Rising Food Prices Series: Part IV

Posted by Patrick O'Connor on 5/19/08 11:41 am

This post contains agricultural stocks that are in our top-ten holdings.

This article is the fourth part of a multi-part series about rising global food prices. In this installment, we will explain one of the factors that is contributing to a rise in global food prices: changing climate conditions. In the following weeks, we will discuss other factors.  Read parts I, II, and III first.

Changing climate conditions create problematic agricultural conditions, driving a rise in global food prices

As world governments continue to release new data confirming escalating food prices, many organizations are taking a harder look at some of the factors contributing to the crisis—including climate change. 

At the root of the global food crisis, as we’ve noted before, is rising demand and dwindling supply. But one factor for the dwindling supply is the changing world climate.

A rapidly growing population combined with the industrialization of the developing world has led to the proliferation of so-called greenhouse gases. In fact, the levels of one greenhouse gas—carbon dioxide—are increasing 200 times faster than at anytime in the last 650,000 years, and the earth’s temperature has been consistently above average since 1982, according to Science magazine. The resulting change in weather patterns is causing floods and droughts, destroying marine life, and in the process, threatening the world’s food supply.

That may seem unfathomable, as technological advances in agriculture—such as genetic modification, irrigation technologies and improved pesticides—would seemingly have led to a dramatic increase in crop yields. The problem is, despite these improvements, agriculture is still highly dependent on the climate because the sun, the temperature, and precipitation levels are the main drivers of crop growth.

As a result, changing climate conditions are causing changes in agricultural conditions. In some cases, that might help farmers: growing seasons are getting longer in typically colder climates. But it is also causing a variety of problems. While the increase in the Earth’s temperature is making some places wetter, it’s making some places dryer; and, flood and drought cycles are becoming more erratic.

These effects may be most noticeable in low-latitude regions, where many developing countries are located. One example is the arid farming region close to the equator. In Australia’s once-fruitful food production region of New South Wales, a severe drought—which many attribute to shifting rainfall patterns—has lasted for five years. Speaking on the issue last year, South Australia Premier Mike Rann said “what we’re seeing with this drought is a frightening glimpse of the future with global warming.”

According to the United Nations Food and Agriculture Organization (FAO), climate change has both an environmental and economic impact on agriculture. Changes in the availability and quality of land and water resources are reflected in crop performance. The decline in production in the face of growing demand can drive up prices in regions that may lack the technology to deal with these environmental changes—for example, by improving irritation systems in drought-ridden areas.

Indeed, Joachim von Braun, general director of the International Food Policy Research Institute (IFPRI) and lead author of a recent report examining how various global trends are impacting world hunger on both the supply and demand ends of the market (“The World Food Situation: New Driving Forces and Required Actions”), says “climate change will also have a negative impact on food production” and “surging demand for feed, food and fuel have recently led to drastic price increases, which are not likely to fall in the foreseeable future.”

According to the report, shifting weather conditions resulting from climate change will disrupt the rainfall patterns that farmers rely on to nourish their crops and water the land that feeds their livestock. As a result, cereal production in South Asia could drop 22 percent by 2080, during which time wheat production in Africa could come to a halt. All things considered, temperature increases of more than three degrees Celsius could drive food prices up by as much as 40 percent.

In an election year, the issue is becoming political, with some Republicans arguing that Democrats are overemphasizing the role of climate change in rising global food prices to promote environmental reforms.

But politicians aren’t the only ones to argue about the role of climate change in rising global food prices. Kym Anderson, a professor of economics at Adelaide University in Australia, says that while “our drought hasn’t helped… we are a small part of the total world market,” and “it’s really petroleum prices that have gone up and that has encouraged both Europe and America to set targets to move towards biofuels and that is driving up the demand…”

Anderson makes a good point. As noted above, changing climate conditions are certainly just one part of a multi-faceted problem. In our last column, we talked about the issue of biofuels, and in our next column, we’ll talk about rising energy prices, which have driven up the cost of transporting food.

Below is a list of Navellier agricultural companies that are top-ten holdings in our all-cap portfolios.

Vantage Portfolio:
Terra Nitrogen Co., L.P. (TNH); 1-yr Chart; Profile

Dynamic MPT Portfolio:
Mosaic Co. (MOS); 1-yr Chart; Profile
Potash Corp. (POT); 1-yr Chart; Profile
CF Industries Holdings, Inc. (CF); 1-yr Chart; Profile
Terra Industries, Inc. (TRA); 1-yr Chart; Profile

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Investment in equity strategies involves substantial risk and has the potential for partial or complete loss of funds invested. It should not be assumed that any securities recommendations made by Navellier & Associates, Inc. in the future will be profitable or equal the performance of securities made in this report. For a list of recommendations made by Navellier & Associates, Inc., for the preceding twelve months, please contact Tim Hope at (775) 785-9416.

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