Profiting from the long-term increase in food prices

A few well-known, savvy, long-term strategic investors have mentioned farmland as a good investment. I assume this is a play on food prices. As far as I know (I admit I need to do some research on this), food prices have been falling in real terms since the advent of the green revolution in the 1960s. Improved chemicals, fertilisers, seeds and machinery have all kept food prices down. Most farmers are still notoriously poor.

However, there seems to be several forces now working against this trend, including: 1) population growth. Although the growth rate is declining, the earth is still expected to add about another 3 billions inhabitans over the next 40-odd years. That is a lot of mouths to feed. 2) There are diminishing returns to the above inputs. 3) Lack of land and water. Growing populations, desertification, falling water tables, disappearing rivers, etc. are all placing pressure on marginal farmland. 4) Climate change. This may open up new farmland in Canada and Russia but my guess is that more fertile land will be lost in the warmer climes than gained in the north.

There have been many stories on increasing food prices over the past 6 months or so. With all of the above factors working together, this could be the start of a long-term, structural increase in food prices around the world. The proportion of total household spending on food has been on a long-term decline, especially if you strip out the increasing spending at restaurants. The proportion should climb back up.

So, how to profit from this trend? Farmland is difficult to purchase for a small-time investor. Too much money, too much hassle, little diversification. My big idea: if food prices increases, farm incomes should also increase. This should translate into higher capital expenditures by farmers, ergo companies that manufacture farm equipment should also prosper.

A brief investigation shows that the largest farm equipment manufacturers are: John Deere (DE), CNH Global (CNH), Kubota (KUB) and Agco (AG). I would like to purchase a broad basket of shares to reduce company-specific risk, plus this is not supposed to be a stock-picking exercise. However, DE, CNH and KUB are also exposed to the construction equipment industry, making them less of a pure play. Whether this will be a help or hindrance over the long-term is tough to say. The slowdown in global economic growth may hurt, but the global infrastructure construction boom is probably still in its early stages.

I will return to this topic in the near future.