Seeds of Change

Imagine standing on a city street and watching an ominous black cloud swell on the horizon, barreling down on you. This is no ordinary thunderhead â€“ it’s a huge cloud of dirt, two miles high and moving at 50 to 60 miles per hour. It blankets the plains to the west before finally choking your city in darkness. When it hits, your eyes sting and your lungs fill with fire trying to breathe the stuff.

Unfortunately, what I just described was an all-too-common experience during the “Dust Bowl” that occurred in the Midwest back in the 1930s. In 1931, even as the nation delivered a bumper crop of wheat, dry conditions started to impact farms. Between 1933 and 1935, a whopping 850 million tons of topsoil dried up and blew off the Southern Plains.

The drought continued through 1938, and by 1940, 2.5 million people had moved out of the area because their farms had turned to dust. The cause of the problem: Extreme heat worsened the drought by baking the moisture right out of the soil.

That was a long time ago. But over the past three decades, the drought cycles here in the U.S. have been worsening. As of October 3, 55.4% of the continuous U.S. was suffering from some kind of drought vs. 47.92% a year ago. What’s more â€¦

The average temperature for the continental United States from January 2006 through June 2006 was the warmest first half of any year since records began in 1895, according to scientists at the National Oceanic and Atmospheric Administration (NOAA).
At the end of June, severe to extreme drought afflicted 27% of the contiguous United States.
A new study from Columbia University shows a connection between unusually warm periods and historical “megadroughts” in the Western U.S. That’s a recipe for long-term trouble.

While this is extremely bad news overall, I know at least two companies that stand to benefit handsomely (while helping the farm industry in the process). More on them in a moment. First, I want to tell you about â€¦

The Worldwide Food Problem

It’s not just U.S. farmland that’s in peril. The heat is on, and it’s withering crops worldwide:

A lingering drought in Argentina is weighing on that country’s wheat production.

The wheat crop in Australia â€“ the world’s third-largest wheat exporter, will be 35% of what it was last year, according to the government. Some estimates are even grimmer, saying production will be half of last year’s harvest.

The Ukraine, the world’s sixth-largest grain exporter, stopped shipments a week ago, seeking to avoid a domestic shortage due to damaged crops.

China, a major corn exporter, is suffering its worst drought since 1891.

China deserves a closer look. Between 1995 and 2005, the country shed 20 million acres of arable land â€“ equal to about two-thirds of Iowa’s farmland. Over the next five years, the nation’s farmland will “irreversibly shrink,” according to an Agriculture Ministry official.

If China’s arable acreage keeps shrinking â€¦ if its water tables keep falling â€¦ if its population keeps growing, China is going to have problems feeding itself.

So, the big picture looks like lower production and increased demand. Just four of the signs:

Global wheat production has been falling for years, and declined another 2% in 2005.
Looking ahead, global wheat production for the fiscal year 2007 (ending June) will be 588 million metric tons, down 4.9% from a year earlier, according to the International Grains Council.
Wheat inventories around the world are forecast to fall to 126.4 million metric tonnes on May 31, 2007, from 146.1 million at the end of May this year. That will be the lowest since 1982, according to the U.S. Department of Agriculture.
The USDA says global demand for wheat will outpace production for the sixth year out of the past seven.

Behind all this mayhem is â€¦

Ongoing Climate Change and
The Wrath of El Nino

The droughts in Australia and China are being worsened by El Nino, an abnormal warming of waters in the equatorial Pacific Ocean. El Nino causes wild swings in the weather from Asia to South America by taking the rain that normally falls on Australia and parts of China and dumping it in the Pacific Ocean.

El Nino will last at least until spring 2007, according to the Climate Prediction Center (CPC). In other words, any fluctuations caused by El Nino will just be a short-term bump in the longer-term trend of global warming.

According to a report from the United Nations, global temperatures are shooting up faster than at any other time in the past thousand years. Over the next decade, this trend may trigger the kind of droughts and extreme heat that caused the Dust Bowl back in the 1930s.

The good news is that advances in farming methods can probably prevent another Dust Bowl. The bad news is that crops might still be affected.

It’s not just wheat or corn that we have to worry about, either. The 2006 world cereal harvest has deteriorated because of exceptionally hot, dry weather this year from Australia to Europe. And dry weather in parts of South Asia is also raising some concern about rice production.

In fact, according to an estimate from the International Food Policy Research Institute, global warming is going to cause such severe water scarcity by 2025 that it will result in global crop losses of 350 million metric tonnes â€“ slightly more than the entire current U.S. food crop!

Bottom line: With wacky weather and increasing demand, farmers are going to need all the help they can get. Lucky for them, some companies are figuring out ways to pitch in …

Two Well-Positioned
Agriculture Companies

As an investor, one of the best situations is finding companies that are going to reap profits by providing helpful goods and services. The following company is going to
do just that â€¦

Monsanto (MON), the kingpin of U.S. bio-engineered crops, has developed drought-resistant corn. Its corn is showing yield advantages over conventional “un-engineered” corn for a third consecutive season.

Monsanto has a lot of other good products in the pipeline, including various types of soybeans. Soybeans require less water than corn, so it should become more popular if the drought cycles worsen.

Also, in August, Monsanto announced it will buy Delta Pine and Land (DLP), the top supplier of cotton seeds in the U.S. Cotton crops are constantly under assault from more than 1,300 different types of pests â€“ weevils, white flies â€¦ and don’t get me started on nematodes!

But Delta Pine and Land is the best in the business at developing cotton that can tell insects to bug off. It’s exactly the kind of company that should do well as summers get warmer and bug swarms grow thicker.

Of course, once crops are harvested, they need to be processed somewhere â€¦

Archer Daniels Midland (ADM) is the Jolly Green Giant of agri-business â€“ the world’s biggest food processor. It handles everything from soybeans to peanuts to wheat to cocoa beans. It even makes ethanol from corn, an alternative fuel source that has intoxicated many investors.

Corn and wheat prices are already soaring, and global warming will probably push prices even higher. Archer Daniels Midland should be able to pass those increases right along.

Good luck, and good trades,

Sean

P.S. Global warming is caused by soaring levels of greenhouse gases. Interestingly enough, an operating nuclear plant puts out zero greenhouse gases. This is one of the reasons why I think nuclear power is going to be something the public demands as awareness of global warming spreads.

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