COMMENTARY | COLUMNISTS | STAN SEWITCH

The end of cheap food

"It all goes back to the dirt." That's one of my fundamental premises of economic theory, built from a nontraditional study of business and trade. Every commercial interaction can trace its existence to the ground, sooner or later. The raw material, or "rude produce" as Adam Smith used to call it, that originates in the earth is the source of all industries, including the service businesses that directly or indirectly depend upon those primary sources of value creation.

A century or two ago, most of the population in any given country derived their livelihood from agriculture, livestock, mining or timber. A smaller segment created processed and manufactured goods from that raw material. A smaller segment still provided services. The tiniest fraction were the indigent and public servants.

Fast forward and, thanks to advancement of science in many fields, most people (98 percent) do not derive their livelihoods directly from the ground. About 60 percent earn a living by providing services. About a third actually make something. Thus, the self-sufficiency of the population has dramatically dropped these last 200 years. Interdependency has increased manifold. And at the same time, the population of just our country has increased by 300 percent, in the last 100 years.

So we have a ton more people, the majority of whom can't directly feed themselves with their own labor. This is true of most, if not all developed countries. It's true to a lesser degree, but increasingly so, in developing countries. Why else would China be buying farm acreage in places like Africa, Australia and Eastern Europe? They have a lot of people to feed and not enough arable land to produce the menu that will satisfy a growing number of stomachs. China represents 20 percent of the world's population, and has only 7 percent of the world's productive, arable land. But China is not alone. Saudi Arabia has spent $100 million to lease land in Ethiopia to raise wheat, barley and rice. In Sudan, South Korea has signed deals for 690,000 hectares, the United Arab Emirates for 400,000 hectares, and Egypt has secured a deal to grow wheat. Private companies are also acquiring land. Sweden's Alpcot Agro bought 128,000 hectares of Russian farmland, South Korea's Hyundai Heavy Industries acquired 10,000 hectares of eastern Siberia, and Morgan Stanley bought 40,000 hectares of farmland in Ukraine.

The population growth alone would tend to predict an increased competition for access to farm land, and thus an increase in its value. But in addition to that, agricultural properties are being stressed and polluted at an alarming rate, encroached upon by housing and other construction to accommodate the rising population, lost to climate shifts and taken out of food production for fuel crops and wind farms. The water tables are being contaminated by salts, industrial waste and other pollutants. Soil erosion occurs from flooding and drought. The American Farmland Trust estimates that farmland is disappearing around the world at a rate of 2 acres per minute. We can't increase the yield of the remaining farm land much, if any, since the overfertilization of "modern" farms has caused massive dead zones in oceans and lakes. Nitrate runoff depletes oxygen, killing fauna that form the foundation of aqueous food chains. Half the lakes in the United States are eutrophic.

Adam Smith proposed that of the four sources of economic prosperity, agricultural land was the most fundamental and valuable. Smith pointed out that it is the only producer of wealth that requires less capital and human labor than the whole amount necessary to bring the food out of the ground. He notes that Mother Nature does a lot of the work, thus the leverage of investment to output is assisted by the natural process of living growth.

These principles and trends explain why, in the United States, agricultural properties have risen in average value by 58 pecent over the last year. Farmers and nonfarmers are buying agricultural land because they believe that the larger patterns of population growth and diminishment of available, suitable dirt will increase the value of food and thus the value of the land used to produce it. Investors in agricultural acreage are betting on this long-term trend, while acquiring assets that have productive value. The bet is also a good hedge against inflation, which everyone is betting will show up sometime in the next two or three years. Farm land real estate investment trusts (REITs) are doing a good business attracting investors. One such REIT notes that another attraction to the asset class is that more than 70 percent of U.S. farm land is owned free and clear. Very little leverage allows minimal debt service to add costs to producing food. And while an investment in stocks can actually go to zero, producing farm land will always have some value.

It is becoming generally accepted that we are in the midst of the end of cheap oil. I think we are also at the beginning of the end of our collective Happy Meal.


Sewitch is CEO of KI Investment Holdings, LLC, conducting an investment experiment in long-term principles. He can be reached at stan@sddt.com.

User Response
0 UserComments