The Economics of Food Security

Written by Brian Hicks
Posted February 15, 2006

Dear Wealth Daily Reader,

On Monday, Luke Burgess wrote an excellent article regarding the connection between oil dependency and a conventional agricultural system reliant upon this shrinking resource.

As Luke pointed out, oil and natural gas are crucial components of the agricultural system. And with peak oil looming, the security of our food supply could be threatened.

Now, a solution to this problem does exist. In fact, it's already been identified and is currently being utilized.

Keeping it local

Thanks to the steady rise of LOHAS consumers looking for sustainable solutions to their lifestyle needs, demand for local, organic food is growing.

But while local, organic agriculture is filling LOHAS feed troughs and local farmers' wallets, it's also providing a solution to the EROEI (energy returned on energy invested) conundrum that conventional farmers will have to continue to compete with as oil prices continue to rise.

You see, a massive drain on oil supplies can easily be traced back to the shipping of agriculture and other manufactured foods throughout the U.S.

If you want to reduce this oil consumption, there's an easy solution - shorten the supply chain!

It's estimated that most food in the United States travels an average of 1,500 miles before reaching us.

Generously assuming a truck logs 10 miles per gallon of diesel on a 1,500 mile trip - you're looking at a total diesel consumption of 150 gallons.

But on a local trip (20 miles each way), the same truck logging 10 miles per gallon of diesel will only demand a total consumption of 4 gallons.

Total savings - 126 gallons per trip!

Multiply that by all the daily shipments of food across the U.S. and you have one hell of an energy savings.

And consider pesticide and herbicide use as well.

Organic agriculture does not allow for the use of chemical pesticides or herbicides. And interestingly enough, most pesticides are derived from or use ingredients sourced directly from petrochemicals or use petrochemical products in their extraction and manufacturing.

In fact, major oil companies, such as Chevron and Shell, have enormous facilities and subsidiaries devoted to nothing more than pesticide development and manufacturing.

And let's not forget the amount of aviation fuel needed to power airplanes and helicopters used to spray the crops too.

Grow more, grow it faster!

In an effort to feed growing populations, the demand for fertilizer production has had to keep pace. And wouldn't you know it, inorganic fertilizers, (again, not allowed on organic farms) used so that crops may grow larger, stronger and faster, are mostly derived from oil, natural gas and mined minerals.

In the early 20th century, two German chemists, Fritz Haber and Carl Bosch, developed the Haber-Bosch process - a method for creating ammonia from nitrogen and hydrogen. And this ammonia synthesis accounts for over 99% of all inorganic nitrogen that is used in farming today!

Of the roughly 130 million tons produced globally (110 of which is fixed nitrogen), 4/5 go into fertilizers.

Now, in the University of Florida, Institute of Food and Agricultural Sciences' report, 'The Energy and Economics of Fertilizers,' nitrogen (one of the three macronutrients in inorganic fertilizer) sucks up massive amounts of energy - 22,000 cubic feet of natural gas feedstock to make one ton of ammonia that is 82% pure nitrogen. And the processing, packaging, transportation and application requires 52% of the total energy inputs in nitrogen fertilizer.

The U.S. General Accounting Office stated that natural gas is the most costly component used in manufacturing nitrogen fertilizer. So when natural gas prices increased in 2000-2001, U.S. companies that produce nitrogen fertilizer reported adverse financial consequences resulting in much higher production costs.

Of course, even beyond the energy-draining, inorganic fertilizer production - farmers still need to distribute it. And tractors don't run on sunshine and rainbows!

Organic opportunities

Because of high energy prices, local and organic farms and organic food manufacturers and retailers are in an excellent position to gain market share.

In fact, over the past few years, organic retailers have been especially profitable.

Of course you're familiar with Whole Foods Markets (WFMI:Nasdaq), the Austin-based organic and natural food chain that's consistently destroyed its conventional supermarket counterparts in sales and growth - while also making investors a lot of money.

Take a look at WFMI's five-year chart:

This once tiny-organic retailer is now one of the most profitable food retailers in the country - in both conventional and organic and natural foods markets.

Of course, Whole Foods Markets, while still an excellent company, is no longer that 'undiscovered' gem it once was.

But that doesn't mean there aren't more opportunities out there in this market.

Take a look at Planet Organic (POH.V) or (POH-X), for instance...

Last year, the company's stock shot up 300% after a number of investors seeking additional organic plays set their sites on an organic food retail company that was truly exceptional.

While those late to the Whole Foods Markets party were contemplating a dip in the company's stock price to pick up a few cents here and a few cents there, Planet Organic was delivering big time!

Since 2001, this company's sales have grown 700%. And it is now the #3 competitor in North America.

Though it's really not all that surprising. The fact is, the stock has finished with a gain every single year it's been public.

And with the organic grocery store market expected to grow to $300 billion by 2010 - this company is in line for a continuous payoff.

You see, the organic food industry has been growing remarkably for the past several years. According to the USDA Economic Research Service, organic product sales in the U.S. have grown by 20% or more each year since 1990.

Compare that with the total U.S. food sales, which grow at an average rate of only 2% to 4% a year.

One of the key factors behind this growth is the increasing consumer awareness of health and environmental issues along with an increasing resistance towards genetically modified food products and GM farming.

But now, with the ominous black cloud of peak oil looming over the world - energy demands for conventional agriculture and food manufacturing are placing an economic burden that could quite possibly force many companies to seek the organic alternative.

Though it's the organic companies that have already laid the groundwork that are certainly going to take the lion's share upfront.

Whole Foods Markets did it first...Planet Organic will do it next.

Stay tuned to see the next logical...and profitable evolution of the organic foods markets.

You can also read more about organic food markets at

Until next time,

Jeff Siegel