Go Long on Food and Water!

We know that the global focus on food security is finally starting to penetrate the thinking in the coastal suburbs of urban Australia when we see an article in the weekend edition of the Australian Financial Review with the title “Boom Goes The Farm” (Australian Financial Review, April 9-10, 2011, page 21).

Graphic from Australian Financial Review, April 9 2011, page 21

Australia is one of the most urbanised societies in the world.   Of our 25 million people, well over 80 per cent of us live in the major and mid sized cities spread around the coast.  Across the  vast dry interior there are only a handful of communities with populations over 50,000 people and most communities are much smaller.  This means that most of us live a long way away from our food production industries (both physically and mentally).  And we probably haven’t really given much thought to where our food comes from.

So what does the current global food security scare mean for Australia? 

We must never forget that food is water,  transformed by plants.  

Add some elements (Nitrogen, Phosphorous, Sulphur  & Potassium - plus some critical micronutrients) and sunshine together - apply the magic of photosynthesis in the leaf of a plant (or algae in the oceans) - and through arcane magic - these ingredients transform water into carbohydrate and protein.   Most of the world’s animals and humans then eat these plant outputs directly to sustain their lives.

The small percentage of the world’s humans who have much more money than the rest (and that includes Australians) prefer to eat their protein in the form of meat - where the carbohydrate produced by plants (or algae) is transformed into the muscles of animals (or fish) - which we then eat.  

This is a much more expensive way to create protein than just eating plants - and also requires the use of a lot more water that is used to grow the food and provide the drinking water for the animal being grown for its muscles.

Regrettably, as well as being one of the most urbanised countries in the world, southern Australia is also one of the driest areas in the world. And the outlook for the impact of climate change on water availability in southern Australia - where most of us live - is very sobering.  

Basically - we will have much less water within our lifetimes.

Last year Australia’s government owned scientific research organisation known as CSIRO released it’s projections for the impact of climate change on Australia.  I live in the South West of Western Australia so I was particularly interested to see their projection for where I live.

Source:  CSIRO Water for a Healthy Country Program

Basically, CSIRO says we are either going to get a little bit dryer - or very much drier!

So turning our attention back to the Boom Boom goes the farm article.  It looks like a once in a lifetime opportunity for Australia's food industry to really make a contribution.  Particularly if we can build more brand value up the supply chains and raise the real price we receive for our food within the farm gate.

Graphic from Australian Financial Review, April 9 2011

I share the optimism of those who are excited by the future outlook for Australia’s food industries as we look to contribute our skills and expertise in food production to helping feed the world.  

However, I am concerned that we are too slow to recognise how precious fresh water is.

When we eat  - we are eating  water.  

When we export food, we are exporting  water.

Just as rapidly as we think about implementing a price on carbon to start to mitigate the impact of climate change, we need to introduce pricing for water that truly reflects how scarce it is and will become.  

And for investors looking for a good asset class for a balanced portfolio, I totally agree with Larry Fink, CEO of BlackRock - quoted in the same Australian Financial Review article mentioned (see extract above).  

“Go long on agriculture and water.  Put them in the bottom drawer and go to the beach”.