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Investments for a world in crisis — food, fuel and water

Three essential needs are dwindling in supply and rising in price around the world, says this Canadian analyst, and investors should take note.

As a rule, big picture or “top-down” investing means finding a sector with a bright future, then deciding which stocks in that sector are going to reap the greatest benefits.

Mr. David Chapman gives a much-bigger-than-usual picture — the whole world. Three concerns are going to have a lasting impact on our daily lives, the chain of supply and demand and the actions of nations. They may well lead to war … in one sense, they already have.

Food. Fuel. Water. Those are the Three Big Issues of the new century, Mr. Chapman writes in Investor’s Digest of Canada. “We can profit and protect ourselves by investing in the very stocks that are benefiting the most from this looming crisis,” he says. He has no less than nine investments that fill the upcoming bill.

In the midst of the two major disasters that dominate the news today, it is not too difficult to imagine the growing crisis in food, fuel and water filling the headlines for a long time to come.

The war for food

The war for one of these three necessities is effectively in progress, says Mr. Chapman, an adviser and technical analyst at Union Securities. The war for fuel got under way with the invasions of Afghanistan and Iraq in the wake of the September 11 attacks. Oil may not be the direct cause of the conflict, but it’s hardly an afterthought, either.

“The war for food may now be getting under way as well,” he adds. Food riots have exploded in Mexico City, Haiti, Mauritania, Cameroon, Ivory Coast, Senegal, Indonesia, Morocco, the Philippines and Egypt.

The reason isn’t hard to find. In the past year, the price of corn is up 31 per cent, rice 74 per cent, soya 87 per cent and wheat a whopping 131 per cent. These are not luxury items. Together, they constitute the basic foodstuffs for a large part of the world’s population.

The World Food Program estimates that it will take $750 billion to fill the gap in world food budgets. That’s a pittance next to the cost of the war in Iraq, says this analyst, but it’s still a big price to pay. An even bigger price to pay would be continuing food riots in developing countries. And sooner or later, those higher food prices will start showing up in the grocery aisles of developed nations as well.

Meanwhile things are going in the wrong direction. We’re not growing enough food. Wheat production is down by a fifth compared to 1961 and rice by a quarter — and we only produce half as much corn as we did then.

Cheap days may be over

This is not liable to be a temporary problem. If the day of cheap fuel is over, the day of cheap food may be too.

“There are many reasons for this growing crisis which is now entering a period of increasing instability,” says Mr. Chapman. “In terms of danger, the food crisis potentially outstrips the credit crisis, the fuel crisis and even global warming.”

The growing demand for food, especially meat, by rising Asian nations like China has contributed to the problem, but it’s not the only reason.

Just as troublesome are trade arrangements that convince developing nations to give up food production in order to stock Western shelves with cheaply manufactured goods. Nations like Mexico, which once produced more than enough food for its people (and still could) now import food.

Western food production is subsidized, which makes it that much more difficult for developing nations to compete. Then there’s the rising cost of energy, driving up expenses in almost any area of agriculture you can think of, including pesticides and fertilizers. Not least, crops are being diverted to produce biofuels like ethanol.

Water and climate change

Now mix in the fact that the price of water is soaring. Aside from the obvious need for potable water around the globe, it is needed in the production of meat foodstuffs and to extract oil, especially in the oil sands.

Oh, and did we mention climate change? Mr. Chapman does, adding that it is going to hit hardest in the countries least able to deal with it. Not least, a group of nations have banned food exports to protect their own supplies. The list includes such giants as Russia, China and India.

Feeling cheerful? Well now we get to the part where there are benefits to be had. Anything that can help fill the food, fuel and water gap will be in demand. But these investments are volatile, says Mr. Chapman, so keep a close eye on their weekly, monthly and yearly lows.

Oil and gas stocks are an obvious choice in a fuel-starved world. But this analyst prefers to “look at the facilities and transportation services that operate behind the scenes but are integral in the equation of getting energy to us.” Westshore Terminals Income Fund (TSX-WTE.UN) runs a coal-storage and loading terminal. It has gained almost 40 per cent in the past year and Mr. Chapman believes there’s more to come.

In transportation, Mullen Group Income Fund (TSX-MTL.UN) is an independent transportation and service agent for the oil and gas industry. This fund has some wild swings, admits the analyst, but it has entered on an uptrend of late.

Surprisingly overlooked

Down on the farm, you cannot overlook Canada’s “Big Three” in Mr. Chapman’s opinion. They are the two giant fertilizer firms, Potash Corp. of Saskatchewan (TSX-POT) and Agrium Inc. (TSX-AGU) as well as Viterra Inc. (TSX-VT) formerly the Saskatchewan Wheat Pool.

But beside these three, there are some “surprisingly overlooked” investments on the chemical side of agriculture. This analyst likes Chemtrade Logistics Income Fund (TSX-CHE.UN), which makes sulphur-based products for the agricultural industry. He also likes methanol maker Methanex Corp. (TSX-MX).

If you want all kinds of agricultural investments under one roof, the choice would be Claymore Global Agriculture ETF (TSX-COW), which holds Potash, Agrium and Viterra along a number of big U.S. companies.

“Finally,” adds the analyst, “our favourite junior that should be in all speculative portfolios” is Athabasca Potash Inc. (TSX-API), a company that explores for potash in Saskatchewan. It’s on the verge of becoming a major potash supplier for a hungry world, he says.

While he admits to his readers in Investor’s Digest of Canada that “there is a certain perversity in investing in a crisis,” Mr. Chapman concludes that investors should be prepared to go with the crisis. Until supplies of food, fuel and water start rising to meet the demand, the crisis will simply get worse. More production is urgently needed — there’s no reason you shouldn’t profit from it.