The world’s population will grow by about 2 billion people by 2050, according to the UN. Furthermore, as incomes rise, we’ll see a rise in demand for food, as more people can afford both adequate nutrition, and more and nicer food than they actually need. With a major secular trend like this, the question automatically becomes: How can you as an investor ride the wave of increasing demand toward higher profits?
In order to meet the world’s needs, food production must double. And according to Mosiac, it has to do so using only 1% more land. Furthermore, as reported by John Deere, the world’s population is expected to move from 50% to 70% urban over this same time period. In other words, agricultural firms must produce more food with fewer resources.
In order to finance the capital expenditures to make this happen, farms will likely have to increases prices significantly. This should drive profit increases to current firms. because they often have sunk capital expenditures, especially in the form of land, and should drive profit increases for those who sell capital to farmers.
Deere & Company (NYSE:DE) is so iconic that it has a color named after it — John Deere Green. In addition, its recent financials are solid, with revenue growth of 9% and earnings per share growth of 15% between 2011 and 2012. On top of this, it set an aggressive but realistic mid-term goal of $50 billion in revenue in 2018 versus $25 billion in 2010, i.e. it’s a company with a plan.
In order to accomplish this, Deere & Company (NYSE:DE) is investing heavily in manufacturing in growing markets, with the goal of achieving 50% revenue share outside of North America in five years. It’s trying to stretch itself to capture a market that should explode as labor costs in those countries increase. Furthermore, it has achieved substantial success so far, with 18% CAGR in Central and South America and 21% in Asia, the Middle East and Africa, as reported in its July investor presentation.
Meanwhile in the United States, as the macroeconomic context improves and confidence increases, many farms will likely choose to make investments they had postponed. We’re currently seeing a similar phenomenon with regard to Ford trucks, whose sales have exploded. The agriculture industry isn’t as cyclical as many of the industries that buy pickup trucks are, so the effect won’t be as large — but it will still be there.