In 2010, a major drought hit Russia. The country experienced the highest summer temperatures recorded in more than 130 years. That decimated the summer harvest, as 17% of Russia's total crop areas were affected.
In response, Russia banned wheat exports, causing the price of wheat to soar 80% in one year. The effects of the Russian heat wave were felt in places like Egypt, which is the world's largest importer of wheat and gets a third of its wheat imports from Russia. As wheat prices skyrocketed, so did Egyptians' tempers. At one point more than 40% of an average Egyptian's monthly income was spent on food. That caused food riots, which spiraled into unemployment and then popular unrest. By January 2011, the government of Egyptian president Hosini Mubarak was toppled.
Resource scarcity could become an economic weapon
While it probably wasn't Russia's intention to topple the Egyptian government, it serves as a warning that the risk is great that food, or really any natural resource, has the potential to become a weapon. We saw that happen here in the U.S. back in the 1970s during the Arab oil embargo. The supply disruption caused the price of retail gasoline to spike, the stock market to crash, and the U.S. to enter into the worst economic recession since the Great Depression. It was at that point that America realized it needed to reduce its reliance on Arab oil.
While the Middle East has always been a hot zone of conflict because of its control of a large portion of the world's oil supplies, the next battlefield could be over food. Countries like Argentina, which is the world's third largest supplier of soybeans, and Brazil, which is also a major food exporter, are resource rich when it comes to food production. That's both a weapon and a target.
India, on the other hand, will likely battle its internal food security issues in the future. The country's population is increasingly becoming more concentrated, while its water resources aren't being properly utilized, causing farmland to be both unproductive and abandoned. It's not alone. Peru, for example, is dependent on importing its grain supplies while the country's crop yields remain low. Another of the many examples is Nigeria, which controls valuable oil but yet imports a growing amount of its food supplies. Future food scarcity could cause a conflict to grow beyond regional unrest in the future if a country feels a supplier is holding its people hostage.
Building or disarming a weapon with seeds and fertilizer
Monsanto Company (NYSE:MON) estimates that over the next 50 years, farmers will need to produce more food than they've produced over the past 10,000 years combined. That challenge will make it difficult to find ways to feed everyone. However, this is why Monsanto and others are working closely with farmers around the world to double the crop yield of its core crops by 2030. While the use of breeding and biotechnology catches most of the headlines, Monsanto is also working with farmers on improving farm-management practices as a way to increase crop yields.
In addition to seeds, fertilizers will continue to play an important role in securing the food supply. About half of the world's food production is a direct result of fertilizer application. It's more important than irrigation, seed varieties and technology, and even pest control. Further, some fertilizers, like potash, not only strengthen plants and speed growth and maturity, but also improve the physical quality and taste of the crop. That puts diversified fertilizer companies such as PotashCorp (NYSE:POT) and Agrium (NYSE:AGU) in the driver's seat to supply farmers with the tools they need to produce more food.
PotashCorp points out that India in particular is an important future market for its potash. The country has 18% of the world's population but just 11% of its arable land. Worse yet, its soils have a very poor nutrient balance that's causing its crop yields to be 20%-50% less than those of what U.S. farmers enjoy. In order to improve, its government heavily subsidizes fertilizer to farmers. If the country can improve its crop yields, then it can increase the security of its food supplies. However, failure here could breed problems later on.
Meanwhile, Agrium is working with farmers in Africa as part of the Millennium Promise program. It has donated more than $1 million to support more than 28,000 farmers in five African countries, including Nigeria. These farmers received fertilizer and agronomic support to become self-sufficient. Further, the increased crop yields helped sustain school meal programs. It's enabling these countries to secure food production so that its best offense will be a solid defense.
Food for thought
Food security is likely to become an important global security issue in the future. While areas in Latin America are blessed with the abundant land and water to create an agricultural superpower, other areas like India are much weaker. Because of this imbalance, the greatest weapon of the future could be growing on farms, as countries with food have a distinct advantage over those that struggle to grow it.
Matt DiLallo has long January 2015 $70 calls on Monsanto, short January 2015 $70 puts on Monsanto, and short July 2014 $105 calls on Monsanto. The Motley Fool owns shares of PotashCorp. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.