What’s he talking about? Today, we take a look and invest right alongside his idea. And it should start to pay off with the arrival of the first swallows of spring in 2010. It’s also timely now — in this weak-kneed economy — because it has traditionally held up well even in when the economy is on the ropes. Even the Great Depression couldn’t put this thing down.

We start with simple truths. The world’s population has more than doubled since 1950 — from about 2.5 billion to 6.7 billion. By 2050, there will be more than 9 billion people on the planet. Almost all of this growth will come from undeveloped markets such as China and India. And they will all be doing one thing, for sure — eating.

Now, hang on. I know that is a banal insight by itself, but this story has layers like a tiramisu. The second layer is the mix of food eaten, which is important. These undeveloped economies are getting richer. Predictably, as people everywhere have done and continue to do when they have a little more money in their pockets, they change their diets. They spend more on food. The average Chinese spends 40 cents of every additional dollar earned on food. In India, it’s about 70 cents of every additional dollar. What do they buy?

They buy more meat, more fruits and more vegetables. Their calorie intake rises. That’s why the U.N. says we’ll need to boost food production by 70% by 2050 — a big task, given increasing restraints on water and quality arable land.

How do we meet that demand? Here the plotlines start to thicken and things get interesting…

Let’s look at soybeans specifically. China is the largest importer of soybeans and has been since 2000. China was once the largest exporter of soybeans, but flipped to a net importer in 1995. It may well be impossible for China to meet its demands for soybeans by producing more of its own. Passport Capital, an astute hedge fund, estimates that in order to grow enough soybeans to become self-sufficient, China would need to cultivate an area about the size of Nebraska.

That looks impossible against China’s arable land base, which has been in decline since 1988 — this despite the fact that China’s subsidizes agriculture. Another reason is the low level of water resources in China. Soybeans require a lot of water — 1,500 tonnes of water for one tonne of soybeans.

Who has lots of water? Brazil. So it is no surprise to discover that the increase in demand for soybeans from China has largely been met by increasing soybean acreage planted in Brazil. (Brazil is the second largest exporter of soybeans in the world, behind the U.S. and ahead of Argentina and Paraguay.)

The easiest way for China to get around its water shortage is to import soybeans. By importing soybeans, Passport calculates that China is effectively importing 14% of its water needs.

It looks likes this trend will continue for quite some time. When you look across the world, arable land per person is in decline. (Arable land simply means land that can be used for farming; it doesn’t mean that it is currently used for farming.) But one nation has more potential for converting arable land into producing farmland than anybody else by a country mile. It’s Brazil again.

Brazil has a large tropical savanna known as the cerrado. You can think of it as the world’s arable land bank. It’s an area of about 250 million acres — about as big an area as all of the arable land in the U.S. It gets plenty of rainfall and sunshine. The soil is very old and runs deep. But there is a problem: The soil is nutrient poor. You need to add a lot of potash and phosphate — two key nutrients — to grow soybeans there.

According to estimates by SLC Agricola and Morgan Stanley, the average new acre of farmland in the cerrado requires 14 times the amount of phosphate and three times the amount of potash of a typical American acre. This means that it is expensive to grow grains here. You need a high soybean price to make it worth the effort — and there is more to it than just adding the nutrients. There is road and rail access, for instance. Someone would have to build all that out, too.

Connecting the Dots — Grains Are Cheap

So now we are in a position to connect some dots. China’s increasing population and affluence will drive its soybean imports. These imports will come mainly from Brazil. And Brazil, as it converts more arable land to producing farmland, will need a lot of potash and phosphate.

What is true of soybeans is also true of wheat and corn and rice and other agricultural commodities. We’ll need more of all of them. And all of them face the same challenges for water and land. All of them require lots of fertilizer.

I’ve not mentioned the biofuel component. But this is another big pull on demand for grains. The U.S. alone aims to produce 15 billion gallons of ethanol by 2015. All over the world, food crops now compete with energy needs.

This is not a gloom-and-doom scenario. It simply means that there is a lot of support for higher prices for agricultural commodities. Inventory levels still remain low worldwide. Grain prices are all well off their highs. After adjusting for inflation, many of them are as cheap as they’ve been in decades.

This is why Jim Rogers said he likes the agricultural commodities. That’s what he was talking about in the quote up top. I couldn’t agree more.

I also mentioned how this idea was hard to kill. In the Great Depression, purchases for jewelry and clothing and the like fell by 50%. But purchases for food — even for meat — held steady. We’ve seen similar patterns in recent busts. In the Asian Crisis of 1998–2001, the demand for food held steady even while other markets collapsed.

Put it all together and you have a great case for higher grain prices. You also have an environment that is very good for fertilizers — in particular, potash and phosphate. An investment in the fertilizer stocks is an investment right alongside the grains.

I’ve just alerted my Capital & Crisis readers to two fertilizer stocks that I believe are best positioned to profit from the coming agricultural commodity boom, but there are a number of fertilizer plays out there that are also ripe for the picking.

A couple worth taking a look at include Agrium (NYSE: AGU) and Western Potash (TSE: WPX). Naturally, I’m partial to the ones that I’ve recommended to my C&C readers – and they’ve got pages of research to back up why that is – but these two tiny stocks could make interesting moves nonetheless.

Sincerely,
Chris Mayer

November 10, 2009

Jim Rogers: Time to Buy Agricultural Commodities was originally featured in the Penny Sleuth.

Today, I might have something even better for you. This one isn’t based on one specific commodity. Although, it does have that element too. Instead, it’s based on a unique situation in our English-speaking relatives across the pond.

Before I get into this specific circumstance, and why it’s about to make you a boatload of money, I have to detail what a semimonopoly is.

As you know, monopolies are one company, or organization, that dominates an industry – free from competition. In the first few years of the 20th Century, the U.S. made these illegal. The story, however, doesn’t stop there…

As you might have guessed, a one-size-fits-all law doesn’t usually work. There are always exceptions to the rule.

I could spend hours listing many of these exceptions. But the main ones (at least, the ones that you can profit from) are utilities. The only time there’s competition in the major utilities – water, gas, electric – is when a region opens up. Mergers and acquisitions are common in these industries. But having two competing interests in the same region is nearly unheard of.

Since these utility companies don’t own the entire industry, however, they aren’t considered monopolies. Even the few that are large enough – like the one I’m about to share with you – are given basically a free pass by the government. And that’s not just in the U.S. Most of the Western world shares similar rules and exceptions to the rules.

I recently found a company that has natural gas and electricity operations in both the U.S. and Great Britain. It is a true semimonopoly. In fact, one could argue it is a true monopoly in the U.K.

It’s the largest supplier of natural gas in the Northeast U.S. A quarter of every watt of electricity in Manhattan comes from this international player. Over one million Long Island residents get their electricity from the company. The list goes on and on. But the real story is its U.K operations…

You see, there’s a significant difference between the U.S. electricity grid and the one in Great Britain. The United States is a huge land mass. There are over 300 million people – some separated by more than 3,000 miles – in the continental U.S. The U.K. is about the size of Kansas, but it has 22 times more people. This creates a significantly different playing field.

The U.S. has a series of grids. There’s no such thing as a national electric grid. The U.K. does. Regulating a grid the carries electricity to over 60 million people is a difficult thing to do. While regulations are in place, the government of Great Britain handed operational control over to one company. This company also happens to be a major player in the industry.

This sets up a situation where control of the industry, as well as, profits generated within the industry is handle by one company. It has the power to accept or deny new competition. In return for this status, it also has the responsibility to make sure the grid doesn’t go down. If it does, the entire U.K. nation goes down – including Scotland and Wales.

Obviously, this unique situation is working well for the company. In the fiscal year ending March 31, 2009, the company brought in over GB£15.7 billion. That’s up from GB£11.5 billion the year before that. It’s almost like this company didn’t realize there was a recession going on.

There’s so much more to this story I can’t go into because of space. But, I am planning on giving my Lifetime Income Report readers the full scoop early next week. If you’re not already signed-up, head over to www.lifetimeincomereport.agorafinancial.com for the full details…

Sincerely,
Jim Nelson

June 9, 2009

Own a Piece of the U.K. Grid was originally featured in the Penny Sleuth.

Obama’s American Recovery and Reinvestment Act sets $126 billion aside for infrastructure projects. The majority of this is for roadwork and water infrastructure.

On top of that, $144 billion more is going to state and local governments. A large amount of that cash will be spent on these failing water systems. After all, we’ve already seen pipes burst throughout the country, and no one wants to be next governor on CNN trying to explain why the state didn’t fix its water pipes.

Right now, there are a handful of dividend producing water infrastructure stocks that are giving investors the chance to profit from this life-sustaining element. Better yet, one class of these companies has a secure government-sponsored monopoly. You can’t ask for a safer stream of income, and I’ve got my eye on one of these stocks specifically.

But to understand the profit potential of these kinds of stocks, you should be caught up to speed on the background story…

Monopolizing the Last 0.3% of the World’s Most Precious Element

Of 6.7 billion people in this world, 1.3 billion don’t have access to safe drinking water. It seems odd considering we have a blue planet. Here’s how it works out…

96% of all water on this planet is found in the ocean – salt water. Another 3.7% can be found in icebergs, glaciers and the atmosphere. That leaves just 0.3%, or 2 million cubic miles, left in groundwater and freshwater lakes and rivers.

Imagine if just a few companies controlled that tiny amount of fresh water. Well, that’s exactly what we have.

You see, municipalities control about 85% of the total market. And you know they won’t allow any competition. The other 15% comes from investor-owned monopolies. Investors call these monopolies water utility companies.

Utilities in general have enormous advantages over regular corporations. Just like monopolies, they are the only provider of a service. There’s very limited or no competition to contend with. That makes them great investments.

The reason we love utilities so much is because in the income world, they are about the closest you can get to guaranteed dividends. Unless these companies are fiscally irresponsible, we are assured of steady income from a competition-free business.

Why Water is the Best Utility Investment

However, water utilities have an extra attribute other kinds of utilities do not. Natural gas can be transported through trucks and pipelines. So if one area is experiencing an extra-cold winter, it can get gas from other places. The same applies to electricity. It can flow through the grid from one area to another to stop blackouts before they happen. You just can’t do that with water.

If one area is suffering from a drought, it’s nearly impossible to bring enough water from elsewhere to make a difference. Transporting water is difficult. It costs way too much. Plus, the infrastructure is simply not in place. That’s why water utility companies can stake out a territory and monopolize the area.

We also love water utilities because they provide an absolute necessity. If you are really sick of high energy bills, you can put solar panels on your roof. If you don’t like your natural gas company, you can find another heating source. There’s no substitute for water. Unless you are willing to ship in an astronomical amount of bottled water or drill a well, you are pretty reliant on the water company.

How much do you really even pay for water? It’s hardly anything at all. There’s very little chance you’d ever think to radically change your water supplier. The cost of drilling a well far exceeds any local municipality’s or utility’s fee. So you are stuck with one provider.

Demand certainly isn’t falling, either. There’s no recession or even depression that can cause someone to say, “I can do without water this month.” In fact, the amount of people this world needs to supply with water is only growing. To really spur a growth play, we need to look for areas that are growing the fastest.

A Liquid Investment

With scarcity, recession-resistance, and a bulletproof dividend stream, water utilities are a fantastic investment that can diversify your small-cap portfolio and add big gains to your bottom line.

Sincerely,
Jim Nelson

June 3, 2009

Retire Rich with This Legal Monopoly was originally featured in the Penny Sleuth.

It’s sometimes uncanny how history repeats. Historian Frederick Lewis Allen writes about the New Deal of the 1930s in his book The Big Change: “It rewrote a good many of the rules of the economic game as played in America.” The steps the government took resemble what’s happening now an awful lot.

“The New Deal,” Allen continues, “continued to prop up ailing corporations through Hoover’s RFC; made arrangements to prevent near-bankrupt firms from going broke; aided farm owners and homeowners in meeting their mortgage payments; underwrote the financing of new housing enterprises; insured bank deposits…” And on and on.

It also went into the business of stimulating the economy directly by “building dams, bridges, parkways and playgrounds on a grand scale.”

If FDR walked the Earth again, Obama’s stimulus would look familiar…

Over the past few weeks, we’ve gotten more details of Obama’s stimulus plan, which comes with a price tag of at least $820 billion (and climbing). Some of the projects of interest to us include:

• Renovate 10,000 schools
• Build more than 3,000 miles of new or modernized transmission lines and install 40 million “smart meters” in homes
• Weatherize at least two million homes and 75% of office buildings
• Launch 1,300 wastewater projects, 380 drinking water projects and 1,000 rural water and sewer system projects
• Repair and modernize thousands of miles of roadways.

“Shovel ready” is the hot new phrase in Washington these days. It means a project is all set to go as soon as the money arrives. The list of projects for Obama’s plan are shovel ready — so they say. As soon as Congress approves the deal, the money goes right to work, like a needle sticking into a vein.

The water pipe business, in particular, ought to benefit from the slew of water projects in Obama’s stimulus plan. Whether the companies build, repair or install pipes, they’re in a great position to cash in on the growing list of projects coming out of Washington these days.

Sincerely,
Chris Mayer

February 3, 2009

Stimulus Stocks and Infrastructure Plays in 2009 was originally featured in the Penny Sleuth.

The force of the water – going at 12-15 miles per hour – pushed cars around like so much debris. Firefighters had to rescue people from their cars as freezing cold water swirled around them. They had to use a helicopter to pull some out of the more sticky situations.

This was a big deal where I live. My kids came home early as the county closed schools over concerns about water supply. It hit home, too, because I’ve been writing about the dangers of this exact thing for at least two years. So I have cause to revisit one of my favorite investment themes – water. When water pipes get old, they break.

The pipe that broke was 44 years old. The Washington Suburban Sanitary Commission, the local water utility, has nearly 5,500 miles of pipeline. Of these, 1,380 miles of water mains are more than 50 years old.

Another 2,000 miles are between 30-50 years old. Many of these pipes are near the end of their engineered life spans. The WSSC replaces 27 miles of pipe per year. At that pace, the WSSC will replace a pipe, on average, no sooner than once every 200 years.

It’s a simple matter of math to see that’s untenable. This was the third major water main break in the last six months. In June, one break led to the widest disruption of service in more than 20 years. Restaurants closed and residents were under a boil-water advisory. From Jan. 1 through November of 2008, the WSSC repaired 1,357 breaks and leaks – or about four per day.

The previous general manager at the WSSC, a former Navy engineer, raised the alarms in February 2008. "In my view, the public will no longer be able to trust the system that delivers water to residents," he said. Unfortunately, this is a problem that is widespread in our country. Water pipes are aging and need replacement.

The Great Water Build Out

Globally, too, the demand for new water infrastructure is also strong. There is, for example, a huge urbanization movement happening on this planet of ours. Think about this: The average population of the world’s top 100 cities in 1900 was 700,000. Today, the average city has 6 million people living in it. In just the last 30 years, the world’s urban population went from 1.6 billion to 3.3 billion. This puts huge stresses on water systems.

Industrialization also eats up a lot of water. It takes large amounts of water to make food – some 630 gallons of water to make a hamburger. Even basic consumer goods take a lot of water to make – it takes 2,900 gallons of water to make a pair of jeans.

Semiconductor plants are huge consumers of water. Power generators also use water for cooling. Manufacturers use it for cutting, cleaning and more.

We ask a lot of water. The water services industry alone is a $385 billion business – and growing. "There is a boom in the construction of new assets," says Antoine Frerot, CEO of Veolia Water. "The assets are also more complex and more technical than before." Water-related equipment is another $64 billion industry. That too is a growing field.

Energy and water are also linked in ways people don’t appreciate. It takes a lot of water to make energy.

As the easy oil is gone and we go deeper into the earth, our water needs rise. "Enhanced oil recovery," reports the FT , "is particularly water intensive." Alternative energy is no better off. Biofuels, obviously, consume water, but so do solar and wind power. It’s just not as obvious. (There are enormous amounts of water used in making the equipment.)

But this is only half of the greater water crisis. The other half is an issue of supply. I don’t have space to get into that aspect of it again here. But suffice it to say that in the American West, China, India and many other parts of the world, getting water where people live is an ongoing problem. According to the U.N., there are over 1 billion people without access to clean water. This has appalling health effects.

"Water has never been more under threat in modern history," reports the FT without exaggeration. A new special report in the salmon-colored pages of the Financial Times is entirely about water. I give the paper credit for reporting on this topic more than any other mainstream outlet I follow.

Thinking thematically, energy, infrastructure and agriculture all look attractive to me as long-term investment themes. And water issues touch each of these in numerous ways.

Over the holidays, I swapped e-mails with my friend Tom Rooney. He is a former CEO of a water pipe company and a highly sought-after consultant on water issues, especially now. "Water and water infrastructure are getting hotter by the day," he reports.

"It’s not going away." I agree, it’s not going away – whether we have a global depression or not. For investors, water is, indeed, blue gold.

Sincerely,
Chris Mayer

January 8, 2009

Investing in Water: Mining for Blue Gold was originally featured in the Penny Sleuth.