Five years ago, almost no one believed that oil prices would soar past $30 per barrel. $50 seemed utterly unthinkable. As oil prices continued climbing, so did disbelief. The skeptics never abandoned their misguided notion that oil was “overpriced.” So when crude retreated from $75 to $50 early last year, the prospect of $100 oil seemed like a ridiculous prediction.

Due to Peak Oil, the prices of agricultural commodities are going much higher…

Most of the agricultural markets have had a big move already, but these markets could easily suffer a big correction from current levels. The long-term investor will want to buy these markets on weakness, not sell them.

A hundred years ago, the average American spent about 45% of annual income on food. Today, that figure is down to about 15%. So we’ve been taking cheap food for granted and have spent our “extra” cash on plasma TVs and leased BMWs.

We don’t worry about food costs or whether it will be readily available tomorrow. But the agricultural markets may have some major surprises in store for complacent Americans…and unprepared investors:

While shortages of key industrial and energy commodities are frightening, no sector will threaten global stability more than agriculture…

In 2007, we saw stark glimpses of just how bad this situation will get. The “Tortilla Crisis” in Mexico, the “Pasta Protest” in Italy, the riots and crushing of one supermarket shopper in China over cooking oil… We have seen dairy, meat, and bread prices skyrocket.

It’s ironic that as global population is reaching an all-time high, we are turning a huge percentage of our crops into ethanol or biofuel…

This questionable, if not idiotic, alternative produces little, if any, short-term benefit and considerable long-term harm — both to the quality of farmland and to the integrity and stability of the global agriculture markets. In other words, using food as fuel can make a big mess out of the global food supply…and the prices that we all pay for that supply.

From sea to shining sea, the U.S. has croplands as far as the eye can see. For years, its bounty has been a supermarket for the world. Now it’s a fuel station, too.

China, which has hundreds of millions more hungry mouths than we have, has far less arable farmland. And worse, China has far fewer controls in place to regulate farming methods.

Trends like these strongly suggest that the agricultural markets will imitate the price action of the energy markets. As investors, we must look at this situation as an opportunity…

We should be looking to buy stocks of some of the key agricultural companies that help support the industry: those dealing with equipment makers, fertilizer, irrigation, and transport.

In my own portfolios, I have exposure to soybeans, wheat, and corn. I also think the soft commodities are much undervalued: coffee, cocoa, sugar, and cotton. These markets are also poised to move much higher…

The planet is not running out of food, but it might be running out of cheap food. So stock up your pantry and start shopping for the kinds of investments that will prosper during the coming agriculture boom.

Regards,
Kevin Kerr
June 23, 2008

P.S.: So now you know what to expect. Food prices will be higher, and there’s not much that you can do about it. So how are you planning to pay for all this expensive food? If you’ve been trying to make your money by just playing the stock market, chances are you haven’t had too much success. But luckily, there’s another market that is paying much more than just regular stocks. And many investors are finding it easier than ever to put food on their tables and still have money left over.

Agricultural Shortages was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

It’s funny how fate can change so many lives. Just before the trip from Sweden, my great-grandmother contracted rheumatic fever, or what they used to call consumption. Nobody is really sure why. She was only 33. Sad to say, she died.

But there is another side to the story. The family was delayed from sailing to America as they mourned their loss. Thus, they missed sailing on the Titanic. And everyone knows what happened to the Titanic.

Later on, my grandmother and her family sailed into New York Harbor on a different ship. She remembered gazing at the Statue of Liberty. I returned with her in 1997, and we walked through Ellis Island together. We even found her name in the book they used to categorize everyone who came through, an experience that is truly chilling. Back then, everyone was processed at Ellis Island and made their way to the places where they had relatives. Typically, the Swedes and Norwegians went to Minnesota, and that’s how yours truly ended up being born there.

Fast-Forward: Doing More With Less

The light that burns twice as bright burns half as long. And America has burned very brightly for a long time. As the resource battles begin to heat up, we are already seeing where some of the major battle lines will be drawn, and it’s not a pretty picture. The simple fact of the matter is the world’s resources — not just oil — are dwindling faster than Britney Spears’ career.

While shortages of key industrial and energy commodities are frightening, no other sector will threaten global stability more than agriculture.

Food Fight

It seems ironic that as global population is reaching an all-time high, we are turning at least half of our crops into ethanol or biofuel. This is a questionable, if not idiotic, alternative that clearly does as much damage as good. While the short-term impact is obvious, the longer-term ramifications for agriculture on a global scale could be devastating.

In 2007, we saw stark glimpses of just how bad this situation will get. The “Tortilla Crisis” in Mexico, the “Pasta Protest” in Milan (I happened to be there for that one), the riots and crushing of one supermarket shopper in China over cooking oil…we have seen dairy, meat and bread prices skyrocket.

The idea of food inflation is new to many Americans, who are used to prices for food being only about 13-16% of income. Back when my grandmother got off the boat in 1912, they were more like 45%.

Bad Choices Beget Bad Choices

In recent years in the U.S., the number of immigrants has swollen. The porous borders continue to attract newcomers as if it were still 1912. Here in the U.S., a lot of people think that America can still absorb a massive influx of immigrants from all over the planet who are poor, tired and hungry. And while that is nice, romantic thinking, the fact of the matter is we cannot.

Now, I would hate for us to change the plaque on Lady Liberty to “Bring us your well-fed and rested, employable and intelligent,” but the truth is maybe we have to.

Get Smart or Get Gone

As investors, we must look at this situation as an opportunity for our portfolio. First of all, I suggest if you have some extra land (condo developers and house flippers, listen closely), grow a vegetable garden, and if you are ambitious, raise some sheep and cows, because they will come in handy. A little more practical and with less bunker mentality is to add stocks of some of the key agricultural companies that help support the industry, like those dealing with equipment making, fertilizer, irrigation and transport.

My grandmother may have missed the Titanic, and figuratively, I hope we all do too. But keep in mind that our ship (the USS America) is sailing in uncharted waters and we had all better get smart fast. Really, the food supply is stretched and getting stretched thinner and thinner. There are only so many lifeboats, and unfortunately, that’s the new reality. Increasing population and rising demand for scarce resources mean that there is a big iceberg ahead. So man your stations.

Yours for resource profits,
Kevin Kerr
April 28, 2008

Agricultural Shortages was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.