No Longer "Cheap as Dirt"

You’ve heard that the world is running out of oil, but now there is something else to worry about: we’re running out of dirt. That’s right. Chris Mayer explains that the race to secure fertile farmland throughout the globe is on…and the topsoil crisis has emerged as a very real problem.

"Taking the long view, we are running out of dirt."
– David R. Montgomery, geologist

Over the summer, Iran bought a large amount – more than 1 million tons – of wheat from the U.S.

That’s something we’ve not seen in 27 summers. In Iran’s case, a tough drought cut the wheat harvest by a third, forcing the country to look abroad. But still, the fact that Iran had to come to the U.S. is telling. It’s like Lee asking Grant for rations in the summer of 1863. As one analyst put it: "Do you think Iran would come to the U.S. if they had any place else they could buy it… They’re searching the world for wheat. They’re buying the U.S. because it’s the only thing they can buy."

Markets, like great unscripted dramas, develop their own plotlines as time rolls on. Now unfolding is a new plotline in the agriculture boom. It begins with the fact that there are fewer and fewer options these days for importers looking for large quantities of high-quality grains. But it speaks more to a deeper issue: an emerging shortage in fertile soil. Yes, we’re running out of good dirt.

In fact, fertile soil – good dirt – may become more important to land values than oil or minerals in the ground. Some say it is already a strategic asset on par with oil. As Lennart Bage, president of a U.N. fund for ag development says, "Now fertile land with access to water has become a strategic asset."

Doubtful? Consider rising export restrictions around the globe, which act as a sort of fence keeping the goods within borders. India curbs exports on rice. The Ukraine halts wheat shipments altogether. The number of grain-exporting regions has dwindled, like the vanishing buffalo herds. Before World War II, only Europe imported grain. South America, as recently as the 1930s, produced twice as much grain as North America. The old Soviet Union, for all its faults, exported grain. Africa was self-sufficient. Today, only three major grain exporters remain: North America, Australia and New Zealand.

No surprise, then, to find faith in the global food supply at generational lows. So begins the scramble to secure farmland. Saudi Arabia, for example, is particularly at the mercy of the winds of global agriculture. It has little ability to produce its own food. The kingdom, reports the Financial Times, "is scouring the globe for fertile lands in a search that has taken Saudi officials to Sudan, Ukraine, Pakistan and Thailand." Saudi Arabia’s quest is not one it pursues alone. There are many hunters.

The UAE has also been looking to lock down acreage in Sudan and Kazakhstan. Libya is looking to lease farms in the Ukraine. South Korea has been poking around in Mongolia. Even China is exploring investing in farmland in Southeast Asia. While China has plenty of cultivable land, it does not have a lot of water.

"This is a new trend within the global food crisis," says Joachim von Braun, the director of the International Food Policy Research Institute. "The dominant force today is security of food supplies." Food prices reflect this crimp in supply.

The mainstream press focuses on issues such as population, dietary shifts and the impact of biofuels. One thing that doesn’t get talked about much may be the most important thing of all: a growing shortage of quality topsoil. Call it the topsoil crisis.

Quality soil is loose, clumpy, filled with air pockets and teeming with life. It’s a complex microecosystem all its own. On average, the planet has little more than 3 feet of topsoil spread over its surface. The Seattle Post-Intelligencer calls it "the shallow skin of nutrient-rich matter that sustains most of our food."

The problem is that we’re losing it faster than we can replace it. And replacing it isn’t easy. It grows back an inch or two over hundreds of years.

This is not lost on certain far-seeing investors. Jeremy Grantham, the curmudgeonly head of the money manager GMO, wrote about soil depletion in his last quarterly letter. "Our farmers are in the mining business! Yes, the soil is incredibly deep, but it is still finite." For every bushel of wheat produced, we lose two bushels of topsoil.

Until the final decades of the 20th century, the amount of new farm acreage added to the mix by clearing land offset the losses on a global basis. In the 1980s, the amount of land under cultivation began to fall for the first time since humble early humanity began to farm the rich land around the Tigris and Euphrates. It continues to fall today.

We lose topsoil to development, erosion and desertification. "Globally, it’s clear we are eroding soils at a rate much faster than they can form," notes John Reganold, a soils scientist at Washington State University. Estimates vary. In the U.S., the National Academy of Sciences says we’re losing it 10 times faster than it’s being replaced. The U.N. says that on a global basis, the rate of loss is 10-100 times faster than that of replacement.

In any case, it seems safe to say that good dirt is in short supply. The obvious investment conclusion: Buy farmland. That’s hard to do as an individual investor, although there are at least a few options. One is Cresud, which owns 1 million acres of farmland in Argentina. It trades on the NASDAQ. Our own Leucadia National (NYSE:LUK) owns 8% of the company and is the largest shareholder. Though harder to buy, Black Earth Farming owns farmland in Russia – which presents its own risks. The stock trades on the Pink Sheets in the U.S.

Another way into the idea is to own farming assets in grain-exporting countries. Viterra, which trades in Toronto, is the largest grain handler in Canada. (We own both Cresud and Viterra in Mayer’s Special Situations.) Viterra thrives on volume. A busy grain market portends good things for Viterra’s business. It is well financed and owns truly world-class assets.

More investment ideas will surely surface as time goes by. The topsoil crisis has a long way to go. It’s not going to resolve itself anytime soon. In the meantime, though, investors may want to rethink the phrase "cheap as dirt." I’ll keep an eye on this new trend in these pages.

Regards,

Chris Mayer
for The Daily Reckoning
September 24, 2008

This essay was taken from a recent issue of Capital & Crisis.

Chris is a veteran of the banking industry, specifically in the area of corporate lending. A financial writer since 1998, Mr. Mayer’s essays have appeared in a wide variety of publications, from the Mises.org Daily Article series to here in The Daily Reckoning. He is the editor of Mayer’s Special Situations and Capital & Crisis – formerly the Fleet Street Letter.

Chris also recently wrote a book: Invest Like a Dealmaker: Secrets from a Former Banking Insider.

The Dow slipped 161 points yesterday. Oil settled at $106. Gold at $900.

And now it’s winter.

We know that because we saw a picture in the English newspaper. There was a group of Druid priests, dressed in white robes, celebrating the autumnal solstice. It’s colder weather from here on…until spring.

We had a dream last night…a nightmare, really. It came as a flash of insight…a look into the future…a dark night dread of what is coming:

What has the War on Terror accomplished? The terrorists – whoever they are – go about their business. But the war has brought together the governments of the planet to work together in an international, coordinated attack on free travel and the free movement of money. This is, curiously, the New World Order, that Bush 41 described 15 years ago. It has become more real, thanks to the War on Terror.

Just try to open a bank account; you’ll see what we mean! The bankers want to know everything about you. Otherwise, they could be held responsible…like a bartender who fails to ask for a photo ID.

The War on Terror has also accustomed people to waiting in long lines…and taking orders from morons. "Take off your belt…" "No jokes…" "Stand over here…" "Put up your arms…"

Once, we risked prison and asked: "What’s the magic word?"

The guard was not amused.

And now, we have the equivalent of a ‘war on bear markets,’ one that will require an international, coordinated attack on free markets.

In our dream, a new world currency had been issued. Paper money, of course – and backed by a consortium of nations and central banks. Use of any other form of money was prohibited. Pull a gold coin out of your pocket, and you were treated as a terrorist – a threat to the whole planet’s financial security.

Hard times had come… bankruptcies, defaults, and unemployment were common. We, who had tried to protect ourselves with gold, found ourselves with a pile of coins…but no way of using them. Otherwise, we were broke…penniless…wondering what to live on.

We could get a pittance from the government. But we would have to register. Then, we would stand in line for ration cards…gas and food were rationed – because we were at war! No jokes or criticism were allowed. Neither of the ‘war against bear markets’ nor how it was managed. This was serious!

Could a world like that exist? We don’t know. But progress is no sure thing. There have been periods of backsliding…depressions…Black Death…and Dark Ages. Life has its winters.

"Historically, there has been one major plague every 100 years," says a colleague in our Paris office. "The last one was about 90 years ago. It was the worst plague in human history…in terms of the people it killed. More people than died in WWI."

But surely medical science has made progress, we replied. Now, we don’t have to worry so much, no?

"Not so!" was the answer. Of course, there’s been a great deal of progress. But these tiny bugs mutate and spread faster than medical science can react. It is just a matter of time until one of them goes berserk.

Apart from the risk coming from Mother Nature, there is also the risk coming from ourselves. Human institutions evolve like bugs too. And every once in while, they work themselves into an awful state – before anyone realizes what has happened or what to do about it.

After hundreds of years as masters of the entire Western world, in the 5th century the Roman Empire seemed to disintegrate. It could no longer maintain bridges and roads…it could no longer collect taxes…it could no longer hold off the barbarians. Soon, Rome was sacked and the barbarians took control.

Property in downtown Rome went into a bear market, from which it did not recover for probably at least 1,000 years.

And then, in the early 20th century, something went terribly wrong again. The French and the Germans went at it – over nothing, it appeared. Then, the British made the mistake of getting in the fight…followed by the Americans. In retrospect, we see that there was never anything at stake worth fighting over. But once underway, no one had a way to bring the war to a close. It just kept going until millions were dead, and almost every government of Europe was either toppled or bankrupt – usually both. The noble houses – the Hapsburgs, the Romanoffs, the Hohenzollerns – all died in the trenches. So, did the Ottoman Empire…France and Britain were broke.

Then, the very year in which WWI finally ended, came the Spanish Flu epidemic – which laid down another 30 million people.

And then, 20 years later, a new generation was ready to do it all over again – with another worldwide war and all that went with it.

Could we be headed into another dark period in human history? Don’t know…maybe. Lucky for us, we have our bear market strategy in hand.

*** And the markets hold their collective breath today as the debate over the proposed $700 billion bailout rages on. While this bailout does little to protect U.S. taxpayers – who, incidentally, will be the ones footing the bill for the bailout – the oil market will certainly stand to benefit. That is, if everything goes as planned.

Oil prices have been falling for a while now, due to the fact that a struggling consumer economy has squelched demand for the black goo.

But, as CNNMoney.com points out this morning, if the bailout focuses on "jumpstarting" the faltering economy, ostensibly, consumer sentiment will rise and so will demand for oil. Also, this major injection of liquidity in the markets, along with the printing presses working overtime to get more and more dollars into the markets would likely devalue the greenback. And since crude is traded in U.S. dollars all over the world, a falling dollar means rising oil prices.

We’ll see if this is really the adrenaline shot the oil markets need to recover…or if a intrinsically weak U.S. economy will prove to be harder to bandage that that. We’re putting our money on the latter…

*** As we said, the debate over the bailout keeps on truckin’…yesterday, members of the Senate Banking Committee who are incredulous about the effects of the enormous bailout drilled Paulson and Bernanke for 5 hours. While much of the backlash the White House is facing could be political showmanship…after all, there is an election right around the corner…Congress doesn’t seem to be giving up this battle without a fight, however staged it may be.

To help put the biggest bailout in history into perspective, Chris Mayer sends us this note:

"Consider some numbers from The New York Times. The $700 billion is about what the U.S. has spent on the Iraq war so far. It’s more than the total annual budget of the Pentagon. As the Times reports: ‘It represents more than $2,000 for every man, woman and child in the United States.’

"What does it all mean? So much has happened so fast that I’m still trying to get my arms around the fuller implications of this. But as an investor, the bailout really doesn’t change much.

"I believe that the long-term trends we’ve identified and invested in are still in play. The energy, agriculture, water and infrastructure trends still march on. The government’s bailout plan does nothing to find new oil and gas deposits. It does nothing to help feed a hungry world or alleviate the growing shortage of arable land. It does nothing about purifying water or increasing water supplies. It does nothing about crumbling bridges, inadequate roads and power systems."

*** Since it is now clear that the reds are going to inherit the world. We thought we’d find out what they were going to do with it.

So we consulted that august commie rag – Liberation – for an answer. Alas, the lefties have even less of an idea of what is going on than the rest of us…

"It’s the end of a certain kind of laissez-faire…" writes Phillipe Martin.

And that’s about as far as they get.

And of course, he repeats what has been noted by practically every conscious commentator in every time zone in the world:

"The irony is that this enormous statist intervention, though presented as an example of American pragmatism is the work of the most ideological and extremist administration that the US has ever had."

Ironic? No…inevitable. We alerted readers of The Daily Reckoning years ago. The Bush administration has never been ‘conservative.’ Instead, it’s the most activist administration since Roosevelt – Theodore Roosevelt, that old windbag meddler.

The Bush administration used the 9/11 attacks as an excuse for the biggest increase in military spending and police power since WWII.

Now it is using the market correction (caused largely by its own interventions in the credit industry) to expand state power in the financial area. Half of all Americans pay their mortgages, directly or indirectly, to the federal government. Most older Americans depend, in whole or in part, on money from the government to live. Now, Americans depend on the government to keep house prices up – by subsidizing demand for mortgage backed securities – and to keep up stock and bond prices too – by buying up Wall Street’s mistakes. Homeowners want protection from their own bad judgment. Investors want protection from Mr. Market. The old want free medicine. The young want free schooling. The unemployed want jobs and money. The rich want politicians in their pockets. The poor want the rich’s money. Investors, homeowners, pensioners – is there anyone left in America who isn’t trying to pick someone else’s pocket?

Until tomorrow,

Bill Bonner
The Daily Reckoning