Will Diminishing Agricultural Inputs Hinder Our Ability to Feed a Growing Population?
Long-term constraints vary among soil, fertilizers, water, seeds, and equipment.
Over the past three years, we've seen corn prices nearly double, soybeans climb more than 66%, and wheat jump 50%, as challenging farming conditions in major growing areas like the United States, South America, and Russia have kept farmers from satiating growing consumption. Over the near to medium term, we believe normalizing weather and slowing demand (principally because of lower growth in U.S. corn-based ethanol production) will drive crop prices lower. But looking beyond the next three to five years raises provocative and important questions surrounding farmers' ability to produce at the levels necessary to meet global demand. We've highlighted five key areas of concern: water availability, soil quality, the abundance of fertilizers, development of seed technology, and potential equipment advancements. We think the world's growing population and increasing demand for high-quality proteins will lead to demand gains and is worth examining as another potential driver of elevated food prices over the long run. We believe the trends suggest the continuing rise of key inputs into the agricultural complex, and firms with economic moats should benefit in particular.
Plenty of Reserves for Potash and Phosphate Fertilizers
Are we in danger of running out of potash and phosphate fertilizers anytime soon? The short answer is no. Reserves are ample and production capacity is set to expand for both fertilizers as demand grows. While we have many decades' worth of potash and phosphate in the ground, production capacity expansions need to keep pace with demand growth to prevent fertilizer prices from skyrocketing. Could fertilizer become so expensive that farmers in developing regions aren't able to buy essential crop nutrients, thus damaging global yields, tightening food supply, and driving up food prices to a point that limits GDP growth? In the medium term, we don't think so.
Adam Fleck does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
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