Thursday, November 17, 2011

Investing in Population Growth -

When the birth of the 7 billionth person was announced by the United Nations on Halloween this year, it was accompanied by a level of fear mongering that made it far scarier than any haunted house or costumed goblin. The facts on global warming are, of course, even more terrifying, and they will result in changes to the way that the world conducts itself in a shorter time frame than many are prepared for.  The price of energy and commodities will rise exponentially with the size of the global population, projected to reach 9 billion by 2030. The recent rejection of nuclear energy only worsens the first problem, while spells of inclimate weather and a growing middle class in the world’s most massive nations, China and India, will exacerbate the fast rise of prices for our most vital resources.

These factors, from a consumer standpoint are disconcerting. From an investor standpoint, however, they could be considered compelling. Supply and demand dictate pricing. Higher demand, born from a  larger population  growing middle classes in India and China, will put pressure on prices for both energy and food. Investment in commodities, agricultural ETFs, companies that produce mineralized soil to helps increase yields, oil futures and oil companies could have major long term benefits if this age-old model can be relied upon.

Energy Prices Climb Under Higher Pressure

Beginning with energy, the trend toward vastly higher prices can already be observed. Oil may have sunk lower as the global economy grew with less sure-footedness than the population itself, but in the macro picture, the price of energy is headed higher. The most recent major projects that oil companies are engaging in are more expensive and involve less hospitable environments. While in the past, the wealth of oil in easy-to-access areas was enough to sustain the population, production has suddenly shifted off shore or into shale, requiring greater efforts and higher expenditures for extraction. When those resources are exhausted or relied upon wholly, the price of energy can be expected to push higher. Investing early could be a helpful tool in affording it later.

A recent announcement from the International Energy Agency confirmed that prices are headed higher. The group predicts that energy will become “viciously more expensive.”  In the next breath, the IEA expressed its weak expectations for renewable energy integration, further raising alarm over future fossil fuel prices. The Paris-based agency projects that global demand for energy will increase 40 percent by 2035, led in part by China, who is expected to augment its consumption by 1.3 percent a year. India, where the population is anticipated to outpace China’s during period, can also be expected to maximize the amount of resources it uses. The group called for a $1.5 trillion annual investment in energy infrastructure to help mitigate some of the fiscal consequences of rising oil expenditures but admitted, even then, “the cost of energy will increase.” The IEA, calculated that crude prices will reach $120 a barrel in 2035, or a nominal $212. The $120 a barrel is the IEA’s best scenario prediction. They added that should the recommended spending levels fall by a third, oil prices could reach $150 a barrel.

Investors looking to prepare themselves for the rise in prices may want to look into ETFs and ETNs that track the long term price of crude like PowerShares DB CrudeOil Long ETN (OLO). Another option for investors looking to participate in the long-term rise in prices  may consider oil services companies which aid in drilling. As the oil becomes more difficult to attain, oil service companies that create and innovate the necessary equipment are likely to thrive. Two examples of companies like this include the internationally operating, Schlumberg Limited (SLB) or Halliburton (HAL). Both companies provide technology and services that will be in higher demand alongside rising growth.

In addition to the rising price of oil, natural gas is also expected to undergo a similar trajectory with demand forecast to reach as much as 5.1 trillion cubic meters a year by 2035 up from about 3.1 trillion as of 2009. The trend toward increasing usages of natural gas has already been evident in earnings reports from Exxon (XOM) and other major companies, and the IEA predicts that trend will continue as many recognize the green benefits to burning natural gas instead of oil. The recent disaster in Japan that resulted in the paring down of Nuclear power use has also been a boon for natural gas. Options for investing in the long-term trajectory of natural gas include Patterson-UTI Energy (PTEN), which provides natural gas companies with contract drilling services and could become more profitable alongside long-term demand. Other options could be healthy majors like Exxon, whose relatively recent acquistion of shale gas producer, XTO Energy Inc., may represent the company’s preparation for a new age in natural gas.

Newfield Exploration Co. (NFX) and Range Resources Corp. (RRC), also specialize in shale production, are considered to be well-managed, and have the potential to profit long-term from demographic realities.

Commodity Prices and the Rising Middle Class

High energy prices can also be expected to drive up the cost of food. Energy is essential to the success of food crops, as a result of its direct influence on things like shipping costs and its impact on fertilizer prices. Add to the mix, more demand from nations where both population and affluence are increasing, and the price of food could sky rocket.

The wealthier a nation the more they expect to integrate meat into their diets. This in turn requires greater energy and more crops in order to sustain the animals until they can be consumed. In and of itself, this causes the prices for food items like corn to increase. We have been seeing a steady rise in the prices of these commodities for over two years and considering global trends and population growth, its likely this will be sustained.

Investors can choose to invest in this trend in several ways. They can like many investors before them, make a bet on agricultural exchange traded funds like Teucrium Corn Fund (CORN) or an agricultural ETF or ETN that tracks a basket of food prices like Power Shares DB Agriculture Fund (DBA). DBA reflects the price of a mix of food items from, feeder cattle to cocoa, coffee, corn, live cattle, soy beans and sugar. There’s also the option of making a long-term play on companies that produce enriched fertilizers, like Potash (POT). The demand on corporations of this nature will be amplified as farmers are under greater pressure to produce stronger and larger yields. It’s estimated that we will need to be producing 50 percent more food than we are now by the year 2030, meaning the global food supply will undergo a major shift both in terms of pricing and technology.

For individuals willing to bet that both prices and technology will shift, it may be wise to consider an investment in one of the major players in agricultural genetic engineering. These companies add transgenic traits to the variety of plants they breed in order to improve production. Other related corporations seek to modify genes of live stock and other animal proteins, like fish, in order to minimize the energy consumed in growth and maximize production. These companies include Monsanto (MON), which has the largest share of genetically engineered crops in the world.  Another of the protein focused is Aqua Bounty (ABTX), a biotechnology company responsible for obtaining approval for the premier animal for food production, an exceptionally fast growing salmon.

Considering the impact of demographic realities on the cost and availability of our most essential resources, investing early in the limited areas that will profit from the shift, may be the surest way to afford lunch and a tank of gas in 2035.