That’s because wealthy populations tend to eat more meat than poor ones, while also eating more fresh fruits and veggies. The diet becomes more diverse, less centered on consuming base grains.

The demand for grains doesn’t diminish, though, because the need to produce meat increases the demand for grains exponentially. Depending on who’s doing the math, five to ten pounds of grain goes into every pound of beef that lands on a dinner plate.

China’s population is also increasing, of course, which is further boosting demand for grains. There are some special issues with China, too. It holds only 10% of the world’s arable land, but 20% of the population. And its arable land resource is in decline. There were about 121 million hectares in service at the end of 2008. That’s down from 133 million hectares as recently as 1988. Increasingly, because of water shortages, desertification, development, urban migration, pollution and a host of other reasons, China is growing less of its own food and relying more on foreign suppliers.

The Chinese government is not happy about that trend and has made food production a priority. In fact, recently, the Chinese premier laid out a number of goals for China:

• Boost Chinese grain production by 50 million tonnes by focusing on increasing the yield per acre
• Subsidize agriculture – which the government does by giving farmers subsidies for irrigation equipment and new seeds and for improving crop yields and crop quality
• Invest in the infrastructure of agriculture – for water supplies, roads and the like.

So it would seem a good idea to be around Chinese agriculture in some way.

Let’s back up a bit and look again at how the dietary pattern has changed. I’ve written about how China consumes a lot more grains before. China is now also one of the largest consumers of fruits and vegetables.

That China is now a consumer of size in the world of fruits and veggies is a relatively new development. China is also a big producer of fruits and veggies. According to the FAO, China produces nearly half of the world’s vegetables and 16% of the world’s fruit. China is today a major exporter of these goods to other Asian countries, supplanting U.S. suppliers.

Well, fruits and veggies have an interesting angle when it comes to fertilizers…

You know if you’ve been reading this letter that the three main nutrients are nitrogen, phosphate and potash. Farmers use fertilizers to boost yields and improve crop quality. Perhaps not surprisingly, China is the largest consumer of fertilizers in the world, with about 25% of global demand.

China is self-sufficient in nitrogen and phosphate. As a result, its application rates are on par with those of farmers in Europe and America. But China is not self-sufficient in potash. The country has few developed potash mines. As a result, it consumes around 12-15 million tonnes per year, but produces only 3 million tones.

Therefore, China relies on imports of potash to obtain most of its supply. But Chinese farmers could use a lot more of this unique fertilizer. In fact, China’s potash “application rates” are half what they are in the West. Quite simply, the Chinese need to use more potash to boost their crop yields to where the U.S. and Europe are.

Potash is an important nutrient because it controls the plants’ water intake, reduces water loss, increases root growth and improves drought resistance. Clearly, crop yields are higher and crop quality is better with the application of potash.

Yet last year, China’s consumption of potash fell. It will probably decline slightly again this year. That’s incompatible with the goals – and the need – of increasing crop yields and quality.

Potash prices soared in 2008 and Chinese farmers pushed back by buying less. The price of potash is cheaper now, but not by all that much. In any event, the Chinese farmers can afford it, as the economic return from using potash is compelling. This two-year decline in potash consumption is unprecedented. And its effects on crop yields and production will not be good.

Most of the potash suppliers that deal in the Chinese markets believe that Chinese demand will pick up later this year as the Chinese burn through their existing inventories of potash and look forward to the 2010 planting season. The Chinese will be hard-pressed to match the record production of 2008 without potash. The quirky thing about potash is that it tends to stay in the soil and you can skip a year, maybe even two, but no more than that.

So potash is also going to be a good way to invest in China’s food story. But there is another layer here.

You see, you can’t use potash directly to grow fruits and veggies. These crops – tomatoes, avocados, melons, etc. – are sensitive to chloride and salt. So you have to modify the potash and remove the chlorine. These potash-based fertilizers, potassium sulphate (SOP) and potassium nitrate (NOP), are ideal for fruits and veggies.

As it turns out, you also need SOP and NOP to grow tobacco. Tobacco is fussy about what fertilizer it will take without messing up its taste or combustibility. It also needs a lot of potash. Yet again, chlorine is a detriment. Chlorine makes the leaves taste sour and can destroy the commercial value of a crop. As with fruits and veggies, you need SOP and NOP.

Selling SOP and NOP to China’s tobacco farmers is also a good business. For one thing, China has the largest population of smokers on the planet, some 350 million. Since potash represents less than 1% of the cost of making cigarettes, the tobacco growers are less price sensitive. What they really want is a quality product consistently delivered.

One of the companies I’m following is the largest producer of SOP and NOP in China and serves both the fruit and veggie market and the tobacco growers. But there are really many ways to get a hand in the Chinese agricultural story. Watch this space.

Source: Buy What China Buys, Part II

The first comes from Karl N. and he says…

Charles, First you have to buy into the assumption that fuel prices are realistic and will continue to increase! In reality, there is no reason for them to be where they are.

Second, Ethanol requires no more energy to produce than gasoline. Producers must pump, refine, and transport gasoline. Global hunger increased before ethanol because the American farmers cannot cost effectively operate. Fertilizer, fuel, seed, transport costs, living expenses, land and machinery have all increased substantially since the 1960’s without a significant increase in grain prices. The market will have more grain with the increased production of Ethanol than without it.

Please do not buy into propaganda that Ethanol is not efficient to produce, will contribute to world hunger or will drive food prices up (a loaf of bread uses 4-5 cents of wheat in it).
The truth is that unless grain prices increase more farmers will be forced to quit and food supplies will decrease.

I have to say Karl, that fuel prices are realistic even at today’s price. Granted, a lot of speculation has helped take prices higher. But the truth is that according to the Energy Information Administration, the world’s oil production peaked in 2005.

Sure, more oil is being found. But it’s not being found in easy-to-reach places. It’s all offshore, sands, and shale. Production from these areas should come online in time to replace lost production from older wells. The net result? Flat to slightly higher production in the next five to ten years.

Even with US consumption falling, consumption in China, Brazil and India is skyrocketing. The truth is, if these countries keep buying more and more, then oil isn’t too expensive.

Second, you have to admit that corn-based ethanol isn’t the most efficient way to make energy, right? The US Department of Energy says that corn-based ethanol produces a whopping (note the sarcasm) 26 percent more energy than required for production.

That’s god-awful.

Cellulosic ethanol, on the other hand, could produce up to 80 percent more energy than is required to produce it. That’s much better. But mass-scale production is also far off. (There are a few companies setting up pilot plants. But that’s all)

Now, I agree that global hunger isn’t all ethanol’s fault. I’d place the blame on the emerging economies like Brazil, Russia, India and China. But you have to admit, using farmland for fuel means there’s less farmland available for food. And if there’s less food being made, prices move higher.

In addition, corn-based ethanol was a big reason why corn jumped well over 100% after President Bush first announced the ethanol initiative. The effect is obvious – the ethanol hype is helping prices move higher. And this has been a boon to farmers.

Better yet, farmers are poised to make even more money in the years to come, mainly because of growing global demand for food.

I also received an e-mail from Sam L. that said…

As a seasoned investor I wouldn’t put one penny in green stocks, not now or for the near future. It is all hype and no action.

All hype and no action, Sam? How about geothermal producers that are taking off? Or solar producers which are making profits? Wind producers are doing well, and many high-tech battery manufacturers are on the cusp of inking huge, multi-million dollar revenue generating deals.

If you think investing in clean energy is a bad idea, just take a look at the Market Vectors Global Alternative Energy Fund (GEX) and you’ll see that the sector’s been clearly moving higher. And the PowerShares Global Clean Energy Portfolio (PBD) has been doing the same.

It seems to me that investing in green stocks is a great thing to do. What you want to do is avoid the companies that have no profits… the ones that are using very experimental technologies that haven’t been proven yet. These companies may do well in the future, but you take a huge risk by putting your money on them now.

Q: Any new comments on the refiners? – C.

Record high oil prices are brutalizing refiners. They can’t pass along the rising costs to consumers, so the companies’ margins are down to whiskers.

In April, I thought things couldn’t get worse. The price of a barrel of oil cost more than the amount of gasoline you can make from it. It didn’t make sense… It was like a bushel of wheat becoming more expensive than the bread you could make from it.

But that’s exactly what happened two months ago. So I figured gas prices had to rise, increasing the refiners’ margins, and jacking up their share prices. But since then, the price of oil has risen faster than the price of gasoline. The “crack spread” – the difference between the cost of oil and the price of gas or diesel – has worsened, and refining stocks have fallen further.

I was too early, but the situation still looks good for big gains… when and if the price of oil declines. If you own refiners, keep holding with an eye on your stops.

Q: I hear the same argument for natural resources as for agriculture – short-term peaks and long-term demand. What’s a short-term versus long-term strategy? – R.A.

I look at the long-term argument for agriculture investment as a function of population and modernization. The world has more people living better, and many of those people want to live like Westerners. That means eating more beef, chicken, and pork, which in turn takes a whole lot more soybeans and corn. So agriculture will continue to rise in the long run.

In the short term, agricultural stocks will face the same ebbs and flows of any market. And right now, I think we’re seeing a short-term peak.

Look at the current situation in fertilizer stocks, for example. Intrepid Potash (IPI) trades for more than 100 times earnings. Potash Corp (POT) trades for more than 40 times earnings.

These are mining companies… They usually trade at a discount to the overall market (which has a P/E of 18). How do you expect to make money as in investor when you are buying a depleting asset at 40 times its current earnings?

My inclination is to stay away from these stocks at these valuations. I’m sure you can find a few gems out there, but the big, easy money in most ag stocks has been made.

Q: What’s going on with copper? Is it too late to buy copper producers? – L.M.

Copper is a critical component of housing, cars, air conditioners, plumbing, and electricity transmission. If you don’t have copper, you don’t have modern civilization. So copper prices, much more so than gold and silver, reflect the health of the global economy…

From 2000 to 2007, the world’s copper production grew 14%. Global demand has risen at a steady 4% a year for the last 100 years, but Chinese demand for copper doubled between 2001 and 2007.

In fact, from 2000 to today, China’s growing demand for copper has accounted for 99% of the global growth in copper consumption.

China holds 16% of the world’s copper-smelting capacity, so turning copper ores into copper pipe is clearly a major industry in China. But very little of that finished copper leaves the country. Of all the raw copper China imported in 2006, it exported about 26% of it as finished goods. In 2007, that number dropped to 9%. This year (through March), China only exported about 3% of that copper. That means domestic demand for finished copper is growing.

In other words, China is solely responsible for the rising copper price. At $3.75 per pound, copper is trading near all-time highs… up roughly 400% in the last five years.

I know you don’t read Growth Stock Wire for my analysis of China’s economy… And I’m not going to try to guess what the suits at Goldman Sachs have trouble guessing. I’ll just say I believe copper prices are going to remain high enough for us to make terrific gains in base-metal producers.

Good investing,

Matt

Editor’s note: Natural-resource expert Matt Badiali answers reader questions every Wednesday in Growth Stock Wire. If you’ve got a question for the Commodity Investor, drop us a line.

Source: The Commodity Investor Q&A