A little more than 10 years ago, a man named Lester Brown published a book titled Who Will Feed China?, which he described as a "wake-up call for a small planet."
His thesis was that a rapidly developing China would put an unprecedented strain on global food and water supplies, primarily because industrial parks would replace China's farms, and the demand for food -- and particularly for less-efficient food such as meat -- would only increase as China's enormous population grew wealthier.
In the time since that book was published, China has indeed grown wealthier. And in 2003, for the first time in its history, China became a net importer in agricultural trade -- a position it's held ever since.
Is this the end of the world as we know it?
The good news is that I don't think it is. The better news is that there are a few stocks out there that will make sure we profit alongside a sustainable solution. But I'll get to those in a minute.
First: There is a very real problem here
I recently saw a presentation on China's agricultural future by Colin Carter, a professor of agricultural and resource economics at the University of California, Davis. China's first and foremost problem, according to Carter, is one of productivity.
According to the Organisation for Economic Co-operation and Development, China has 40% of the world's farmers -- yet just 10% of the world's arable land. Taken together, that means its agricultural operations are generally small-scale, hard to manage, and woefully inefficient. Carter also pointed out that although farmers are 40% of China's labor force, they produce less than 12% of the GDP. Finally, China has produced just 1% yield growth over the past 10 years, while the U.S. has increased its own yields by approximately 2.5% annually.
For a country seeing a rapidly increasing demand for food, these are damning statistics. It means that without substantial improvements to efficiency, the world will see rapidly rising food prices and the possibility for food shortages as the Chinese government -- flush with cash -- buys up more and more of global supply. This could ultimately lead to countries, fearing scarcity, shutting down their agricultural export markets, which would have an enormous slowing effect on the global economy.
It's not just China
Now, China is not alone in straining global food supplies and driving up prices. Ill-advised ethanol mandates, for example, have increased the price of corn and induced farmers to grow corn instead of wheat or soybeans, which in turn has driven up the prices of the latter two commodities as they have become less available.
And this has reverberated throughout the market. Since cattle in the U.S. are largely fed on corn, beef and milk prices have increased. The same goes for chicken and their eggs. That not only results in more expensive trips to the supermarket, but also puts profit pressures on companies such as Tyson Foods (NYSE: TSN), Chipotle (NYSE: CMG), and Starbucks (Nasdaq: SBUX) -- all of which have seen their stocks suffer as a result.
In other words, this is a truly global problem that many actors are looking to solve. And that provides opportunities.
That brings us to the stocks
Although China has improved its agricultural sector over the past 25 years, government-led efforts have largely focused on achieving food self-sufficiency. Now, however, smaller farms are being consolidated, specialized, and set up to take advantage of China's enormous agricultural labor market -- which is leading toward a focus on maximizing yield from the land and selling the excess production on the free market.
There are two additional catalysts that will provide investors a way to profit from China's move toward sustainability: the introduction of genetically modified (GM) seeds to the marketplace and the widespread distribution of advanced fertilizers. As Carter noted in his presentation, "There would be an instant boost in productivity ... offering huge economic benefits to farmers."
The opportunity in China for GM seeds probably brings to mind Monsanto (NYSE: MON), DuPont (NYSE: DD), and Dow Chemical (NYSE: DOW), three giants in the field. Indeed, it's with GM seeds that Carter believes China's biggest opportunity exists. But those companies are locked out of China.
Although the Chinese government got out of the seed production and distribution business in 2007, it still mandates that no seed production company in China be more than 49% owned by foreigners. China, however, has its own GM technology, and small players such as Origin Agritech (Nasdaq: SEED) stand to capitalize from the commercialization of GM seeds across China.
The fertilizer business isn't subject to similar restrictions, but the Chinese market is so fragmented that multinationals like Scotts have difficulty branding and marketing their products. So while companies such as Potash Corp. stand to benefit as sources of raw materials, the best opportunities to profit from the distribution of fertilizer in China lie with the domestic producers that have established brands as well as the capital to absorb their competitors and build out nationwide distribution networks.
The world is not doomed
If China increases access to GM seeds and fertilizers and rationalizes its agricultural industry, we're likely to see reduced food inflation rates and perhaps even China's return to being a net exporter of agricultural commodities -- which would help keep prices down and avoid global food shortages. And while this would be good for companies and consumers worldwide, it would be particularly beneficial to the people who have invested in the companies that will drive this agricultural revolution forward.
At Motley Fool Global Gains, we seek to identify global megatrends and then identify the best of the companies that stand to benefit. The need to increase agricultural production is only one of the megatrends we're following right now. We're also recommending companies that are meeting the world's energy demands, enabling global flows of capital, and providing the burgeoning middle classes around the world with new phones, cars, and even branded luxury sunglasses.
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Tim Hanson
owns shares of Starbucks and B shares of Chipotle. The Motley Fool owns shares of Starbucks. Chipotle is a Motley Fool Hidden Gems and Rule Breakers recommendation. Starbucks is a Stock Advisor and Inside Value pick. Dow is an Income Investor choice. The Fool's disclosure policy is hoping to soon be recognized as a bank holding company.
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