With global vital resource supplies increasingly tight, however, unrest in any producing country can affect prices. And the rising wave of resource nationalism–the desire to extract a bigger cut from what’s produced within a country–is far from cresting.

World oil prices have long been at the mercy of nationalist tendencies. It’s been almost 30 years since Iranian revolutionaries and their allies held consumer nations over a barrel, triggering the second dramatic price spike of the 1970s. Today, Chavez’ Venezuela is the most aggressive oil nationalist. But governments from Canada to Russia are increasing their take. And with Nigerian rebels constantly threatening supplies, producer nations’ clout continues to grow.

In recent weeks, however, food nationalism has taken over the headlines. In contrast to oil, the US has a very strong hand in this game. US cornfields produce an average of 153 bushels an acre, double the average of the rest of the world and twice the productivity of the previous generation of farmers. Total corn acreage rose from 66.3 million in 1987 to 93.6 million in 2007. That adds up to nearly a tripling of overall US corn production over the past 20 years.

As the graph below shows, corn prices have risen along with production, particularly over the past few years. That’s partially because of growing demand for ethanol as a replacement fuel for soaring oil per government mandates. But the larger factor is growing demand for food, particularly in developing Asia where incomes are surging and diets are becoming increasingly complex.

Source: Bloomberg

Since the first colonists set foot in Virginia and Massachusetts, the policy of this country has been to encourage agricultural exports. Despite surging prices for corn and grains–and everything made from them–that policy endures. Moreover, the clout of the farm states in the US Senate would be hard to overcome should a movement develop to keep US foodstuffs in country.

America’s policy of mandating ethanol development is siphoning off a huge amount of corn from global markets and keeping it here. And it’s also depressing production of other foodstuffs by encouraging corn plantation instead. That, in turn, has tightened global supplies and pushed up prices to levels that are simply unaffordable in some parts of the world.

Last week, United Nations Food Agency chief Jacques Diouf warned of civil war in some countries–particularly in sub-Saharan Africa, but also in Asia and Latin America–because of global food shortages. Unrest has already erupted in several West African countries, as well as Ethiopia, Madagascar and, surprisingly, in faster growing, more developed Indonesia and the Philippines.

Some of the problems leading to underperforming agriculture in developing lands are manmade: leaky water management; decrepit rural transport networks; inadequate storage facilities; disease and lack of ability; and expertise and money to implement new technology. Meanwhile, the rapid urbanization of Asian countries takes a growing portion of arable land out of circulation every year. Then there are changes in the climate–manmade or not–that continue to wreak havoc on traditional producing areas with too much or too little rainfall.

It all adds up to growing global dependence on a shrinking number of food producing nations. Those are the very same elements impacting other vital resources here in spring 2008. And they’re an extremely strong underpinning for continued higher agricultural prices for many years to come, particularly with the world adding 78.5 million people each year.

There will be ups and downs for prices along the way. A throttling back of America’s efforts to develop ethanol so extensively or a move to use something besides corn to brew ethanol could take some of the upward pressure off corn prices. A real global recession could also cause food prices to back off for a time, though that looks less likely with the US economy growing 0.6 percent in the first quarter, identical to its fourth quarter growth rate.

It’s also possible we’ll see some form of US government intervention to curb food prices within America’s borders, particularly as the presidential election develops. Big agriculture companies’ first quarter profit gains, for example, are likely to become more of an issue as Super Oils’ are already, particularly as more Americans get squeezed by rising inflation and lower housing prices.

Republican presidential candidate John McCain said he favors scrapping the 51 cents per gallon ethanol tax credit and the 54 cents per gallon tariff imposed on most imported ethanol. That could encourage more US production for food and less for ethanol. If that to reduce corn prices significantly, however, it could have the perverse impact of cutting production and actually worsening the global food crisis.

In any case, history clearly shows that government intervention would have only a temporary impact on food prices. That’s because the underlying fundamentals of rising population, incomes and dietary complexity would remain intact. In fact, a temporary dip in prices would likely intensify them. Moreover, agricultural production costs are rising along with energy prices, which could rise further if biofuels were deemphasized.

All vital resource bull markets ultimately come to an end. But they only conclude when real developments occur that permanently destroy demand and increase supply, thereby tipping the balance of power back to consumers and away from producers.

Food demand destruction is a horrible issue because it also involves dramatically lowering incomes, war and/or pestilence. The 20th century was rife with such catastrophes, from tens of millions starving in Russia and China in earlier decades to World War II and, more recently, genocide in Cambodia and Rwanda.

Fortunately, there’s also a supply-focused solution in agriculture that’s more likely to tilt the balance back: wide-scale application of technology accompanied with vast improvements in infrastructure. And there’s nothing like high food prices to ensure the money needed will be spent.

Finding and applying solutions will take years and heavy investment. The silver lining: big profits for companies that are producers, technology developers and water system managers.

We currently have six agriculture/water recommendations in the VRI Portfolio. PowerShares DB Agriculture Fund (AMEX: DBA) is an exchange traded fund (ETF) representing ownership in a wide range of agricultural commodities. It’s our simplest though most volatile bet on the long-term uptrend in food demand and tightening supplies.

China Green Holdings (Hong Kong: 904, OTC: CIGEF) is an aggressive but diversified bet on tightening agriculture conditions in Asia, the fastest growing food market in the world. Added to the VRI Portfolio last issue, The Andersons (NSDQ: ANDE) is a diversified play on the continuing rapid growth of the US agriculture industry, on which the world is increasingly dependent. Syngenta (NYSE: SYT) is our bet on crop protection and seed development, which are critical to increasing crop yields.

Finally, Singapore-based Hyflux (SG: HYF, OTC: HYFXF) is a rapidly growing play on the need to maximize water resources, with contracts in Asia and elsewhere. And Canadian-based Sino-Forest (TSX: TRE, OTC: SNOFF) is benefitting from the growing shortage of timberlands in Asia as more land falls to urbanization.

Last week, we noted the near parabolic rise in agricultural commodity prices so far this year. We also advised investors who had purchased two of our most profitable holdings–ProShares DB Agriculture Fund and Syngenta–to pare their investment back to its original size in anticipation of a sector dip.

This is a strategy we’ll employ from time to time to maximize our bull market profits. Suppose you buy $5,000 of a particular recommended stock and the value of your stake rises to $7,000 in a couple weeks. Paring your investment back to its original size would entail selling $2,000 worth of that particular stock.

We did see a pullback in both DBA and Syngenta over the past week. And we’re still well ahead in both positions from our original recommendations. If you bought in with us, pare back if you haven’t already.

Otherwise, stick with positions in all of these stocks. Again, there will be ups and downs. But all are quality stocks locked into the long-term bull trend in global agriculture. That means they’re headed a lot higher in coming years. 

Finally, we’re also adding another agriculture play this week: EI du Pont de Nemours (NYSE: DD, DuPont).

DuPont is the second-largest US chemical company in terms of market cap and sales. The company is divided into five segments:

• Agriculture/Nutrition
• Coatings and Color Technologies
• Electronic and Communication Technologies
• Performance Materials
• Safety/Protection

DuPont’s main appeal is its strong global presence and diversified market exposure. This was seen clearly when the company reported first quart 2008 earnings, with sales up by 9 percent despite weakness in the US auto and housing market. More than 60 percent of sales come from outside the US, at least 25 percent of which is generated in emerging markets.

By 2010 the company expects almost half of its revenue growth will come from emerging markets, contributing to around 30 percent of total revenue.

Source: DuPont

DuPont is one of the world’s largest producers of corn, soy seed and crop protection chemical products.

Agricultural sales should surpass USD7 billion this year mainly because of better expected sales of triple stacks (roundup resistance and protection against corn borer and corn rootworm) corn seeds. DuPont has aggressively picked up market share in corn seeds in Brazil and has also realized strong growth in insecticides in Europe and South America.

DuPont has been allocating a lot of resources in research and development (R&D) focusing on new technology in corn traits that can offer triple herbicide resistance to increase productivity gains.

The big potential of the agricultural business has sparked talk of potential separation of the agricultural arm of the company. Until now, management has maintained that shareholders are better served under the current arrangement.

It remains to be seen if this view will hold as the market has been increasingly attributing more value in the innovation and growth potential of the agricultural division. Additionally, an eventual spinoff could potentially unlock hidden value and reward current stockholders even more.

DuPont will endure challenges this year because of higher costs in sulphur and urea raw materials used in herbicides as well as high natural gas costs and soybean commodity prices.

From the other divisions, the electronic and communication technologies division has benefited from strong demand for refrigerants and photovoltaic products. And this is expected to continue as the energy efficiency investment theme unfolds. 

On the other hand, the coatings and color technologies division is most challenged by weakness in the US auto and housing markets. But foreign demand is expected to pick up some of the slack. The same is true for the performance material division.

On the corporate finance level, DuPont successfully implemented its lower-cost strategy (see the chart below) and recently revealed a new USD800 million three-year, fixed-cost productivity target. Given its past success in the area, we expect that it to deliver once again. The company is also aiming to reduce variable costs by USD1 billion in the next three years. EI du Pont de Nemours is the new addition to the VRI Portfolio and is a buy at current levels.

Source: DuPont