So just where is this dead zone? It’s just off the southern coast of the United States, in the Gulf of Mexico. And it puts a $26 billion industry in harm’s way. Last year, the dead zone continued its expansion. It’s now larger than the state of New Jersey.

It’s hard to believe, but true. An environmental “dead zone” has killed off everything in a 7,000 square-mile radius.

Worse still, I’m not talking about some over-polluted region in Mongolia. This isn’t some far off Asian province packed with coal-fired power plants to meet China’s insatiable power demand. It’s right in America’s back yard.

That’s right. While the Greenpeace folks are out saving baby seals off the coast of Newfoundland, these environmental warriors seem to have completely overlooked a real problem.

So just where is this dead zone? It’s just off the southern coast of the United States, in the Gulf of Mexico. And it puts a $26 billion industry in harm’s way.

The Gulf of Mexico

This Gulf of Mexico dead zone is bad. Very bad. But I’m not here to blather on about how you and I accidentally created it and need to start driving hybrid cars. Not at all. My concern is there are companies that are going to pay the price for this dead zone. I want to show you how to avoid investing in those companies — and how to find others that will profit from it.

Dr. Nancy Rabalais, a marine scientist at Louisiana State University, has actually swum in the dead zone. As Dr. Rabalais says, “Anything that can’t move out eventually dies.”

Pretty bad, eh? And that’s just the environmental side. Jim Giattina, director of the Gulf of Mexico Program, says that “Fisherman in the Gulf of Mexico have an annual catch of 1.7 billion pounds of fish and shellfish, worth $26 billion. We’ve seen what can happen in other places in the world with ‘dead zones’… We don’t want to see a collapse of this fishery.”

As always, crisis breeds opportunity in some areas and poses long-term risks in others. Let’s take a look at how this happened.

Food, Fuel and Fertilizer

By now, you’ve probably heard of the pending global food crunch. Oil and energy grab the headlines, but surging demand for grain is fueling a shortage the likes of which the world has never seen.

As developing world consumers rise out of poverty, their top choice of spending is food. Think about it: After you’ve survived 50 years of rice and famines, it’s a big change to be able to afford chicken, beef, corn and bread to go with it all. That makes food the perfect luxury. This decision to upgrade the family diet is being made all over the world, and the agriculture markets are showing it.

Add to all that the fact that the world’s breadbasket, the United States, is starting to use more and more of its agriculture production for fuel. Subsidized ethanol and biodiesel plants are buying up corn and soybeans at record levels, with a blatant disregard for cost.

All this caused corn production in the United States to surge 25% last year. But corn can’t grow in the United States without lots of fertilizer.

After half a century of overfarming and record-high corn and agriculture prices, farmers are now fertilizing their fields in record amounts. Last year, farmers in the United States increased their fertilizer use by 9.9%, almost twice as much as anywhere else in the world.

All that fertilizer doesn’t go into the ground, though. A lot of it simply runs off into the local rivers and streams. From there it flows into the Ohio and Missouri Rivers, and eventually flows into the Mississippi River.

The Mississippi eventually deposits the fertilizer run-off into the Gulf of Mexico. All of that toxic run-off is creating the Gulf of Mexico dead zone.

Within the zone, there are no shrimp, crab, crabs, fish or any other meaningful signs of life. Last year, the dead zone continued its expansion. It’s now larger than the state of New Jersey.

Six Degrees of Superior Returns

Certainly there’s a big problem there. But with high agriculture prices and farmers continuing to fertilize, it’s going to get a lot worse before it gets better.

That’s where the profit opportunity comes in.

In the grains, soybean and wheat prices climbed as planting acreage was reduced to make room for corn and demand increased at a fairly average rate. This made feed for cattle and livestock more expensive, driving up meat prices.

Now we’re reaching the next inflection point — the rise of seafood prices. With growing demand around the world and high and rising meat prices, fish and seafood are the next alternative.

The problem is that the heavy fertilizing that helped produce more corn is killing the seafood supply from the Gulf of Mexico.

The global agriculture boom is starting to have downstream effects. Seafood is the final piece of the puzzle. The chain of events is a little complicated, but all the warning signs are there. We’re about to see seafood and fish prices surge, just like the cost of everything else at the grocery store.

The Year of the Fish

How do you play rising fish prices? I’d have to advise against loading up your freezer or trying to start your own fish farm. Fish farm operations are already traded all over the place — and they are expanding.

For instance, a company in Washington state offers exposure to this idea. HQ Sustainable Maritime Industries HQS just raised an additional $25 million to expand its fish farming operations in China.

And then there’s Neptune Industries NPDI, which is also an aquaculture company. However, with an $8 million market value, no sales, no profits and a recent press release touting the achievement (“Neptune Industries Featured in Local Newspaper”), this company just isn’t ready for prime time.

The big opportunity in fish will be in the Nordic countries. Sweden, Norway, Finland and Denmark are the leading fish farmers in the world, even though the aquaculture business is still in its infancy there. Little more than $50 million in new investment capital flowed into building fish farms last year.

I think it’s still very early for the aquaculture boom. But for the smart investor, there’s no better time to be paying attention. We’ll keep an eye on this trend — and the growing dead zone in the Gulf of Mexico — to determine the right time to buy.

After all, China may have labeled 2008 the Year of the Rat… but I’d bet it turns out to be the Year of the Fish.