Food for Thought

by Dan Denning

“…There are a lot of risks, of course. But you know that already. I mention it now simply to remind you that seventy percent of your total return in any investment comes from being in the right asset class. In other words, you can own the best company in the world, but if stocks are in a bear market, you’re in the wrong asset class…”


Smarter investors than I will make money sussing out little-known technology and manufacturing companies in Asia. Those stories are sexier. The potential payouts are enormous. So are the risks and multiples.

I prefer to focus on businesses satisfying a known demand with a profitable product. The more I look at Asian stocks – or the stocks of Western firms doing business in Asia – the clearer it becomes that it doesn’t make sense to take more risk than you have to.

There are a lot of risks, of course. But you know that already. I mention it now simply to remind you that seventy percent of your total return in any investment comes from being in the right asset class. In other words, you can own the best company in the world, but if stocks are in a bear market, you’re in the wrong asset class.

If you buy the stocks I’m recommending below, you’re counting on some combination of the three forces below being in your favor (and staying that way):

First, you’re counting on commodities being in a long-term (secular) bull market that supports food prices

Second, you’re counting on the fundamental shift in global economic fortunes from the West to the East (the Money Migration)

Third, you’re counting on the debt-burdened U.S. dollar leading to an inevitable global currency realignment – the world getting off the dollar standard and Asian central banks dumping their trillions worth of dollar assets.

I’ll cover all three of these forces as I uncover the companies I’m recommending. They each suggest a powerful force behind higher prices for certain stocks. It won’t be a straight line up to overnight profits. Big bull markets don’t work that way.

In fact, China and all of Asia are entering a cycle of mini-booms and mini-busts. The important fact to note is that the overall trend is up. ( I don’t buy for one minute this business about a “soft landing” in China, but more on that later.) Asia today is similar to the United States in the 19th Century. It’s a volatile place with a wildcat mentality. Back then, all of North America was industrializing, modernizing, and fantasizing about a richer future. Now it’s Asia’s turn.

Some of the best investments at the beginning of America’s century of global dominance were in downright modest companies…Levi Strauss selling workmen’s clothes to the prospectors of the California Gold Rush is best example. It didn’t matter to Strauss if fortune hunters in California struck gold. He had already struck it outfitting them all.

Or take electricity. Think of the number of appliances in your house that use it. Each of those is a business, a product, a stock. But they all come back to electricity. Without it, all of them are useless.

Now think of Asia in the same terms. A million fortunes will be made. Thousands of new businesses will be created. It’s happening in China as we speak. But regardless of the business, the fundamental economic demands of human beings are not going to change, and that in itself is the basis of a powerful and relatively safe investment idea: Invest in the businesses that literally feed the growing trends.

The populations of the world’s poorest countries are set to grow by 55% in the next 50 years, according to the Population Reference Bureau (PRB). India will pass China as the world’s biggest country. There will be 3 billion more mouths to feed all over the globe.

What may save the day for us is that some of the world’s richest countries are actually getting smaller. Chalk it up to religion, atheism, birth control, or just selfish living, but a lot of countries are going to be less populous. For example, according to the PRB, Bulgaria will contract about 40%, from a current population of 7.8 million to 4.8 million, by 2050.

Southern European countries, including Italy, Portugal, and Greece, are expected to lose at least 10% of their current populations. Worst of all is Japan (more on Japan later). The PRB report claims that in Japan “only 14% of the population is below age 15, while 19% is above age 65.” Based on these numbers, the Japanese population will contract by 21% over the next 50 years.

Yet despite smaller populations in Europe and Japan, world population is growing. That means more people competing for the same scarce resources. And when it comes to food, those resources are already stretched thin.

The U. S. Department of Agriculture publishes a painfully dry monthly report called World Agricultural Supply and Demand Estimates (WASDE). The August report shows that despite record stocks in some commodities, increased consumption is keeping supply tight. Here are some highlights:

Price pressures build: This year’s wheat crop of 609 million tons is the second largest on record. But wheat stocks – the surplus amount of wheat in storage – are actually at 30-year lows. The report says price pressures will soon start building, because wheat stocks have not been dramatically rebuilt.

Grain consumption exceeds production: In all of the last four years, world grain production has fallen short of consumption, forcing a draw down of stocks in wheat, corn, rice, and soybeans. Soybean prices recently hit 15-year highs, and wheat and corn 7-year highs.

Reserves being drawn down: Despite the largest U.S. corn crop in history projected, the WASDE report said that the global stocks-to-use ratio for corn will be at a 30-year low, with stocks drawing down for the fifth straight year.

These numbers aren’t meant to scare you. I don’t believe we’re headed for a Malthusian famine. Quite the contrary. What these statistics show me – coupled with what I saw on the ground everywhere in Asia – is that there is a tremendous opportunity for food growers.

But which growers? Should you buy at the wholesale or retail level? And aren’t rising commodity prices bad for companies that sell food products? Well…yes. Think of oil refiners.

A refiner makes gasoline and other products from oil. When the price of oil goes up, the refiner has to pay more for the chief input of its product. Oil is a cost for refiners. Higher oil prices squeeze margins.

True, if oil prices are high, it means gasoline prices are probably high too. But we live in a competitive world. Producers are not always able to pass on the higher cost of raw materials directly to the consumer. Raise your price and your customer may decide to get his gasoline from that station across the street.

The good news is that we may be seeing the peak of commodity prices in the short term. This will mean a big boost in the profit margins of the companies I’m recommending below. And you can buy them today before that boost is priced in to the stocks.

Long term, though, based on the population statistics I mentioned above, the demand for basic food commodities is one of the bedrock economic truths of our lifetimes. Food is in growing demand, and supply is increasingly tight.

Find The Trend Whose Premise Is False – Then Bet Against It

Dan Denning is the editor of Strategic Investment , one of the most respected “big-picture” investment newsletters on the market. A former specialist in small-cap stocks, Dan has been at the helm of Strategic Investment since 1999 – where, drawing from his network of global contacts, he has designed an investment strategy that takes into account global political and economic trends. His weekly e-mails and monthly newsletter give investors the most complete picture of what’s shaping investment markets, what’s coming next, and exactly what to do today.

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