Global food prices jump 10%

The increasing demand for food presents an opportunity for Australian companies

As much food is wasted in developed countries as is produced in sub-Saharan Africa. So says Chris Barrett of Cornell University, an expert in agriculture and economics.

In a recent interview, he went on to say that demand for food is about to rise significantly, primarily because of population growth in developing countries, rises in income and migration of people to towns and cities. Increasingly erratic weather patterns and the popularity of crop-based biofuels are also adding to the price rises.

Yesterday, the World Bank issued a statement saying that world food prices rose by 10% in July, as drought affected crop lands in both the US and Eastern Europe, and issued a hunger warning. Last year the Bank issued a similar statement, due to a drought ravaging the Horn of Africa. And just three days ago, leading water scientists predicted that there will not be enough water available on current croplands, to feed the expected 9 billion people on the planet in 2050, unless we change the current trends towards diets common in Western Nations.

For investors wanting to take advantage of the potential demand for food, a closer look at Australia’s listed agricultural companies might be in order.

Growing demand for exported beef has seen Australian Agricultural Company (ASX: AAC) report an 84% increase in earnings before interest and tax (EBIT). Increasing demand for grains is forecast to continue, and expected to increase by 50% by 2050 which is good news for GrainCorp (ASX: GNC), one of Australia’s leading grain handling companies.

Even BHP Billiton is trying to get in on the act, by investing in potash projects – potash being one of the main ingredients in fertiliser.

Overseas companies appear to have recognised the potential, with many of Australia’s agricultural and food producing companies taken over in the past few years. The Australian Wheat Board was taken over by a US company, Agrium, National Foods was taken over by Japanese giant, Kirin, and ABB Grain was acquired by Canadian company, Viterra. Viterra itself is now the subject of a takeover by Swiss commodities trader and miner, Glencore. Ruralco Holdings Limited (ASX: RHL) may be positioning itself for a takeover of Elders Ltd (ASX: ELD), as the company continues to build its stake, with RuralCo now holding more than 12% of Elders.

The Foolish bottom line

The potential for Australia’s agricultural companies and food producers appears rosy, either from the massive potential growth required to feed the world’s population, or from takeovers by larger competitors or international commodities traders.

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Motley Fool writer/analyst Mike King owns shares in BHP. The Motley Fool’s purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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