Beijing’s financial district was electrified by news of a $586bn building bonanza this week. But 70km outside the city, an even bigger government project continued unnoticed. Since 1978, Chinese forestry engineers have been planting a 4,500km-long barrier of trees through the desert that now borders Beijing. After years of overfarming, China’s farmers have turned half the country into a giant dust bowl and left the city at the mercy of a rapidly encroaching desert. Soon 40% of China will be scrubland, according to China’s Environmental Protection Agency. The Great Green Wall may be all the stands between Beijing and oblivion.
But China’s farmers aren’t the only ones destroying their farmland. This is a global problem. In Australia, vast wastelands have opened up as years of fertiliser and pesticide use have destroyed the soil. In Eastern Europe, farmers have scorched acres of farmland with chemicals. Across the world, topsoil – the thin layer of earth that makes planting crops possible – is being stripped away by development and aggressive farming. And it’s not about to grow back fast. Healthy topsoil is a complex ecosystem, says geologist David Montgomery in his book Dirt. In every handful of soil you have billions of beneficial microbes, fungi-churning nitrogen, and earthworms who turn rock and plant detritus into fertile excrement. Topsoil grows back at a rate of an inch or two over hundreds of years. The trouble is, we’re using it much more rapidly than it can regenerate.
The problem is population pressure, says Fiona Harvey in the FT. There are 6.5 billion people on the planet; by 2050, that’s expected to rise to nine billion. The scramble to feed all those people is leaving a terrible mark. For every bushel of wheat grown, we lose two bushels of topsoil. Cropland in America is being eroded at least ten times faster than it takes to replace lost soil, says the National Academy of Science.
“Fertile soil – good dirt – may become more important to land values than oil or minerals in the ground,” says Chris Mayer in his Capital & Crisis newsletter. So what sort of opportunities does this hold for investors? You could buy one of the fertiliser firms that are helping farmers get the most from dwindling land banks, says MarketWatch’s Barbara Kollmeyer. There are just 12 productive potash (the basic fertiliser for plants) mines around the world. Firms such as Potash Corp and Uralkali (see below) have been charging customers up to $1,000 a metric ton, up from a spot price of $270 last year.
Or you could follow the lead of Saudi Arabia and UAE and buy up farmland, says Mayer. One of the few places left with large, uncultivated stretches of land is the Russian Black Earth region. Around 7% of all arable land on the planet is owned by the Russian state or collective farms, says Irwin Greenstein for Contrarian Profits. But having let 35 million hectares go wild since the Soviet Union broke up and collective farming collapsed, Russia has let foreign firms buy up the land in an effort to boost grain yields. In the last two years, the average price for a hectare has jumped from $570 to $1,000. That’s cheaper than comparable land in Argentina ($6,000 to $8,000). But as Russian billionare Mikhail Prokhorov told Bloomberg recently, with so little good soil left, land prices could rise 25-fold in years to come.
The best bets in the sector
It’s been nearly a year since we last tipped Black Earth farmland. So far, it’s proved a pretty ugly recommendation. Stockholm-listed Trigon Agri (TAGR) has seen its share price drop from €1.8 to €0.53 since we tipped it. Just like the other big foreign owner in the region, Black Earth Farming, the stock was oversubscribed when it listed, explains Irwin Greenstein on Contrarian Profits. As these speculative investors sold out, the shares have fallen to rock-bottom prices, but are attractive long term. Trigon turned profitable this year and is expecting a bumper harvest with over 65,000 hectares of farmland cultivated in Russia and Ukraine. SEB Enskilda analyst Shana Gavron has a target price of €1.75. With inflation running at 14% in Russia, the government is eager to encourage foreign firms to cut grain prices by boosting paltry Russian crop yields. The short supply of potash will be a boon for Potash Corp of Saskatchewan (NYSE:POT), now on a forward p/e of 4.5. But a word of warning on Russian potash giant Uralkali (URKA). It’s likely to face damages ($619m minimum) for a flood at one of its mines in 2006 that caused a railroad collapse. CEO Dmitry Rybolovlev says the group’s “future existence is in doubt”. That would leave its 50 million metric ton potash reserves up for grabs. Best to avoid it.