Why you should bet on these 3 food producers

Legendary fund manager Jeremy Grantham says the world is running out of food.

Jeremy Grantham is the legendary Chief Investment Strategist at the company which bears his name, Grantham, Mayo, Van Otterloo & Co (GMO). His views on the state of markets are widely followed by investors via his Quarterly Letters. Famous for having accurately calling a succession of past market bubbles, lately Grantham has expressed concerns that the world is facing severe  environmental problems and may be running out of food.

In a recent interview with the Wall Street Journal Grantham stated that, “I think oil, the metals and particularly fertilisers, I would own – and the most important of all is food. The pressures on food are worse than anything else, and therefore, what is the solution? Very good farming land, which can be done. The emphasis from an investor’s point of view is on very good farmland.”

Grantham’s concerns over the future state of the environment leads him to suggest agricultural inputs such as fertiliser and high quality farm land are going to be essential for future food production and hence he sees an investment opportunity. With Grantham’s investment idea in mind, here are three companies which could do well in a world suffering from an increasingly constrained supply of food.

Select Harvests (ASX: SHV) manages 60% of Australia’s almond orchards and is a leading domestic manufacturer, processor and marketer of a range of nuts and associated products. The company also owns significant almond orchards. The company has been a particularly strong performer in the past 12 months, with the share price up 306% thanks to the benefits of a weaker Australian dollar, good harvest yields and a higher almond price.

Fonterra (ASX: FSF) is a major producer of dairy products from its home base in New Zealand. The company handles around 22 billion litres of milk each year and exports around 85% of its output to 140 countries. While the company is affected by dairy prices, its significant scale and close relationship with NZ farmers — who own highly productive farming land — creates a unique set of assets for investors in Fonterra.

Tassal (ASX: TGR) is engaged in the farming, processing, sales and marketing of Atlantic salmon in Tasmanian waters. The company posted a 20% increase in operating net profit after tax to $26.6 million in FY2013. Just like the scarcity of good farming land, the availability of good farming waters that have all the right attributes plus the requisite knowledge and skill to farm in the sea makes Tassal a unique and valuable business.

Foolish takeaway

While farming is inherently difficult and generally provides a low return on invested capital, there are some exceptions to the rule. With careful selection investors should be able to identify profitable ways to gain exposure to the inevitable increase in global demand for food and higher food prices.

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Motley Fool contributor Tim McArthur owns shares in Tassal Group.

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