A worst-in-a-generation drought stretching across the United States is damaging crops and rural economies and threatening to drive food prices to record levels.
Agriculture, though a small part (1.2%) of the $15.5 trillion U.S. economy, had been one of the most-resilient industries in the past three years as the country struggled to recover from the recession.
However, the U.S. Drought Monitor is now calling this the worst drought since 1956 — one that could persist for the remainder of the growing season. So it appears that there’s not much relief on the near horizon for either the U.S. farmer or the U.S. consumer anytime soon.
However, there’s a way for bullish investors to play a “growing” technology that has the potential to become as essential as the iPhone.
First, the Bad News
Looking only at the 48 contiguous states, 55.96% of the country’s land area is in moderate drought or worse — the highest percentage on record in that regard.
And just last week, the USDA reduced this summer’s expected corn production figure by 1.8 billion bushels. It also further reduced the per-acre crop yield to 146 bushels per acre this month, down from 166 last month.
Corn exports from the U.S. in the marketing year that ended on August 31 accounted for the lowest amount of global trade in 41 years, according to the USDA. The U.S. shipped 42 million tons of the grain to overseas buyers, accounting for 43% of global exports, the least since 1971.
And that share is falling further.
Last week I talked about how other countries would benefit from the food export trade, especially Brazil and Argentina, by picking up the pace of their exports using new approaches. The U.S. drought is likely to give a significant permanent advantage to farmers in those countries.
And that’s where we have an incredible opportunity to plant a profit seed of our own.
Technology: Mother Nature’s Secret Weapon
Global seed companies are positioned to benefit from this shift, particularly those that produce GMO seeds, or Genetically Modified Organisms.
One such company is Monsanto Co. (MON), a leading agricultural biotechnology firm in the U.S and abroad.
As growth of its GMO seeds outside the U.S. is expected to outpace the domestic market for the first time during the upcoming crop season, Latin America has taken on new importance for Monsanto and its rivals, including DuPont Co. (DD) and Syngenta AG (SYT).
Next season, 2012-’13 Brazilian soybean growers could be in place to jump from the world’s No. 2 producer and dispute the top-“seeded” United States. Brazil’s 2012-’13 soybean production is expected to rise 25%, to 83.1 million tons.
Argentine President: ‘Plant Corn, Boys’
And while not on everyone’s investing radar, Argentina may actually be an even bigger beneficiary.
Argentina is increasing food export quotas as it prepares to sell more to China. The two countries signed a deal on corn exports earlier this year, raising market expectations that Argentine corn would soon start heading to the world’s most populous country.
And this time they have the full backing of the government. The feisty Argentine President Cristina Fernandez said during a televised speech, “Plant corn, boys, because exports are on their way.”
But it’s not a sure shot yet. Argentine farmers need to manufacture, and get to the market, the same kind of GMO corn as U.S. producers do. And China should have no problem importing Argentine corn since it has already approved 12 GMO corn strains for import.
Argentina is forecast to sell abroad 13 million tons of 2011-’12 corn and 16 million tons of the 2012-’13 crop, according to the U.S. Department of Agriculture.
Drought Conditions Not Just a Single-Year Event
So it’s the big farms of Brazil and Argentina that have become a key battleground for Monsanto as the agribusiness heavyweight seeks to maintain its market leadership in GMOs in Latin America.
And this is not just a one-year event.
Argentina is the world’s second-largest corn producer. In addition, it is the world’s foremost seller of soybean oil and the third-largest seller of soybeans.
So it’s natural that Monsanto would make a $329 million investment in a corn seed factory there to increase production and improve revenues from farmers using seeds with its traits embedded. The new factory is scheduled to open in 2013 and, once the plant is completed, Argentina will boast the two largest factories for seed production in the world.
Monsanto Chief Executive Hugh Grant has said, “The next place where we expect momentum to accelerate in 2012 is in Latin America … in particular, we expect the ramp-up of the corn opportunity in Brazil and Argentina will be one of the single largest sources of new growth in the next few years.”
This drought is a natural disaster that has shifted the economic advantage toward the emerging economies with higher growth prospects, lower currency exchange rates, abundant untapped natural resources and the right technology — genetically modified seeds.
That’s my take on it.