If we want to continue putting food on the tables of India and petrol in the cars of China, we need to grow more crops and find more oil. The quest to do both those things is an increasingly high-tech one - and some specialist engineers, manufacturers and consultants stand to benefit.
Big Fact 1: Almost 20 per cent of the US corn crop is now going into the gas tank and that's projected to double within just five years.
Big Fact 2: When a population achieves a per capita income of $3,000 to $5,000, its demand for meat and dairy products sharply increases. Hundreds of millions of citizens of China, India, Brazil and southeast Asia are passing this income threshold and upgrading to richer diets larded with more meat and dairy.
Big Fact 3: No new refineries have been built in the US for the past 25 years.
The Big Story:
It's difficult to ignore the astonishing commodities boom globally. Virtually every tabloid is now full of stories about drivers running their cars at below 60 mph to save fuel or families desperately trying to save money on their food bills by shopping at Lidl. If the commodity bulls are to be believed, this is only going to get worse if oil hits $200 a barrel and global demand for grains for bio-ethanol fuels an explosion in spot prices.
But a growing army of cynics think this is just a bubble. The chief cheerleaders of the commodity bear camp can be found at SocGen, where chief economist Albert Edwards and in-house value fiend James Montier have been busily pumping out papers claiming that commodity shares and spot prices will come tumbling down by the end of the year. They point to the fact that many industrial metals have already lost as much as 50 per cent in spot price terms in the last 12 months as evidence of the impending collapse - pushing the world into deflation.
A more nuanced middle ground of analysts and investors have long expected a price drop in headline commodities, but believe that prices will probably rise over the long term, especially in real terms. This will feed through into a bonanza for one group of companies - the companies that supply the technology, services and engineering for food, mining and energy producers, the so-called picks and shovels experts. A good example of what may lie ahead centres on the gold sector - gold prices spiked a few months back, but have since wobbled back towards $800. Even at these high levels gold producers should be making huge profits, but the big miners have been hit hard by cost inflation - the average price of much gold production has shot up past $500 an ounce as engineering firms (and labour) have passed on costs. It's the same story in oil where the large integrated oil companies are increasingly being forced to pump more and more oil from technically complex fields. The Canadian Tar Sands and the Bakken formation in the mid-west of America are both exciting for explorers, but the cost of production is dramatically higher as more inaccessible deposits force companies to spend money on technology. One key measure of this price inflation - the IHS/CERA Upstream Capital Costs Index, or UCCI - measures cost inflation for oil and gas projects. The index is up a startling 79 per cent since 2000.
In agriculture, there's also a cost inflation story - yields can and are increasing, but it's forcing farmers in the developing world to make more and more use of high productivity, genetically engineered crops supplied by the likes of Monsanto and Syngenta. In addition, farmers use advanced fertilisers and that has meant bumper business for the likes of Potash in the US. The bottom line is that if the world wants more resources, it'll cost more in terms of engineering, technology and intellectual property. That means a boom for oil and gas equipment/service companies (a big sector in the UK), agritech giants, and mining engineers (such as Charter and Weir).
Any benchmark indices?
Deutsche runs a Global Agribusiness Index that's tracked by an ETF from Van Eck Global in the US - it's called Market Vectors-Agribusiness (MOO) and tracks a diverse global index of 40 agriculture businesses, and includes Komatsu (the Deere of Japan) and IOI Corp, a leading Malaysian producer of palm oil. In the oil services space, there's a large and vibrant sub-sector in the UK market called FTSE Oil Services (not tracked by an index fund) while in the US there's a sub index called S&P Oil and Gas Equipment and Services, which is tracked by an ETF from SPDR State Street with the ticker XES.
How to access the theme
In agribusiness, one of the biggest beneficiaries will be US giant Deere & Co. (symbol DE) - it has the fullest line-up of tractors, combines and harvesters, a strong global dealer network and a powerful brand name. The company controls half the North American agricultural equipment market, and has more than doubled its dividend since 2004. In the genetically modified organism (GMO) space, the giant is Monsanto.
There is a wealth of UK oil and gas equipment shares - big players include Expro (taken over by US giant Halliburton), Dubai-based Petrofac, AMEC, Wood Group, Hamworthy, Bateman Litwin (also strong in the mining and agriculture sector), Kentzner, Hunting and many more. In the US, the simplest purchase may be the iShares ETF based on the Dow Jones Oil and Gas Equipment Providers IEZ.
Left of field ideas?
In mining, many bulls think that coal's day may come, and if it does one big winner could be US firm Joy Global (JOYG), which is the world's largest manufacturer of mining equipment. Around 45 per cent of Joy Global's revenue comes from US coal miners, but it doesn't rely on just coal: it also produces machinery for the extraction of gold, copper, and oil sands. Back in the UK it might be worth watching very small oil technology companies like GETECH - a university spin off - which has been making a name for itself in next generation oil database techniques. In agrotechnology, it is worth watching Plant Health Care, a long-term Investors Chronicle buy.
Caveats?
The big caveat is that these companies are hugely popular - in the US most leading oil services companies are trading on forward PEs of well above 15, while their UK peers (arguably a weaker bunch) are usually trading at well over 20 times forward earnings. Multiples in the agricultural technology space are even higher - leading outfits like Monsanto are trading at 33 times forward earnings, although Deere is cheap at 13 times 2008 estimated EPS.
