Here in the UK until recently we followed the standard model of heavy machinery compressing the fields, ploughing and levelling until they look like bowling greens. It is a very expensive process.

The clay soil is gradually breaking into sand and has a nasty smell. Lots of nitrogen and dubious chemical sprays are applied yet most years there is only a tiny profit, even after subsidies. In the Baltics we plant nearly half the seed numbers per hectare compared with the UK. Our fertiliser is mostly chicken muck. We spray rarely and selectively. We rotate crops. Our yields are better than in Britain, profits are peachy and soil improvement dramatic. In Uruguay we are mostly renting and do even less, but I expect the profits to be higher still. Yet in the UK we get the full fat subsidies, in the Baltics a third of that level and in Uruguay, none. All subsidies are on the block following the pandemic, not least because government deficits and debt levels are rocketing. Farm lobby groups still mutter about food security, but given the continuous global surplus and that during the pandemic the supply chain worked remarkably well, their case is weak.

What happens next in the UK and Europe is easy to forecast from the mood music. Big farmers and giant agribusinesses are bad. But small mixed farms with grass-fed animals and operating in the sensible, but unfashionable way (such as crop rotation), will be the winners from a smaller subsidy pot.

Step away from that steak

There is one other change that will transform farming even more than environmental concerns and subsidy cuts: the trend towards lower meat consumption. As someone who needs at least two steaks a week to function I am not keen, but the vegetarians are largely on the money. Around 70% of the world’s land is habitable. Of this, half is used for agriculture; forests comprise a third and the rest scrub. Built-up land and freshwater lakes and rivers make up only 1% each.

Of the agricultural land, three quarters is used for animals – beef dominating, followed by dairy, with only a fraction for sheep, pigs and poultry. Eating less beef would free up enormous quantities of land twice: there would be less cattle and lower demand for grains. It takes seven pounds of grain to produce one pound of beef. Most other animals are far more efficient converters: pigs 3:1, chickens 2:1 and salmon 1:1.

Expect bargains next year

So is there any money to be made by investing in farming? Yes, but selectively. Overall UK land prices started to slip immediately after the Brexit vote and continue to weaken. The peak for good arable land was around £11,000 per acre in England. Now the price is around £8,500. It gets into value territory below £7,000. Outside England there are two areas where land prices are already low: much of France and central Scotland, where some large parcels are a snip.

One area where I want to buy is woodland, which in no particular order will be a big beneficiary of changing grants, is likely to maintain its highly favourable tax treatment and will be a winner from environmental awareness. One day the government will wake up and notice that wood (including pulp, paper and furniture) is the UK’s sixth-largest import, yet we could be almost self-sufficient. Woodland is also relatively easy to manage, while professional sub-contractors are plentiful. There are also potential sidelines in camping and eco-tourism. Depending on the age (the closer to felling, the higher the price) valuations look appealing and one can expect a yield of around 3%. England looks fine, while Scotland and France offer better value.

The next two years will give us a better idea of the government’s plans, but even the most optimistic outcome will compress land prices further. Many farmers will sell up and leave and one weak harvest would force out more. The bargains should appear as soon as late next year. Buy small (less than 80 hectares), buy mixed and chase the eco-money, including organic. However, don’t buy a listed farm fund; historic returns were bad even in the good times because management charges ate the profits. And don’t buy unlisted agri-funds, you will be shark food. In the box below I look at listed investments in agriculture.

What to buy now

I can find no suitable fund providing broad exposure to agriculture, forestry and environmental improvement. All are either too small, suffer from lacklustre performance, or are too widely diversified. Thus the only option is to invest in listed companies directly. I recommend mostly larger companies that are the best in their class.

In agricultural machinery two stand out. The first is New York-listed Deere & Co (NYSE: DE), which with a market capitalisation of $56bn is the largest listed manufacturer. Offerings range from combine harvesters to forestry equipment. Extra profits stem from machinery add-ons and financing for buyers.

Many farmers tend to be repeat buyers of a trusted brand such as Deere. Its share price has easily beaten the leading US S&P 500 index over the last three and five years.

I prefer (and own) the much smaller ($5bn) competitor AGCO (NYSE: AGCO), even though it has underperformed Deere recently. It is also headquartered in America, but most of its sales (combines, tractors and grain-storage equipment) and production are based in Latin America, eastern Europe and East Asia. Economic problems in some countries (such as Argentina) have held back sales and profits. In most of its markets it’s number one or two.

Local manufacture can be risky, but it means AGCO is also much closer to clients and local governments. Last year earnings per share reached $4.40, giving a historic price/earnings (p/e) ratio of 15 – cheap for the sector. This year profits will be about a fifth lower, but 2021 should see a strong recovery.

In nitrogen fertiliser – it will never be “green”, but many crops won’t grow without it – the standout is America’s CF Industries Holdings (NYSE: CF). This is based both on performance and better management than its competitors. When cereal prices enjoy a cyclical upturn (currently they’re flat), fertiliser firms boom. The stock is at a three-year low, on a trailing p/e of 19 and yields 3.5%.

Viniculture is often ignored, yet is a huge industry. The three largest companies in this subsector are all based in North America, but the fourth – which also produces far better wines – is Australia’s Treasury Wine Estates (Sydney: TWE). A star performer for five years to 2019, it has since fallen dramatically from A$18.50 to A$10.90 because of reduced demand from China, two profit warnings (one Covid-19-related) and some seemingly tendentious legal actions. These will pass; demergers and sales of non-core divisions should herald a recovery.

The UK has few listed agriculture-related companies, but in forestry one stands out: Gresham House (LSE: GHE). Small, with a market cap of only £220m, it was until early last year an “alternative asset manager”, but made a transformational acquisition when it bought Forestry Investment Management. It manages funds in the forestry sector, which now accounts for half of assets under management. In the half year to 30 June these increased by 17%. It’s not cheap, but seems to have the growth mojo.

This article was first published in MoneyWeek magazine issue no 1000 in May 2020. To make sure you don't miss out in future, and get to read all our articles as soon as they're published, sign up to MoneyWeek here and get your first six issues free.

It is hard to see into the future at the best of times, but the coronavirus has made our crystal balls murkier than usual. Lockdowns have throttled large parts of the global economy. Governments are beginning to take their hands off our throats, but there’s no way of knowing whether the casualties will ever get up and walk again, as Edward Chancellor put it in a recent interview with MoneyWeek.

Will businesses that have temporarily shut up shop open again and resume business as normal, or will they find their customers and workers gone, their supply chains broken? Will the economy roar back to health in a V-shaped recovery? If not, perhaps a U-shaped one? Can anyone yet be very sure that it won’t be an L, at least for the foreseeable future? We just don’t know.

Some things, however, do seem relatively clear. One is that the coronavirus crisis has accelerated trends that were already apparent before the outbreak. Another is that governments can usually be relied upon to fight the last war vigorously. Both may give a lift to companies that seek to alleviate water shortages.

Get the dull stuff right

Preventing pandemics is relatively cheap, simple and cost-effective, certainly when compared with the costs of letting them rip, as we are seeing now only too clearly. As Max King recently pointed out in these pages, when the World Health Organisation was required to trim $1bn from its budget in 2008, it dissolved its pandemic response department, slowing its ability to respond to Ebola.

An analysis by Dr Jonathan Quick, who wrote a book on the threat of epidemics in 2018, suggested that the equivalent of just $1 for every person on the planet per year ($7.5bn annually) would save lives and pay for itself. Developed-world governments, now shovelling hundreds of billions into an economic black hole with no end to the task yet in sight, will surely reconsider their attitudes to what it’s worth spending to prevent future known unknowns.

As has been well understood for more than a century, when it comes to public health, dull efficiency, in the provision of effective sewerage infrastructure for example, can be far more effective and important than the excitement of flashy new technologies or praying for vaccines and therapies that may never arrive.

In the case of the coronavirus crisis, we all got used early on to the advice that we should wash our hands more regularly and it seems increasingly likely that a Sweden-style route back to normal life involving relying on people to take modest but sensible precautions will prevail globally, whether or not the fancy new tracing apps or tests or therapies ever amount to much or reach enough people to make a difference.

Yet something as simple as regular hand-washing is far easier said than done for those who do not have ready access to water. Very many people around the world do not. And as this crisis has shown only too clearly, that is not only a cause of real suffering for them, it is very much our problem too.

Health authorities advise washing hands frequently for at least 20 seconds to prevent the spread of coronavirus, yet three billion people, 40% of the world’s population, lack access to basic hand-washing facilities in their homes, as the World Resources Institute (WRI) points out.

Nearly a billion people have only partial access or experience regular outages even when they do have piped water, making frequent hand washing difficult or impossible. Charitable organisations have ramped up assistance to provide short-term solutions to this problem to help prevent the spread of coronavirus, but securing public health and controlling Covid-19 in the future will require governments to address the root problems of water scarcity.

The UN reckons that the capital investments required to meet its global sustainability goals for water supply, sanitation and hygiene services in low-income countries are at least three times current expenditure levels. Such investments, along with improved management of existing resources, including the natural ecosystems that ultimately provide the water, not only create a sound foundation for preventing the spread of Covid-19 and other diseases, but also boost local economies. WRI’s research suggests that the UN’s goals could be achieved by 2030 by spending as little as 1% of global GDP.

Richard Connor, editor-in-chief of the UN World Water Development report, told The Observer earlier this year that water investments are often overlooked because the economic benefits are not emphasised. Water scarcity is perceived as being mainly a social or environmental issue, rather than an economic one. “Yet the economic costs of an outbreak [such as Covid-19] are enormous, both in terms of national economies and stockmarkets, as well as in terms of household revenue – when people cannot work because of sickness or lockdowns.

Realising the economic importance of water and sanitation should provide an additional catalyst for greater investment,” he said. Connor cites evidence that returns on investment in water and sanitation can be high, with a global benefit-cost ratio of 5.5 for improved sanitation and 2.0 for improved drinking water, when broader macroeconomic benefits are taken into account.

The bigger picture

The coronavirus crisis is throwing new light on these issues, but the underlying causes of the problem have been manifest for many years. Water use has increased sixfold over the past century and is rising by about 1% a year owing to rising populations and increasing demand from industrial and agricultural production, and our increasingly urban existence, as well as from domestic use. At the same time, supply is under strain.

The overall amount of water has not, of course, changed – three-quarters of the Earth’s surface is covered with the stuff – but only about 3% of that is fresh and shortages of potable water have been exacerbated by pollution and climate change, which tends to make drier areas drier, causing droughts, and wetter ones wetter still, causing flooding. Ecological destruction, such as deforestation, only makes the problems worse.

According to the UN, global demand for fresh water could outstrip supply by 40% by 2030. More than five billion people could be suffering water shortages by 2050. As a result, commentators have worried about the prospect of water wars for years and, although we have yet to see a full-blown conflict explicitly about the issue, security of water supply has been an element in many geopolitical disputes and conflicts around the world.

What is to be done? The UN’s report mentions a range of measures, including innovative techniques such as fog capture, traditional ones such as wetland protection, and methods for using less water in agriculture and industry, by reusing waste water without necessarily making it safe to drink, for example.

Other promising developments often mentioned include water desalination, drip irrigation systems that give crops only exactly what they need, and generally improving the efficiency of existing infrastructure by fixing leaks, and so on. The crucial question, of course, is financing.

The authors of the UN report point out that the services relevant to achieving success in all these areas are often underfunded and need greater attention from states, and point to the scope for integrating such services within water-scarcity investment vehicles to make them more attractive to donors, as has happened in Sri Lanka, for example.

When it comes to the role of private firms, their involvement is sometimes contentious. Attempts to privatise water resources have had mixed results and provoked criticism for making water harder to access for poorer communities, as Antoun Issa points out for Brink News.

Water pricing, although the obvious way to motivate change to an economist’s way of thinking, is largely taboo for political and ethical reasons. The UN has proclaimed access to water a human right, which makes it politically difficult to then charge for it, especially as those worst affected will struggle to pay. But private firms are inevitably going to be part of the solution. “Investment on every possible level is what will end the water crisis and bring water and sanitation access to all,” says Gary White of the WaterEquity fund, a global non-profit organisation that provides affordable financing to poor communities lacking access to clean water.

How to invest

When governments wake up to the fact that dealing with the water issue is one way of providing a decent buffer against future pandemics and act as they did when they demanded that banks provide bigger buffers of their own in the wake of the financial crisis, it will be private firms that will provide the nuts and bolts. The cheapest and simplest way to invest in companies tackling global water scarcity is through exchange-traded funds (ETFs).

One option is a relatively new entrant, the L&G Clean Water ETF (LSE: GLGG), which listed on the London Stock Exchange in 2019. It is slightly cheaper than the obvious alternatives, with a total expense ratio (TER) of 0.49%, but also “offers something different”, as Kenneth Lamont points out in Money Observer. Like its peers, the fund tracks an index of global water stocks, but it also targets companies that provide technological, digital, engineering and other water services beyond utilities and water equipment. This gives it a greater tilt towards small caps and growth.

An actively managed alternative is the Pictet Water Fund, with an ongoing charge of 1.15%. Its managers invest for the long term in companies around the world operating in the water sector. It has been a steady performer, generating annualised returns of 8.79% over the past ten years.

A top holding in the Pictet fund and many of the sector’s ETFs is Xylem (NYSE: XYL), which operates in water infrastructure and also sells metering, networked communications, remote monitoring and measurement and control technologies. The stock had been on a steady upward trend for the past five years before taking a hit due to the present crisis, which took it down to what Simply Wall Street’s analysts judge to be fair value. Xylem looks to have a bright future, with earnings predicted to rise by 75% over the next few years.

Things seemed to be turning out well for pot-heads in 2019 and for the companies that seek to provide for their needs. Then a new, more depressing reality dawned.

What's happened?

This was the year in which Canadian and US cannabis stocks burned brightly but then went up in smoke. At the start of the year, cannabis stocks (such as Canopy Growth, Aurora Cannabis and Innovative Industrial Properties) were all the rage on the back of legalisation in Canada and California and a tripling in size of the worldwide legal cannabis market over the past four years.

In the US, 33 states now allow medical use of cannabis, and 11 have legalised recreational use. Medical use is increasing across Latin America and in countries including Germany, South Korea and Thailand.Breathless predictions suggested that the legal global market could be worth $150bn within ten years that's about the size of the global illicit market now. Since the spring, however, the market has turned, with most pot stocks losing at least half their value, and plenty of them far more than that.

What has caused the downturn?

In part, it's the old story of greed followed by fear. This is a relatively thinly traded market (and one unusually skewed towards retail investors) which has seen irrational exuberance followed by a sell-off. But there's lots of fundamental factors, too. Canadian regulators have been swamped by licensing applications, and retail rollouts have been slower than predicted. The health scare over vaping has dampened enthusiasm. Sales and earnings figures have disappointed.

And the whole market has been spooked by unnerving data from California. The traditionally liberal state is the world's biggest legal cannabis market, where medicinal use has been legal since 1996. Ominously, though, since the legalisation of recreational cannabis at the start of 2018, the legal cannabis market has actually shrunk.

According to stats from market analysts Arcview Market Research and BDS Analytics, the size of the legal cannabis market there fell from $3bn in 2017 to $2.5bn last year. The main reason for this is that many firms in the medical space have found the new array of regulations too onerous, and the fees for permits and licences so pricey that they've struggled to make their businesses work.

What about the recreational market?

Even in California, the retail cannabis market has not taken off as expected. Many cities still don't allow shops, despite state-level legalisation. Some cities, including LA, allow shops, but have been super-slow to issue licences. And the high taxes payable on the cultivation and retail of cannabis (which remains illegal under US federal law) have made the end-product expensive.

In August, an Economist journalist researching the marijuana market at Harborside Oakland ("a modern-day temple to the delights and possibilities of the botanical marvel that is the plant Cannabis sativa") was advised she could get an ounce of cannabis delivered (illegally) outside the store for $150. Inside, the same product was priced at $400.

Is cannabis safe?

The arguments in favour of decriminalisation are familiar and clear: less power to criminal gangs, fewer young people criminalised, lots of tax revenues for the state coffers. But sceptics say that all these arguments rely on the assumption that cannabis is basically benign, when in fact it's more dangerous than it was a couple of decades ago. "Study after study", says Clare Foges in The Times, "has found a clear association between the high levels of THC that most present-day cannabis contains and serious mental health problems, particularly schizophrenia and psychosis". In London, a study found that the use of super-strength cannabis had helped push up psychosis rates to the highest in Europe. "If we could abolish the consumption of skunk, we would have 30% fewer patients," says Professor Sir Robin Murray, a psychiatrist at King's College London.

Won't regulation address that?

The idea that regulation will ensure that only safer, low-THC forms of cannabis are licensed is nonsense, argues Foges. That's because people who want the bigger hit will still buy through the traditional illicit channels as has proved to be the case in Canada. "Around the world we have seen that legalisation does not rid a country of its dealers; instead, by normalising drug use, it increases their potential market."

How policy-makers around the world balance these issues will be "the single biggest catalyst" when it comes to the future prospects of the sector, says Christopher Carey, an analyst with Bank of America. His bank's research puts the value of global cannabis sales at $166bn this year but the legal slice of that (mostly in North America) is just $15bn. Until that balance changes dramatically, investing in cannabis stocks is always going to be very high risk.

Is it still worth taking a punt?

As ever, that depends on individual investment objectives and appetites for risk. In the short-term, some analysts think that the sector is likely to see further losses. But in the longer term the outlook remains positive.

One key factor to bear in mind is the distinction between recreational and medicinal uses. Europe is much more focused than North America on the latter sector. Companies such as GW Pharmaceutical, for example, have a number of promising patents for medical applications (Cannabidiol, or CBD, is the basis for its epilepsy drug Epidiolox, for example). This is the sector that currently has the most promise.

But potential investors should be aware that the market is immature the results of clinical testing (in the medicinal space) or the emergence of trusted consumer brands (in the recreational arena) remain to be seen. This situation will change in time, however. That could be the tipping-point.

Ever since last summer, the Chinese government has been insisting that it has the outbreak of African swine fever under control, says the Financial Times. But "the crisis is now undeniable", and the world's biggest producer and consumer of pork is shaking the global market.

The number of pigs in China, around 450 million, is set to shrink by a third by the end of 2019 as the incurable disease rages. US pork sales to China have hit a record high despite a 62% tariff imposed on the products amid the trade war. Dwindling supply will propel Chinese prices up by 70% year-on-year in the second half, reckon analysts, while lean hog futures traded in Chicago, a key global benchmark, have just rocketed to a two-year high around 90 US cents per pound.

Viewpoint

Nick Maggiulli, Of Dollars and Data

Coffee prices have tumbled to a 12-year low. Benchmark New York futures have now fallen below $1 a pound, thanks to a bumper crop in Brazil, the world's largest producer, coupled with a stronger US dollar. Prices are below the cost of production in many of the main coffee-growing countries, says Emiko Terazono in the Financial Times. In Colombia and El Salvador it is $1.20 and $1.50 a pound respectively.

Producers are now calling on the big coffee companies to help "cover farmers' costs as they struggle to make ends meet". The world's top ten coffee firms account for more than a third of bean consumption. Nestl's share is 9%, private equity group JAB Holdings takes 8%, and Starbucks consumes 3%.

Viewpoint

"Oil broke higher [this week], with the price of Brent decisively breaching US$80/bbl, a level it had repeatedly tested since early May, when the US administration announced it would reimpose sanctions on Iranian exports. The immediate trigger for the break-out was the decision at the weekend by the Opec cartel, plus Russia, not to increase their formal output target in the near term. With supply squeezes and bottlenecks elsewhere in the world, dealers fear a growing supply deficit in 2019. Their fears are justified Even with US shale producers and the rest of Opec pumping at full stretch, vigorous enforcement of US secondary sanctions against buyers of Iranian oil could send oil prices spiralling higher. So could any new supply disruptions in the Middle East or Nigeria. As a result, the risks for the oil price will be skewed firmly to the upside over the next 12-15 months."

Tom Holland, Gavekal Research

US cheese prices have crumbled thanks to a glut,says Myra Saefong in Barron's. The block cheddar cheese benchmark price settled at around $1.54 a pound after a bout of volatility this month. Traders predict more of the same for the year. But in the long run, prices should recover.

Two of the largest importers of US dairy products are China (which imported $577m in 2017) and Mexico (with $1.3bn), and both implemented tariffs on cheese in retaliation against US levies. These ongoing trade wars are likely to lead to dairy-farm closures, which would slow down cheese production.

US cheese prices have crumbled thanks to a glut the block cheddar cheese benchmark price settled at around $1.54 a pound As supply dries up, cheese prices will come to reflect a new balance between supply and demand.

Viewpoint

"During more than 40 years of European integration, the UK economy has become so enmeshed with those of the rest of the EU that a vast tranche of our economic activity is only legally authorised by a thicket of EU laws Even before the referendum,some of us were urging that there was only one practical way we could get pretty well all we wanted: to become a fully independent country, freeing ourselves from three-quarters of the EU's laws, while continuing to enjoy "frictionless" trade. And also leaving us free to sign trade deals across the world, and even to exercise some control over EU immigration. This was to remain in the wider European Economic Area (EEA) by rejoining Norway in the European Free Trade Association. This could have solved virtually all the problems that have proved so intractable, including the Irish border."

Christopher Booker, The Telegraph

Your "artisanal vanilla ice cream" could be "under threat", says the FT's Emiko Terazono. Vanilla prices have rocketed to a record peak of more than $600 a kilo. A cyclone in March dented supplies from Madagascar, which accounts for half of world output. The storm accelerated an upswing caused by food manufacturers promising to use real vanilla rather than synthetic flavourings, while speculative hoarding by traders in Madagascar also raised prices. Vanilla pod producers are now frantically planting more, but it could be several years before prices subside to historical norms.

Viewpoint

"What a bloodbath the UK stockmarket was last week. Profit warnings from Provident, WPP and Dixons Carphone mean 2017 is shaping up to be a real rollercoaster for investors, after Serco, Carillion and Pearson served up some proper horrors earlier in the year.With the economy slowing investors may fear a slew of others. Yet the reality is that most are the result of problems specific to individual companies. Dixons has been hit by changes in consumer behaviour, while WPP is a victim of the rise of the big online giants Provident was the architect of its own downfall [due to a] botched attempt to embrace technology. This isn't part of any wider trend."

Ben Marlow, The Sunday Telegraph

Toblerone isn't the only famous chocolate to have suffered "shrinkflation" a reduction in portion size for the same price, says Emiko Terazono in the FT. In recent years a 1kg Quality Street tin has been cut to 820g, and six Creme Eggs have become five.

Cocoa bean futures have risen only slowly in the past few years, but the price of cocoa butter has soared, gaining 40% this year alone. It contains beans and other ingredients, including sugar and whole milk powder, which have both jumped by 50% amid supply squeezes.

The squeeze is easing now, thanks to better weather.

Viewpoint

"[Warren] Buffett once declared he has an 800 number to call if he ever feels the urge to buy an airline stock so someone can talk him out of it. Well this week [he] invested over a billion dollars into America's big four carriers. Why? Sure, they are cheap and oil is low... But a bigger attraction, ironically, could be the sector's enormous fixed costs' something Mr Buffett has long cited as a deal breaker. If the US economy is near take-off, the likes of American Airlines has ten times the operational leverage of, say, ExxonMobil and Caterpillar. And nothing beats an oligopoly; the four biggest US airlines have an 80% domestic [market] share "

Deutsche Bank

Heavy rains in the Tanaro river basin in Piedmont, northwest Italy, have led to a bumper harvest of Alba white truffles this year, according to Bloomberg. Alba truffles are the most highly sought-after of all truffles and are considered the "diamond of the culinary world".

The harvesting season usually runs from November to January, but the rainfall has meant an early start, with the first crop hitting the shelves as early as September. Prices are down by 30% on last year, with €100 buying 72 grammes of the much-prized fungus, compared with 52 grammes in 2015, as the chart on the right shows.

China's clampdown on equity trading has prompted speculators to bet on commodities instead, sayEmiko Terazono and Lucy Hornby in the FT. Take the bubble in the garlic market.

The wholesale price in China, which accounts for more than 80% of the world's garlic exports, has risen since 2015 as heavy rains damaged the crops planted for the 2016 harvest. People began to hoard garlic, while speculators have now piled in, propelling prices to multi-year highs.

Mung beans and pickled walnuts are other niche markets to have "fallen to the vagaries of hot money'".

Viewpoint

Economists are bad at short-term forecasts, especially when it comes to assessing the impact of anticipated shocks, where... prejudice dictates the prediction. But they tend to be much better at the longer-term implications, and I do worry that we are starting to fall prey to the very reverse of Project Fear call it Project Delusion where to express almost any vaguely negative view on economic prospects is to be labelled "unpatriotic". What's required is realism and honesty economic conditions are going to get tougher, but so long as cool heads prevail, not disastrously so. Time for Project Reality.

Jeremy Warner, The Sunday Telegraph

Hipsters have helped propel lobster prices to an 11-year high, says Emiko Terazono on FT.com. Over the past few years, the crustacean has become an "affordable luxury", thanks to the surging popularity of the lobster roll, which used to be largely confined to New England.

Lobsters have also begun to appear in discount supermarkets. The price dip following the global financial crisis has bolstered demand in Asia. Global lobster imports were 7% up year-on-year in the first quarter, with imports to the EU up 20%. Demand has overwhelmed a gradual supply increase in recent years.

Viewpoint

"The consumption of financial media can be dangerous In August 2000, Fortune magazine [tipped] Ten stocks to last the decade' [the] recommendations concentrated on technology, media and telecoms stocks the Fortune portfolio lost 65% of its value over the subsequent decade. Three companies went bankrupt, and one was bailed out. In the words of the legendary value investor Benjamin Graham, Investors do not make mistakes, or bad mistakes, in buying good stocks at fair prices. They make their serious mistakes by buying poor stocks, particularly the ones that are pushed for various reasons [by Wall Street]'."

MoneyWeek contributor Tim Price in his PFP Wealth Management newsletter

Spot butter prices in America hit a record peak above $3 a pound in 2015, but now they are falling. Butter has gone through a typical pattern for soft commodities: strong demand and higher prices prompt a jump in production, resulting in a glut and falling prices.

After 2012 demand jumped as anti-fat diets went out of fashion and people started buying butter again. Consumption reached a 40-year high. Producers diverted resources from other dairy products to meet demand, says Chelsey Dulaney in Barron's.

Now stockpiles are up 52% from a year ago and close to a 23-year high.

Viewpoint

Deutsche Bank

In 2008, wheat prices briefly spiked above $13 a bushel, sparking food riots in emerging markets. Since then, the price of the world's most commonly consumed food grain has slumped by more than 70%, with benchmark US futures now at a ten-year low below $4, says Gregory Meyer in the FT.

Harvests have been plentiful in most major producers. In the US, farmers have run out of space in silos and are stockpiling wheat outside, while Russia, likely to become the top exporter this year, also faces storage problems.

Global supply is set to hit a record 743 million tonnes this year.

Nut lovers beware, says Emiko Terazono in the FT. We are facing a cashew supply crunch. Unusually hot and dry weather, a result of the El Nio phenomenon, has reduced crops in Vietnam and west Africa.

Global production this year could fall by as much as 4% to 708,000 tonnes, reckons the International Nut and Dried Fruit Council. Rising labour costs in India have compounded the shortfall by eroding margins and encouraging the temporary closure of production facilities. Benchmark Vietnamese prices have soared to a five-year high of $4.20 a pound.

On the MoneyWeek cruise last week there was much talk about sustainability about pollution, about climate change, about energy usage and waste and generally about the ability of the earth to keep giving and giving to a growing human population.

Regular readers will know that, being great believers in human ingenuity, we are generally optimistic on these things. That's a position increasingly borne out by new technology.

Consider agriculture. The truth is that, while there are obviously iffy moments (North Korea, China's great leap forward', etc) agricultural yields always rise over time as new techniques and technologies take farming to new levels. Some of the our major crops have seen yields rise ten-fold in the last 200 years corn yields alone are up four-fold since the 1950s.

We're reaching one of those new levels right now thanks to precision agriculture' a mixture of big data and (coming soon) robotics that helps farmers to customise the cultivation of every square foot of their land.

According to IBM(which is active in the area) by "collecting real-time data on weather, soil and air quality, crop maturity and even equipment and labour costs and availability" and then using predictive analytics, farmers can make smarter decisions, decisions that result in better productivity, less waste, fewer pesticides, less energy and water usage and, in the end, fewer people.

One of the best descriptions of how all this works comes from Jess Lowenberg-DeBoer in Foreign Affairs magazine. The key to getting this right is to use what is known as variable rate technology' to map every part of a field for things such as phosphates, acidity, potassium and the like, and then to treat each part of any field with the fertilisers that suits it and to see which fields will work best for which crops at which time of year.

Right now, this means putting sensors in the soil manually to check which bit needs what, something that means that, in the US, they are used only every 2.5 acres (in Brazil it is every 12). That's a start, but it also means that "huge productivity gains" are missed soil can change every few feet.

It's also expensive which is why only 20% of US farms are fully precision-farmed. However, new sensors are in development that can be put into the ground every few feet, take regular readings and report those readings via GPS, something that will lead to a system whereby each plant effectively reports its needs as the tractor approaches. Fertiliser drops can then be automatically adjusted as the vehicle moves down a field.

There are also sensors in development that can check on the colours of plants to judge their water and nitrogen requirements.

There's more. GPS data can also be used to auto-guide' tractors. Manual driving is skilled and expensive, and involves a lot of overlapping (farmers worry more about missing bits of the field than they do about over fertilising), says Lowenberg-DeBoer. Auto-guidance takes away this problem (nothing is missed and nothing is done twice).

That takes us on to the next bit.

Some 60% of UK farms are thought to use some kind of precision farming techniques (sensor systems, cameras, drones, virtual field maps, GPS-guided tractors etc) but if tractors can be guided via GPS they don't need drivers at all. And if tractors don't need drivers (driverless tractors are being tested and introduced in the US), they don't need to be particularly big.

The future might be about entirely automated agriculture fields looked after by bots on the ground checking for weeds, pests and fertiliser levels, while drones check the weather above and report all information back to the farmer's central systems.

There's a fun piece on this in the Guardian. The key point to note is that this isn't all futuristic imagining about how we might feed a future world, it is technology we have and we are beginning to use. As one farmer told the Guardian, "in ten years we will look back at today and think that we were dinosaurs in our methods".

So how do we invest in all this? There are the big players IBM and Accenturebeing the obvious players in digital agriculture, and John Deere being the obvious in the equipment area (they'll be making the driverless tractors). Otherwise a lot of the interesting companies in the area are unlisted (the UK's Precision Decisions for example).

That makes it tempting look at the robotics market. Jim Mellon listed all his favourite robotics stocks for us late last year (Kuka and Yamaha are two of the big leaders in agricultural robotics) and this week's cover story will look at more.

Finally, we talked at length on the MoneyWeek Cruise about a French firm that has a finger in many of the relevant pies here. I will be telling John all about it in our podcast on Friday. Look out for that!

Salad dressings are getting ever more expensive. Consumer prices for olive oil have climbed by an average of 10% worldwide this year due to drought and disease in southern Europe. In Spain and Italy, which jointly account for 70% of the world's olive oil, production has fallen by around 50% owing to unusually hot weather and a bacterial disease known as "olive ebola". In two southern Italian provinces where the disease is rampant, officials have declared a "state of calamity". The bug has now reached olive groves in Corsica.

Meanwhile, demand remains buoyant, with retailers and distributors keen to buy 12% more olive oil than exporters were able to deliver last month, says Sarah Butler in The Guardian. Stockpiles in Spain are now at "critically low levels", according to industry researcher Oil World. Prices have jumped to near-record highs, with the main benchmark, Spanish oil, at over $4,200 a tonne, a level not seen since 2006.

As if economic stagnation weren't bad enough, southern Europeans now face an olive oil shortage. A hot, late spring in Spain, the world's top olive producer, has hit harvests, while pests and bad weather have cut Italian output by 40%-50%, says The Observer's Tracy McVeigh.

As a result, the price of extra virgin olive oil is at seven-year highs, according to an index compiled by the IMF.

Global demand for cocoa is soaring, says Alexandra Wexler in Barron's. Chocolate sales have rebounded to 2008 levels and are growing as increasingly wealthy consumers in emerging markets buy more of it.

The growing popularity of cocoa-rich dark chocolate also fuels demand. But supplies have stagnated as land originally set aside for cocoa has been used for other commodities, so stockpiles are dwindling. A 'cocoa crunch'is looming.

The price of Arabica (high-quality) coffee has shot up by 60% since the start of 2014. That's due to a drought in Brazil, which accounts for a third of overall production. The driest January and February for 30 years will squeeze output.

Yet, the sharp rise in prices is an overreaction and should reverse before too long, reckons Commerzbank. Last year global production hit a 24-year high and demand has not kept pace, so stockpiles remain healthy.

Investors breathed a sigh of relief yesterday as Abu Dhabi rode to the rescue of its naughty younger brother Dubai.

A last-minute $10bn loan reassured investors that no problem in global markets is too big to bail out. $4.1bn was used to repay troubled property developer Nakheel's bond which came due yesterday. The rest will buy Dubai World time to negotiate a restructuring of its debt with lenders.

Stock markets around the world made gains. But they shouldn't get too complacent. Dubai's little hiccup is far from being the worst shock investors can expect in the months to come...

Dubai's not the only region in trouble right now

Dubai's woes aren't important enough on their own to derail the global economy, as my colleague Cris Sholto Heaton pointed out in his MoneyWeek Asia email yesterday (you can subscribe to it here for free). However, the emirate's clumsy attempts at dealing with its debt problems are a very real reminder that the world is a risky place.

And it's not the only region in trouble. Many far more financially significant parts of the world are under pressure. For example, the Greek government seems to be waking up to the need to reassure markets about its commitment to dealing with its budget deficit. But there's a big difference between talking about fiscal responsibility and acting on it.

Unlike Ireland, the Greeks haven't yet convinced their public sector workers of the need for wage cuts and job losses. Indeed, the Greek Prime Minister, George Papandreou, has said that public sector workers will receive real wage increases next year. As Jonathan Loynes of Capital Economics points out, that's "hardly a sign of serious fiscal restraint."

Meanwhile, Austria has just nationalised its sixth-largest bank, Hypo Alpe-Adria Bank International. It's the second Austrian bank nationalisation since the financial crisis began. The main worry for Austrian banks is property debts going bad in Eastern Europe. A bank collapse in Austria could undermine confidence in the whole region.

With all these timebombs waiting to go off, the euro looks vulnerable to falling further, particularly against the dollar. We looked at ways to play a rising dollar last week: Three ways to profit as fear returns to global markets.

• Why UK property prices are going to fall 50%
• When it will be time to get back in and buy up half price property

Why food prices are set to rise further

Of course, we can't be sure of where future surprises will come from. But as Cris puts it, like it or not, investors will have to get used to a more volatile world. Another area that seems likely to see a lot more volatility is food prices. Global food prices rose by 7% in November, according to the UN Food and Agriculture Organisation (FAO). That's the biggest jump since February 2008.

Soft commodity prices in general have lagged behind other commodities this year. But Barclays Capital reckons prices could continue to rise into next year. "Inventories are extremely low in a number of grains markets. The prospect of a further bout of food-price inflation in 2010 cannot be ruled out." For example, global production of rice has "lagged behind demand in four of the past eight years," reports Bloomberg.

The FAO reckons that food production must rise by 70% over the next 40 years. That's based on the global population growing to 9.1bn, from 6.8bn now. As populations get richer, they tend to eat more protein-rich food, which in turn is more grain intensive. That spells higher prices.

How to play rising food prices

You can bet on soft commodity prices directly. But it's not the best way to play rising demand for food in the long run. Food prices are very dependent on the weather. So if anything, it's even harder to estimate future supply and demand than it is for the likes of base metals. More to the point, high food prices can't last for long. A solution needs to be found, whether that be devoting more land to food production or improving existing yields. We can't reach 'peak food' or we're all in trouble.

So a better way to play long-term rising demand for food is through investing in companies involved in the food production process. My colleague Eoin Gleeson wrote about this in a recent MoneyWeek magazine cover story: Five ways to profit from the new agriculture revolution. And another interesting area in the food sector right now is milk. Chinese demand for dairy produce is recovering after its contamination scandal last year. Eoin also looked at the companies best-placed to profit from this recovering demand last month: Profit from China's rediscovered love for dairy if you're not already a subscriber, you can subscribe to MoneyWeek magazine.

Our recommended article for today

Gold - the trade of the decade

Whatever happens in the short term, the next decade should be another good one for gold. So it's worth stocking up when the price dips, says Merryn Somerset Webb.

The rampant rally since March has driven up prices across the board. Last week, my colleague David Stevenson had to have a real trawl around to find any remaining sectors on the stock market that looked cheap. He found one (Here's where to find the cheapest stocks on the market), but it wasn't an easy job.

In the wider investment universe, there's the same problem. From corporate bonds to oil to copper to government debt, the price of everything has been driven higher. If you care even remotely about fundamentals, it's getting harder to find value out there.

But one market looks as though it's been left behind in the big bounce agricultural commodities. And there are plenty of good reasons why it should recover and rise much higher...

Why grain prices should rise

Agricultural commodities grains specifically have been left behind somewhat in the 'Rally in Everything' as Dylan Grice of Socit Gnrale puts it. Individual 'softs' such as sugar have done well for reasons specific to that market. But grains have pretty much halved since summer 2008, and recovered only a little, whereas global stock markets have rebounded strongly.

Yet the fundamental concerns that helped to drive softs higher in the first place are still intact. China is still an agricultural cul-de-sac it has 22% of the world's population and just 7% of its arable land and 8% of its water. Worse still, China's supply of arable land is falling, as increasing amounts are lost to industrialisation.

Meanwhile, as the country gets richer, its people will want more protein in their diets. That means even more pressure on the grain supply, because raising livestock to turn into meat is more grain-intensive than a low-meat diet.

And of course, China's not the only place where the global population is growing. Even although we've had a couple of very good years harvest-wise, global grain inventories remain near record lows.

What it comes down to is the simplest story in the world. Supply looks vulnerable, and there's no reason to expect demand to decrease. Therefore, prices - if we're looking across the board, rather than at individual grains - should rise.

There are a wide range of exchange-traded funds (ETFs) that allow you to take advantage of this, by simply tracking the price of various groups of grains (or even individual ones if you feel particularly strongly about a single one). But you should be aware of a few things before you pile in.

• Why UK property prices are going to fall 50%
• When it will be time to get back in and buy up half price property

Speculating on the commodities market

As we've pointed out several times before, buying directly into a commodity is not investment it's pure speculation. Commodities pay no dividends. Therefore you are buying them in the belief that you will be able to sell them at a higher price at some point in the future.

That's not to say there's anything wrong with speculating on the commodities market. But it is important to go into such a trade with your eyes open. Commodities are certainly not a buy-and-hold investment so if you buy, you should have a good idea of when and at what price you are aiming to sell.

Just to go off topic for a second, I realise many of you will be asking how gold fits into all this. Gold is a slightly special case in that you don't buy gold to bet on supply / demand imbalances. You buy it because it's historically performed well in times of fear over the ability of paper currencies to maintain their value. I would regard gold as a financial insurance policy and wealth preserver. Of course you can take bets on the price of gold going up or down, but there are also sound reasons for holding on to a chunk as part of your portfolio.

Anyway, getting back to soft commodities, Grice makes a good, related point. Ultimately, "any commodity bull market is really just a bottleneck and human ingenuity has a good track record of unblocking the bottlenecks which have appeared in the past."

Necessity is the mother of invention. If the alternative is going hungry, cold or without transport, then we have little choice but to find technological solutions or substitutes or efficiency improvements to reduce our dependence on commodities as they are used up. In other words, rising commodity prices sew the seeds of their own destruction, which is another good reason why you should have price targets before you take direct exposure to any commodity.

An alternative investment to buying directly into softs

The good news however, is that this also means that you don't have to buy into commodities themselves to take advantage of any shortages. You can instead buy into the companies who are working to fix the problem to get rid of the bottleneck and profit from their progress in doing so. For example, if part of the problem is inefficient use of water, then companies that can help farmers irrigate their fields more efficiently should profit. Then there are areas such as genetic modification, or fertiliser and farm machinery providers.

My colleague Eoin Gleeson looks at the most promising areas to invest in, including irrigation and third-generation biofuels, in the current issue of MoneyWeek: Is the drought over for agriculture stocks? If you're not already a subscriber to MoneyWeek magazine, subscribe to MoneyWeek magazine.

Our recommended article for today

Why stockmarkets are still blowing bubbles

While the 'real' economies of the West remain mired in recession, newly-printed government money is fuelling the stockmarkets' remarkable rallies, says Martin Spring.

Between 1941 and 2002, average US farmland values outpaced the growth of inflation by 2%.

In fact, some call farmland as good as gold with yield because you clock in steady income from rents while you wait for the value to grow. I can think of no better asset to own during any kind of financial crisis.

In some ways, farmland is even better than gold or silver. At least farmland is an intrinsically useful thing. It provides a tangible yield in the form of good things from the earth. We all have to eat. As consumers trim their sails, they'll give up a lot before they give up their calorie intake.

Governments, particularly in times of crisis like now have a tendency to flood the system with money in an attempt to "goose" the economy. Mostly, such efforts have succeeded in destroying the value of the currency in question.

Anyway, if you believe that we will continue to feel the bane of inflation, then farmland's performance in the 1970s will give you some comfort... While you lost half of your money in the S&P 500, your farmland kept its value nicely. Again, I think that's rooted in the fact that farmland is intrinsically useful. It produces useful and needed things.

• Why UK property prices are going to fall 50%
• When it will be time to get back in and buy up half price property

Now imagine what farmland might do in today's climate, in which you have not only the likely prospect of inflation, but also a tightening supply of farmland and rising demand for crops. You have biofuels eating up more of our grain supply. I imagine you'll do quite a bit better than in the 1970s.

Farmland treated British investors great just last year. As British housing prices collapsed in 2008, British farmland value rose by 21%. Over the last five years, Brit farmland rose a total 135%. Forget commercial property. That's not a bad ROI in my book.

And there's one more way to look at it: This hedge can outperform gold. In Britain, the farmer outpaced the gold owner. Expanding land values rode up 115% since 1983, versus gold at 81%. You can be sure institutional investors are already placing their long-term bets. Almost half the farmland bought there last year was snapped up by banks and funds.

The obvious investment conclusion: If you're worried about the dollar, the economy, or any other problem, buy farmland today. This is hard to do directly through the stock market... so I encourage you to consider a private deal. You can play agriculture through companies that manufacture irrigation equipment, produce fertiliser, or operate grain-handling facilities.

Check these investments out soon. I think we're in for broad farmland/agriculture rally that should be good for hundreds of percent returns. As you can see from farmland's past results, it's a great hedge in all kinds of environments.

This article was written for DailyWealth by Chris Mayer, editor of the monthly financial advisory newsletter Capital & Crisis .

The 'great recession' has been painful for investors in most asset classes, and agricultural ('soft') commodities have been no exception. Last February we warned readers to be wary of a bubble in softs when the price of wheat shot up by 25% in a single day after Kazakhstan announced it would impose export tariffs. Now that this bubble has popped along with the rest of them, evidence of the fall-out is everywhere.

Schroder's Agriculture Fund, for example, is valued at around $1.5bn, down from $6.4bn at the time of our warning. Land prices in the once red-hot Ukraine have tumbled: at the start of 2008, leases of between two and 20 years were being sold for around $1,000 per hectare; now they're more like $250 per hectare, say consultants Brown and Co. And the broad Rogers International Commodity Index fell by around 50% in 2008.

But recently, agriculture has shown signs of life corn prices, for instance, have risen by around 26% since December, while soy beans and wheat are up 20% and 10% respectively. The US Department of Agriculture (USDA) reports that despite falling profitability, total farm income will still be 9% higher this year than the ten-year average of $65bn. And now last year's froth has been largely blown away, it's clear that the long-term fundamentals of growing demand and tighter supply are intact.

The ghost of Malthus

The demand-side arguments put forward by prophets of global population doom are hardly new, but they're still relevant. Thomas Malthus (1766-1834) warned in 1798 that humans were breeding faster than they could grow food, and we haven't grown any less fond of reproducing since then the US Census Bureau reckons we're adding new bodies to the food queue at a rate of around 75 million a year, with the rate of growth expected to rise until 2030. Between 2000 and 2012 a billion more of us will have been born, taking the total global population up to around seven billion.

Not only does agriculture have to feed all those extra bodies, but many want better diets that include more meat. As Bedlam Asset Management puts it: "Three-quarters of the world's population now has enough money to eat like us; and they are". Since 1985, average Chinese meat consumption per head is up around 2.5 times. JP Morgan estimates it could grow another 50% by 2020.

Consultants at McKinsey reckon around 1.1 billion people will join the middle-class income groups in China and India between 2005 and 2025. Most want a much meatier diet. Given that it takes around 7kg of grain to produce 1kg of beef, the demand pressures on agriculture are huge.

At least demand is fairly predictable. But that's not true of supply. For reasons we'll discuss in a moment, global grain supplies have fallen from 342kg per head in 1984 to 302kg in 2006. The combined average grain stock levels of Australia, Canada, the US and European Union dropped from 47.4 million tonnes between 2002 and 2005 to 27.4 million in 2007. Most important of all, between the world's five largest grain exporters, the ratio of stocks to consumption-plus-exports has fallen to 11% in 2009, below the ten-year average of more than 15%. As a result, food prices are proving sticky in Britain, for example, while food-price inflation eased in April, it was still running at 8.6% a year, compared to a 1.2% fall in the retail price index.

The wrong kind of weather

So why is food supply under such pressure? First off, we can blame the weather, with 2009 looking to be "a humanitarian disaster around much of the world", according to Eric deCarbonnel on Bestwaytoinvest.com. His roll call of countries plagued by crop-unfriendly weather is a long one. Northern China is still suffering its worst drought in 50 years, threatening the entire wheat crop in eight of the region's ten provinces. Between November and February this year, Henan China's largest crop-producing province saw its least rainfall since 1961.

And Australia has been in drought mode since 2004, with around 40% of its growing regions experiencing the worst conditions for 117 years. In the US, California is facing its worst drought in recorded history, resulting in forest and bush fires. In South America, emergencies have been declared in Uruguay, 50 rural districts of Chile, Bolivia and Paraguay. That's less than half of the countries on deCarbonnel's list, but you get the picture.

The yawning yield gap

The weather might not be a problem if boosting supply by other means was simple after all, farmers have had to cope with bad weather since the dawn of agriculture. But increasing supply is harder than you might think. There are two obvious solutions: bring more land into use, or use what we have more efficiently. For decades, both happened. Between 1825 and 1927, forests and prairies were cleared, notably in Russia and North America, doubling the land available for farming. The pace then slowed, but between 1927 and 1960 global arable land still rose from a billion hectares to around 1.4 billion.

Mechanisation also meant agriculture became more productive, with machine oil replacing human sweat. However, from around 1960 the world has not gained much, if any, new arable land. That's not to say the same fields are always furrowed and ploughed. It's just that for every new acre, an old one is lost either to degradation (in developing countries the problems range from over-using fertiliser to poor irrigation techniques), or expanding cities.

So what about increasing yields? After all, between 1975 and 1986, rice yields rose by 32% and wheat yields by 51%, says Mark McLornan in the Gloom, Boom and Doom report. The so-called Green Revolution brought better seed varieties, wider use of fertilisers and pesticides, and improved irrigation techniques.

But that revolution is largely over. China, the world's largest producer and consumer of grains, shows why. Even though average fertiliser usage per acre is three times the world average, and 75% of its cropland is under irrigation, "they don't even achieve average yields". In global terms, that sort of statistic explains why, having risen an average of 2% a year between 1970 and 2000, global productivity (measured by the USDA as the average aggregate yield) declined by around 1.1% a year between 1990 and 2007 and is expected to keep falling. Wheat yields have been virtually static since the 1980s, even allowing for the impact of GM strains. Falling yields will be made worse this year as credit-crunched farmers cut back on fertilisers.

The ethanol squeeze

But that's not the only problem. Lorry loads of US corn still end up on US forecourts rather than in supermarkets. This may come as a surprise to anyone who bought into the ethanol bubble, as Scott Brown, CEO of New Energy Capital, admits to Barron's. "The industry has a black eye financially. It's been a bit of a poor performer."

The reason is simple: aggressive targets set by George Bush for ethanol use in fuel, plus a surging oil price that peaked at $147 a barrel, led to too much capacity being "built too fast". Of 175 corn-based ethanol production units, around 150 are still running and 25 are idle. You can't just switch off these plants to save cash it costs $200,000 to $500,000 a month just to keep a large plant idle.

Meanwhile, in the past 12 months, spot ethanol prices have dipped from $2.54 a gallon to $1.72, taking the average profit per gallon on average from 50 cents to more like five cents, says TD Bank.

Yet ethanol is far from being a dead issue for agriculture. At its peak last year, the industry was using around 23% of the US corn crop. President Barack Obama is a renewable energy fan and shows no signs of abandoning his predecessor's ethanol targets. The US Environmental Protection Agency is even considering raising the proportion of ethanol that must be blended into gasoline from 10% to 15% to help beleaguered producers, who also happen to have influential lobbyists in Washington.

Meanwhile, although the oil price may have subsided to around $60 a barrel, it's still stubbornly high compared to even a few years ago and well above the $32 low it hit in December. The higher it goes, the bigger the interest in alternative fuels. So the knock-on impact for US agriculture looks set to continue. Some analysts expect the corn price at $4.30 a bushel, around half the peak last summer to hit $5 within the next few months.

Merrill Lynch summed it up in a recent note: "A pick-up in global oil demand next year could drag millions of tonnes of corn, sugar and wheat out of the food pool into the fuel pool". So after last year's lull (when soft prices didn't even dip as much as some other assets), they advise investors to position themselves for "a second round of food and fuel competition as soon as next year".

A dead cow bounce?

Despite the compelling demand-and-supply story, some analysts smell a rat. Isn't the recent rise in grain prices simply part of the bear-market rally that has boosted oil prices and driven the FTSE 100 up by around 30% since the start of the year? And in agriculture, this rally has been compounded by a Chinese buying binge that has seen US soy-bean sales to the country rise 42% year on year. Remove both drivers and prices could collapse, the sceptics argue.

Some caution in the near term is indeed warranted, says Bedlam. Prices of individual soft commodities may dip should investors get nervous and flee risk, which is why we would avoid buying into specific individual softs. However, as Dan Basse, President of AgResource puts it, any dip is likely to be short-lived: "Nine to 18 months from now, I think we'll be right back in the food inflation cesspool". Record recent shortages of grains would have seen to that even before central banks started to print money. And as more and more dollars chase fewer and fewer commodities, rapid price rises for 'real' assets become ever more likely.

What to buy

You can get exposure to crop prices themselves. One of the easiest ways is through the range of exchange-traded commodities (ETC) from ETF Securities. As noted above, we'd avoid buying individual grains just now, but a basket, such as the ETFS Agriculture DJ-AIGCI (LSE: AIGA), may be a better bet. This ETC tracks the Dow Jones-AIG Agriculture Sub-Index and gives exposure to seven softs, from soy beans to corn to cotton. The annual management fee is a reasonable 0.49% a year.

As for stocks that might profit, those involved in improving crop yields through technology are worth considering. One interesting play is fertiliser we look at how to profit from that in the box on page 26. Meanwhile, genetically-modified (GM) crops are a controversial area, but as David Morgan of agribusiness group Syngenta (Zurich: SYNN) argues, "we need to grow more from less".

As Henk Potts at Barclays Wealth Management notes, Syngenta "ranks favourably both in terms of its valuation and its short-term momentum". Its first-quarter results beat hopes, and while the growth outlook is "modest" this year, it will be "double digit" in 2010, Potts believes. The firm is cheaper than larger rival Monsanto, trading on a forward p/e of 14. It offers a dividend yield of 2.6%, covered 2.7 times, while the price-to-forward earnings growth ratio is just 0.9.

When farmers make decent profits, they tend to buy more tractors and other farming equipment. Bedlam tips the world's leading agricultural and forestry machinery maker, Deere & Co (US: DE). The shares have halved in the past 12 months, even though the firm beat analyst estimates for second-quarter profits. According to analyst Stephen Volkmann of Jefferies & Co, "the farm business is performing well". The forward yield of 2.7% is covered 2.4 times. The forecast p/e ratio is 13, while the price-to-book ratio is a reasonable 2.6 times. Bear in mind that all these stocks trade in dollars (or Swiss francs in the case of Syngenta), so there is currency risk to sterling investors.

How to profit from fertiliser: buy sulphur

A key tool in the battle to improve yield is fertiliser. However, thanks to the global downturn and the need to tighten belts, "farmers haven't been laying crop nutrients on as thick, much to the dismay of fertiliser companies," as Forbes puts it. But given that the immediate supply outlook is so grim, especially for corn "by far the most fertiliser-intensive of the major row crops" farmers will soon be scrambling to boost yields. Indeed, as Morgan Stanley analyst Vincent Andrews notes, "cutting back on fertiliser doesn't eliminate costs, it merely delays them", as more of the stuff is then needed to reverse soil depletion. And that could soon mean a "surge in sales".

Investors can gain exposure via one of the large chemicals firms, such as Mosaic (NYSE: MOS) or the Potash Corporation (NYSE: POT). Both have enjoyed a rebound already this year (Potash is up 73% since we last tipped it in March), but are still well off last year's peaks, so if you own them already, they're worth holding.

An alternative option with a bigger potential upside is Chemtrade (TSX: CHE.UN). The group stores, markets and distributes bulk chemicals. It is one of the world's largest suppliers of one chemical with a particularly fizzy future sulphuric acid. Around 60% of global production of the acid goes into making phosphate fertilisers of the type now imported in large quantities by China and India in particular. Some Western farmers are also keen, because applied neat, sulphuric acid kills potato plants, which makes harvesting them much easier. And its uses don't stop at agriculture it's a key construction chemical too. China's infrastructure stimulus will require large amounts of iron and steel. Sulphuric acid is used to de-oxidise both prior to galvanisation or electroplating. It is also a vital component of lead-acid car batteries, as well as many plastics.

Demand slumped last year and early in 2009 as use in many industries slowed, and Chemtrade's share price is down by around 50% from when we tipped it last May. But that makes now a good time to get back in before demand, and prices, rise again. The group trades on a current p/e of just six depressed in part due to the temporary closure of a major plant in Beaumont, Texas, and a first-quarter profits slump to $1.3m, compared with $9.5m last year.

The scramble for soil

To see how seriously some countries are taking the crop supply crunch, look no further than Africa, where China recently secured rights to grow palm oil for biofuel on 2.8 million hectares of the Congo. That's enough land to create the biggest palm-oil plantation in the world. And it's not just China the International Food Policy Research Institute says 15 million to 20 million hectares of farmland in poor countries has been the subject of talks or deals with foreigners since 2006 equivalent to all of France's agricultural land, says The Economist.

These deals are big enough to topple governments one involving a lease on 1.3 million hectares to Korea's Daewoo Securities was so unpopular it contributed to the downfall of Madagascar's president. And there's enough concern for Japan to have called for a set of investment principles to be formed at the latest G8 summit, reports the FT. This is to encourage "responsible investing in agriculture" and to prevent African countries from being ripped off by wealthier predators. So what's going on?

Countries such as China and the Gulf States, who are capital-rich but lack land, are hoovering up other people's land in a string of government-to-government deals. In return they promise goodies such as improved seeds, schools, clinics and roads. The aim is simple: rather than remain exposed to the open market, Beijing and Riyadh are taking food security into their own hands by planting crops on these vast overseas plots and shipping them home. One Sudanese official reckons his country will set aside around 20% of its cultivated land for Arab governments.

As for why the land-grabbers don't just grow their own, they've tried and failed. The Saudis, for example, found that growing wheat in the desert consumes hideously large quantities of water. Meanwhile, demand has already dried out swathes of former breadbasket country in China, such as the North China Plain.

So what if you want to get your hands on quality overseas farmland as a British private investor? Be warned that the area is riddled with possible pitfalls currency risk and low legal transparency in less developed countries are two of the biggest. But if you're still interested, Andrew Shirley, head of property development at Knight Frank, tips Australia and Canada, which offer "relatively cheap land in a low-risk political and economic environment". Both are drawing investors who "might otherwise have considered South America or eastern Europe".

If you've a stronger stomach for risk, Bulgaria and Romania have decent long-term potential as farm prices gradually catch up with the rest of the EU, says Shirley. A purchaser is betting on "improved national stability" and the benefits both should derive from "unfettered access to EU markets". An extra bonus came from the recent Budget: UK agricultural property relief, which can cut inheritance tax by up to 100% (subject to conditions) is being extended to farmland and forestry across the European Economic Area. But we'd be very wary: eastern Europe has been among the regions hardest-hit by the credit crunch, so stability may take time. Any investor in these countries would need strong local knowledge to be confident of striking a good deal.

To predict the stock market, I watch lumber...

To store lumber, you need a large climate-controlled warehouse with a railroad spur. Even then, it could still spoil within six months, destroying your entire investment.

Because lumber loses its value quickly and it's expensive to store, the investment public at large does not participate in the lumber market. The costs are too high...

The mills use "just-in-time" manufacturing principles to keep inventories to the bare minimum. By producing only what they can sell immediately, they avoid wastage. Lumber customers do the same thing. They only buy what they need that week.

There is a lumber exchange in Chicago where you can trade lumber futures. It's a "professionals only" industrial matchmaking service. If you're a homebuilder and you need lumber for a current construction project, the lumber exchange works fine for you. But if you're an investor looking to hold lumber for a year or more, you'll get ripped off.

First, you'll pay huge storage costs. The market builds these costs into the futures price. Second, there's almost zero trading volume once you get beyond the next three months, so you'll pay a massive premium for illiquidity.

For example, right now, if you want to buy lumber into the future say a contract that expires one year from now you'll have to pay a 38% premium over the price of lumber delivered next week.

These costs keep the riff-raff out of the market. This is why I love to watch lumber. The price of lumber is set entirely by commercial money responding to real business conditions. There's no public speculation to muddy the water and generate confusing signals.

Take the 2008 credit crisis as an example. The lumber price was the first to signal a bear market was coming. It peaked in May 2004. The Bloomberg Homebuilders Index peaked in July 2005. The Case-Shiller U.S. home price index peaked in July 2006. The credit crunch started in February 2007, when New Century Financial collapsed. And finally, the S&P 500 peaked in October 2007.

Here's a chart of lumber going back three years. As you can see, lumber bounced like everything else earlier this year, but has not been able to hold its gains.

I take this as a message from the homebuilders and the giant logging companies that the real estate market is getting worse again. And if that's the case, it might be time for stocks to take a breather, too...

This article was written by Tom Dyson, co-editor of the free daily investment newsletter DailyWealth

The world's water needs are leading to bold new technologies and brassy new profit opportunities for investors, say Janice Warman and Annunziata Rees-Mogg

Update: read Investing in water: how to cash in on blue gold for more on how you could profit from water

The lack of pure water is the greatest killer on the globe. Four children die each minute from illness caused by a lack of drinking water. That's the equivalent of 30 fully loaded Boeing 747s crashing every day far more than are killed by Aids and malaria combined.

Yet the world is not running out of water. In fact, there is exactly the same amount of water as there was a million years ago. The problem is the soaring world population, the runaway urban sprawl and the rocketing cost of food production. The levels of waste are phenomenal. "A typical meat-eating, milk-guzzling Westerner consumes as much as a hundred times their own weight in water every day," says Fred Pearce, former New Scientist news editor and author of

When The Rivers Run Dry

.

That's because it takes between 2,000 and 5,000 litres of water to grow one kilogram of rice, 11,000 litres to grow the feed for enough cow for a quarter-pound hamburger, 50 cups of water for a teaspoon of sugar and 140 litres of water to produce just one cup of coffee.

In the 1960s, the planet's population was predicted to double in a generation and there were fears that there would simply not be enough food to feed the world. The result was the green revolution' a new generation of high-yielding crop varieties such as rice, wheat and maize. The world today grows twice as much food as it did then but uses three times as much water to grow it. Two-thirds of all the water taken from the environment goes to irrigate crops. "This is massively unsustainable, and has led many people to conclude that the apocalypse wasn't averted, only postponed," says Pearce.

Across the world, millions of small farmers are drawing water from underground to irrigate their crops. India, China and Pakistan pump out around 400 cubic kilometres of underground water each year, according to Tushaar Shah of the International Water Management Institute, a worldwide research network funded by the World Bank. Sri Lanka, Indonesia, Iran and Bangladesh are following suit. Even the US is emptying its underground reserves to grow grain and beef for export.

Investing in water: the virtual water trade

And the over-use of water doesn't just apply to food production. Every T-shirt you wear will take 25 bathtubs of water to produce. Every small car uses 450,000 litres. If what you wear or drive is imported, you in the West are helping to empty rivers across the world. Water used for growing food and making products is called "virtual water". Every tonne of wheat arriving at a dockside carries with it, in virtual form, the 1,000 tonnes of water needed to grow it, explains Pearce.

The global virtual-water trade is estimated at around a thousand cubic kilometres a year, or 20 river Niles. Two-thirds is in crops, a quarter in meat and dairy products, and just a tenth in industrial products. The biggest net exporter of virtual water is the US, which exports in grain and beef around a third of all the water it takes from the environment; Canada, Australia, Argentina and Thailand are all net exporters too.

Some importers of virtual water, like Japan and the EU, are not short of water but for others, including Iran, Egypt and Algeria, it is vital, explains Tony Allan of the School of Oriental and African Studies in London, who invented the term virtual water'. The Middle East ran out of water years ago, and Jordan imports 80%-90% of its water in the form of food.

Global warming means that the UK has not escaped the worldwide drought phenomenon. London's long-term average rainfall has now dropped below that of Istanbul, Dallas and Nairobi, points out Juliette Jowit in The Observer. The Government is considering proposals to introduce drought orders banning non-essential' use of water. Australia is suffering severe droughts, exacerbated by the El Nio effect. India's water table is at an all-time low and dropping fast; in some areas, it has fallen from 20 to 285 feet below ground level in the last decade. China is suffering from annual droughts, with Peking besieged by sand storms blowing down from the ever-expanding Gobi Desert. Southwestern America is struggling to find enough water for its growing population. California and Nevada are being particularly hard hit. "And the shortage is getting worse", Rick Rule of Global Resource Investments, a leading natural resource broker, told MoneyWeek.

Rivers are running dry across the world, from the Rio Grande in Texas to India and Northern Nigeria, and the Aral Sea in central Asia, where a thriving fishing industry died as the sea was drained to feed the cotton farms, and where now the population is being poisoned by dust storms of salt. Governments who concentrate on building yet more dams and draining subterranean aquifers need to look for other solutions, according to Pearce. We could grow crops with a quarter of the amount currently used, he told MoneyWeek. Most people don't pay an economic price for water because Government subsidies keep prices artificially low. "Until there is a price incentive, they won't cut back."The supply side mentality has bedevilled the industry. Water engineers have "an obsession with building dams, laying pipes and pouring concrete. They want to supply ever more water and they are deaf to calls for investment in demand management This supply-side fixation is creating a global hydrological crisis".

Investing in water: supplying the solutions

But where there is a problem, there must be a solution. And where there is a solution, there must be the opportunity for profit. So where can investors make profits from an industry that is the third-largest in the world? The solution lies in investing in solving the problems caused by decades of over-use and mismanagement of water.

In summary, there's a supply problem so prices will rise. The world's water pipes are crumbling and not only in Britain, where much of our water leaks into the ground before reaching us so there will be repair and replacement projects. There will be more privatisation. Municipal utility operators often do not have the resources to maintain the water systems up to regulatory standards.

Climate change will mean more extreme weather conditions and more water in the sea. Alternatives, such as desalinisation, are set for sustained growth. Southern Spain's Andalucia, one of Europe's most arid regions, is also the continent's most productive agricultural area. Intensive irrigation has seriously depleted resources. Now the city of Almeria collects and recycles all of its water, using it for agriculture. And the newly created Programa Agua will supply desalinisation facilities all along the Mediterranean coast.

This is an alternative that has long been considered too expensive. But that state of affairs is changing, says Dr Stuart Downward, lecturer in geography and environmental science at Kingston University and a specialist in water resources. "Huge volumes of power are needed to drive the pumps, but so many people are investing that the unit costs are coming down.

"Now cities are looking at their spreadsheets and say it's beginning to stack up. The traditional players have been in the Middle East, such as Dubai, and island communities. Malta and the Canaries have been using desalination for four to five decades because it's been their only source of water. Big cities are beginning to take it seriously. Perth has given the go-ahead for a big desalination plant."

Investing in water: new technologies

New water-quality standards are being put in place in countries such as China and India, which will drive major new investments in water treatment and purification. There will be new investments in water supply and other infrastructure projects. China, in particular, has water supplies that are very badly managed. There are massive shortages, and more than 70% of its industrial waste water is simply dumped into its rivers and lakes. Now China is trying to solve its problems, charging consumers and companies for water consumption, and allowing foreign companies.

There are countries that have an over-abundance of water and here there are opportunities for sale to other countries. Canada, for example, has the same amount of water as China, but just 2.3% of its population. Brazil has far less need of its water than many of its neighbours. As the value of water rises, countries like these will start to export their spare reserves to those more in need and willing to pay. Pipelines will spring up, connecting states and countries. Tankers will transport water across the sea as often as they do oil. Water will be on the move. And those who can transfer it will be there to benefit.

Already, Turkey exports water to Israel and Cyprus in large balloons that can hold up to five million gallons of water. Singapore buys 10% of its water from private-sector suppliers who have built desalinisation plants in order to reduce its reliance on Malaysia. Companies in Scandinavia are investigating the ways in which they can profit from their watery landscapes, such as one company that intends to ship the equivalent of 1,000 Olympic swimming pools of water to Iran every day.

This company is not listed. But there are still plenty of opportunities for investors. The profits will come from companies that help nations improve the water that they already have. Right now, many of these firms are small companies that most analysts, let alone the public at large, have never heard of. But some of them will soon be giants. After all, with the global water industry valued at $300bn a year by the UK Trade & Investment ministry, it can't be long until investors finally catch on.

For more on this topic, read When The Rivers Run Dry

by Fred Pearce, published by Eden Books.

Investing in water: the best water stocks to buy

To profit from the world's shortage of water, you might think that water utilities are an obvious way in. But companies such as Thames Water are highly regulated and have infrastructure up to 150 years old. There are better ways to profit from the "looming crisis," says Derek Moorhouse in the Fleet Street Letter. "One company we particularly like is Halma (HLMA)," which is active in leak detection and water-quality analysis. Not only has this diversified engineer "identified water as a key long-term growth market," but it has delivered an increased dividend every year for the last 26 years. Halma's shares have risen strongly in the last six months, but they are still on a price/earnings to growth ratio of 1.6, with a yield of 3.6% forecast to rise to 3.8% by 2008.

A less well-known company is Pico Holdings (PICO). Pico spotted a potential gap in the market and started buying up water rights in Nevada and Arizona. Though it's not a pure water play, it has been "consistently profitable," says Rick Rule of Global Resource Investments.The region is already suffering from water shortages, which are getting worse. The Colorado River supplies Wyoming, Colorado, Utah, Arizona, New Mexico, Nevada and California with water and the competition is fierce. That gives private water rights "a huge premium," says Rule. By holding a substantial number of water rights, Pico "is turning water into money."

Another, even more obscure company, is Boswell Land and Farming (BWEL). It is the largest farm owner in California and with its farmland comes one of the area's largest aquifers, or underground lakes. The Tulare Lake is now a cotton field. But underneath there is still lots of water an estimated 400,000 to 2,000,000 acre feet (the amount that would cover one acre a foot deep) a year that could be drawn up without damaging the environment. At the lowest estimate, that's enough water to service 800,000 Californian families every year.The Californian municipal water agency values water at $10,000 per acre foot if it is easy to get to (Boswell's aquifer runs next to the main canal), making it worth at least $4bn. Its shares are $745, giving a market cap of just $750m. The company is also building 50,000 homes. That could end up being worth another $5bn and make its shares soar. (Boswell is a family owned company, but it has 500 shareholders who trade on the OTC market. It is highly illiquid, but if you want to buy the stock, Rick Rule says: "Give me a call.")

One great water firm that "is yet to hit British investors' radar" is Doosan Heavy Industries and Construction (034020), says Edward Lam of Lloyd George Management. They invested in the company "partly as a water play, but also because it's a great company." The South Korean firm makes desalination plants indeed, it is "the world's largest maker of plants that purify seawater," says Keejin Koo on Bloomberg. It already has massive plants all over the Middle East and is constantly winning new projects. Alongside its desalination plants it also builds power plants so as our energy needs grow, it gets a second kick. The company is currently on a forward p/e of 15.9, which is cheap for such a good growth story.

Small stocks are higher risk than their bigger counterparts and investors ought to investigate them thoroughly before handing over their cash. One lower-risk option is a US-listed water ETF (exchange traded funds). ETFs are a basket of shares that you can buy and sell like a normal share. The PowerShares Water Resources Portfolio (PHO) is based on the Palisades Water Index, which identifies companies that focus on the provision, treatment and technology of water. It is up more than 39% in the last year (compared to the S&P 500, which is up just under 12%).