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Editor's note: Contributing today's essay is my colleague Chris Mayer… one of the best investment researchers in the business. If you'd like to check out other insights from Chris and the rest of the team at the Rude Awakening, click here.

The Return of the Dust Bowl

By Chris Mayer, editor, Capital & Crisis
Saturday, February 10, 2007

A darkness blacker than night is how it was often described. At least one could pierce the black veil of night. Not so with this kind of darkness. It was opaque. People were afraid. It was only midmorning. They had never seen anything like it.

If you ventured outside into the cold and biting wind, sand would get in your nose and mouth and ears. You would hurry back inside and cough up black. While inside, people soaked sheets and towels. They would try to stuff them around windowsills and doorframes. But it didn't help much. Choking dust still filtered in. It spread out in little ripples on the floor and seeped through windowsills.

It was Nov. 11, 1933, Armistice Day, South Dakota.

When it was finally over, families would stumble out of their farmhouses and peer out at a new surrealist landscape. The fields were gone. The trees were no more. Just mounds of sand and eddies of dust swirling in the light autumn breeze. There were no roads. No tractors or machinery, no fences. All of it laid buried in sand. As one observer said, "The roofs of sheds stuck out through drifts deeper than a man is tall."

The great black blizzard of 1933 destroyed acres of farmland stretching from the Texas Panhandle all through the Great Plains and clear to the Canadian border. The following day, the skies darkened over Chicago. A steady stream of filth fell on the city like snow. Even people as far east as Albany, N.Y., could see the menacing dark clouds roll their way across the horizon. That winter, red snow fell softly on New England.

Yet 1933 was "only a prelude to disaster," as Frederick Lewis Allen wrote in his panorama of the 1930s, Since Yesterday. In 1934 and 1935, the dust storms destroyed thousands and thousands of acres of farmland. The lives of more than half a million Americans changed forever. Many hit the road, forced to wander like refugees in their own land. Most headed west, looking for a new start.

The Dust Bowl was a seminal event in American history. Unlike a natural disaster such as a hurricane, "There was a long story of human error behind it," as Allen wrote. After World War I, there was a great demand for wheat. Mechanized farming also became common. Farmers tore up the sod that covered the plains and farms expanded. Production soared.

The Plains were a region of high winds and light rainfall. Yet the 1920s were pretty forgiving in terms of drought. There were warnings, though, such as stories of topsoil blowing in Kansas after a stretch of dry hot weather. But in the 1930s, we had some real drought in these places. The combination of drought and desiccated farmland would create the epic dust storms. "Retribution for the very human error of breaking the sod of the Plains had come in full measure," Allen wrote.

I recently spent some time looking over pictures of the aftermath of these blizzards. They are incredible and simply hard to believe. Yet I see how something like this could happen again. Except this time, it will be bigger. And it will happen in China. But don't think it won't affect what happens in America. Plumes of dust emanating from northern China have already hit the U.S. mainland.

As Lester Brown, author of Outgrowing the Earth, explains: "With little vegetation remaining in parts of northern and western China, the strong winds of late winter and early spring can remove literally millions of tons of topsoil in a single day — soil that can take centuries to replace." These dust storms are so strong that they can peel the paint off cars. They often force the closure of schools, airports and stores — even in places as far away as South Korea and Japan.

As with the Great Plains, northern China is dry and farmed intensely. Already, China's farmland is turning to desert at an alarming rate. Estimates peg the loss at more than 900 square miles per year. Chinese farmers struggle to meet the demands of the Chinese people. Meat production, for example, has grown at an 8% clip since 1980. That's the biggest increase of any major meat-producing country in the world, yet it still falls short of demand.

It's not so much the basic demand for food as it is a change in the mix of what people eat. Clearly, in poor countries, cereals and grains make up the vast majority of a person's diet. But in richer countries, people eat more meat, as well as fruits and vegetables.

Meat is incredibly expensive to produce, because raising the necessary livestock requires large amounts of grain. According to The Silk Road to Riches, the average cow consumes 2.5–3% of its body weight in grains every day. "A typical 1,200-pound beef steer could consume about 35 pounds of feed per day," the authors write, "or more than 13,000 pounds annually. That's enough grain to feed more than 10 average-sized adults for an entire year." It's also very water intensive. It takes about 6,600 gallons of water to produce just 8 ounces of beef. As you can imagine, this puts meat beyond the pale of many poor countries.

There is limited arable land in northern China. So the Chinese rely more on fertilizers to boost yield. Currently, fertilizer use in China is more than three times the global average.

China's ability to produce the fertilizers it needs — in particular, potassium and phosphate — is limited. As a result, China is one of the largest importers of these fertilizers. This is one of the reasons companies such as Agrium thrive today.

So you have chunks of Chinese farmland turning into desert every year. You've got limited water resources in a dry region. Already you've got dust storms that kick up plumes of dust that travel thousands of miles. All of this is reminiscent of the U.S. in the 1930s.

We all have a stake in what happens in China. If China relied on the rest of the world for even 20% of its grain needs, there would be an incredible strain on the world's grain producers.

Many of the challenges China faces exist in the world at large already. Grain production per person is falling worldwide. So is cropland acreage per person. We are also approaching the limits of what fertilizers can do in terms of boosting crop yields. Plus, strong demand for biofuels — like ethanol — now competes with food demand.

By some estimates, we'll need to produce about 136 million tons of grain in 2007 to prevent grain stocks from falling again (they fell in 2006). Yet annual increases in grain production have averaged only about 20 million tons since 2000. That gives you something of a snapshot of the hurdle in front of us.

The investment conclusion from all this seems to be that we are in a long bull market for grains. Expect the prices of corn and wheat to keep rising. Expect the price of meat to rise. It also seems that fertilizer producers, such as Agrium, should continue to do well. Other ancillary ideas also come to mind — shippers of dry goods (i.e., grains) and manufacturers of farm equipment. If you followed along with my Mayer's Special Situations letter, for example, you're up 40% since June on irrigation equipment maker Lindsay Co.

The potential for another 1930s-style Dust Bowl only adds to the power and durability of these trends.

Good investing,

Chris Mayer

Editor's Note: Believe it or not, water-themed stocks have been one of the stock market's hottest sectors over the last six or seven months. Last summer, Chris published a report on the world's water crisis... and the seven water stocks he chose to play it are up an average of 42.6%… with no losers.

Chris' contrarian style of finding out-of-favor assets has delivered a lengthy list of winning investment ideas for subscribers of his advisory Capital & Crisis.

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