Chris Mayer

“All life is a process of breaking down,” the great F. Scott Fitzgerald once wrote. “But the blows that do the dramatic side of the work…don’t show their effect all at once.” These other blows you don’t feel until it is too late to do anything. Fitzgerald was writing about his own famous crackup in the 1930s, but his comments also apply to the agricultural scene circa 2010.

We return to a theme in last month’s letter. The world will need to boost its production of food. The UN estimates that the world will need to boost investment in agriculture by $83 billion a year – that’s a 50% annual increase – to feed a growing population. Its estimate may prove an errant shot from an uncertain bow into an unpredictable future. But it doesn’t matter. Investing is more like horseshoes and hand grenades, as the old saying goes – close counts.

If the UN is half right – others have done similar work with similar conclusions – then we’re talking about a healthy bull market in all things green. The question is where does the boost in production largely come from? The answer is Brazil, as we discussed last month. We’ll explore the idea a little further here from a different angle.

In my last letter, I noted how lack of electricity in India leads people to heat their homes and cook with dung cakes, crop residue and firewood. Why is this a bad thing?

Because the soil needs that precious manure and crop residue. It nourishes the soil and allows it to hold water. Without this natural replenishment, the soil deteriorates. It compacts and turns to dust. When the next monsoon season rolls around, it washes away. And the burning of firewood, on such a scale as the Indian population requires, leads to the disappearance of forests. A similar cycle ensues.

This is the “topsoil crisis” that we first talked about more than a year ago. The world continues to deplete its base of arable land. Though it’s been going on for some time, the dramatic blows are only now showing their effect. In East and North Africa, in the plains of India all the way to Turkey, the story is the same. Some of it is just human carelessness about the land. Some of it is climate driven: the declining snow melts of the Himalayas and more frequent crop-killing heat waves in places such as India.

Climate change has been going on for a long time, too. As Peter Matthiessen points out in The Snow Leopard, the Gobi Desert was once fertile. In Central Asia, he writes, “broad lakes vanished in dry pans and grasslands turned into shifting sands.” Many of these changes happened in only a few hundred years. “The death of a civilization can come quickly; the change in climate that dried up rivers and destroyed the savannas of the central Sahara scattered the great pastoral civilizations of [Africa] in just a few centuries after 2500 B.C.”

Such changes impact economics as well. Already, we are close to passing some giant milestones of our own. China, you may recall, is now the largest net importer of soybeans in the world. A mere 15 years ago, it made more than it needed and exported soybeans. Now India may import rice. Some think that India could import as much as 2 million metric tons, the most in the world. Traditionally, India has been the world’s third largest exporter. (It’s already banned overseas rice sales in an effort to keep rice at home.)

The Philippines, thanks to typhoon damage, will also be a net buyer of rice this year. South America will produce less, and there is potential trouble with the crop in the Mississippi Delta. Yes, Thailand and Vietnam appear to have healthy rice supplies. But it won’t be enough.

All of this puts Brazil in the catbird seat, as more people are starting to figure out. “Superpower Is Ready to Feed the World,” reads a Financial Times headline. You may quibble with the FT’s exuberant labeling of Brazil as a superpower. But Brazil is now the top exporter of chicken and beef, orange juice, green coffee, sugar, ethanol, tobacco and the soya complex of beans, meal and oil. It is No. 4 in maize and pork. It is, agriculturally speaking, deserving of the superpower label.

However, expansion is not so easy, and here lies the treasure for investors. As the FT reports: “In Brazil, analysts say [that] output is reaching its limit and the investment needed for growth, especially in transport infrastructure, is falling short.” This jibes with the UN’s report I mentioned above.

On-the-ground reports from farmers in Brazil add further confirmation and make the hurdles clear. There is a lack of rail and water transport infrastructure. As author and traveler Roy Nash wrote in 1926 – and it is still true today – “Space is Brazil’s pride. Space is equally Brazil’s weakness.”

Most of those crops must make a tortuous 2,000-kilometer trek over bad roads to congested ports. (Brazil has the world’s third largest road network, but only 12% is paved.) The cost of transportation is often north of a $100 a tonne, more than three times what farmers pay in the US to bring their goods to market.

The Brazilians have a national history that ought to give them hints that infrastructure is critically important. The history of the city of São Paulo is one example.

Founded by Jesuits in 1554, São Paulo was one of the few cities that did not sit on the coast. Instead, São Paulo was inland, perched on the confluence of four rivers. From here Paulistas would search inland for gold. But the city didn’t really boom until the end of the 19th century. Then coffee became the cash crop. The coffee boom set off an investment boom in railways and ports. São Paulo soon passed Rio de Janeiro as Brazil’s most important metropolis. And wealthy Paulistas and coffee barons invested in the city. Today, São Paulo is one of the largest cities in the world, with some 20 million people.

So perhaps the new boom in all things agricultural will spur similar investment boomlets in Brazilian cities and towns.

This is why Roberto Rodrigues, an agribusiness consultant and former Brazilian ag minister, says: “If I were an investor, I would put my money in logistics and fertilizer. The opportunities are fantastic.”

We are amply represented here with our fertilizer stocks, though only one remains close to my buy price as I write: Mosaic (NYSE:MOS). This one is particularly fitting for the Brazil angle because it is the world’s largest producer of phosphate, of which Brazil is in particular need. Mosaic has phosphate plants in Florida, in places such as Riverview and Hopewell and Wingate. It ships these to Brazil, where it has seven warehouses and blenders and two production facilities. It also has a major office in Brazil – in São Paulo.

Unlike the crackup Fitzgerald describes, it’s not too late for agriculture to do anything about its long process of breaking down. Prices of grains and agricultural commodities will rise to attract the needed investment. That will be good especially for the fertilizer companies, who sell a product needed to replenish the world’s tired soils.

Regards,

Chris Mayer
for The Daily Reckoning

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Chris Mayer

Chris Mayer is managing editor of the Capital and Crisis and Mayer's Special Situations newsletters. Graduating magna cum laude with a degree in finance and an MBA from the University of Maryland, he began his business career as a corporate banker. Mayer left the banking industry after ten years and signed on with Agora Financial. His book, Invest Like a Dealmaker, Secrets of a Former Banking Insider, documents his ability to analyze macro issues and micro investment opportunities to produce an exceptional long-term track record of winning ideas. In April 2012, Chris released his newest book World Right Side Up: Investing Across Six Continents

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