With all the talk about rising food demand, and all the talk about GMO yield
advantages, you’d think there’d be no problem. But the politics of GMOs are
complicated, and the populist view of GMOs is negative in some key world
food markets. But as food price inflation moves up, politics and economics
are beginning to collide, and investors should put their money on economics.
Over the next half decade, we expect all but the most virulent anti-GMO
markets to swing 180 degrees, as populist politics responds to the practical
reality of affordable food. Western Europe may take longer—but not much
longer, with Eastern Europe likely to lead the way.
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For the seed players, the technology race continues, but the game isn’t
“catch me if you can”, so much as “follow the leader”. Monsanto is likely to
maintain a huge market advantage across the next half decade or so. After
that, the playing field may well shift substantially.
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We all understand the demand side. As emerging markets emerge, living
standards rise, and the demand for nutrition and calories rises far faster than
simple population would suggest. But how do we meet that new demand?
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Subsistence farming is the rule in many emerging markets, and that has to
change. Killing the family farm is the first and most powerful way to increase
farm productivity. As farm commercialization proceeds, fertilizer is the first
tool farmers reach for. Then comes ag chemicals. And then comes GMOs,
not a lot later (if regulators or practical realities allow). You simply cannot
maximize yields without GMOs in the mix.
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But commercialization is a long term trend. In the short term, farm income is
high and our estimates say that it will stay high. So farmer input demand is
going to stay high, and pricing power should be solid.
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Fertilizer has already done much of what it can in terms of yield (the
emphasis now is mostly on new growth). GMOs are proceeding apace. Ag
chemical demand is rising too, but, for investors, ag chemicals have been
largely ignored. Over the next few years, we see ag chemicals as offering far
more value opportunity for their producers than the market currently
appreciates. Pricing power, which was almost completely lacking in the last
few years, is turning a corner. Ag chem is the under-appreciated part of the
farm input equation.