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The Hueber Report

RSS By: Dan Hueber

The Hueber Report is a grain marketing advisory service and brokerage firm that places the highest importance on risk management and profitable farming.

A Look Forward Part III

Aug 08, 2014

www.thehueberreport.com/freetrial

 

A Look Forward Part III

Next is the issue of production.  Just as in the 1970’s, concern is growing.  With world-wide urban sprawl, is there enough ground to continue with increased production?  That is where supply and demand comes in.  There is an old adage that the best cure for low prices is low prices, and conversely the best cure for high prices is high prices.  This is basic economic theory, because if you provide individuals with a profit incentive, they will find ways to make it happen.  A perfect example of this can be found in South America in the early 1970’s.  Though countries like Brazil and Argentina did produce soybeans, corn and wheat prior, the price explosion in the 70’s provided the incentive to invest in expanding that production. Here we are today, with South American producing more soybeans than North America.  There is still room for expansion in that region but not on the kind of scale witnessed through that previous period. 

So the question is, where can we grow now?  The old quote by Mark Twain would seem to ring true: "Buy Land, they’re not making it anymore" but that does not mean there is not land that could be brought into production.  The UN Food and Agricultural Organization estimates that only 32% of the arable ground on the planet is in production, but much of this has been taken over by cities and towns.  Still, there are areas where expansion for agricultural production is possible.  Increasingly, people are looking to Africa where it is estimated to be home of over 1/3rd of the remaining untilled arable ground.  Ethiopia alone has nearly 183 million acres of soil suitable for farming, of which only 1/5 is currently under cultivation.  The landmass that could be used for production in the Democratic Republic of the Congo would rival Brazil.  Civil Wars, corrupt governments, and a multitude of other problems have kept investment at bay in recent years. 

But as prices have rallied, investors seem more willing to take a chance on these African countries.  Saudi Arabia has created an $800 million fund for joint agricultural investment, and has been very active in Ethiopia.  The nation of Qatar has accumulated over $1 billion in its sovereign wealth fund, and has created a food company with the express mission of investing in agricultural production around the world.  Beginning in 2009, South Korea begun committing 1/10th of its agricultural budget to assist South Korean companies in purchasing land in other countries, and India has already invested more than $2 billion in Ethiopia to gain access to food production[i]

And China?  The investments being made by China globally take us into a whole new realm. Their need to look beyond their own borders for food and other resources is very much driven by necessity.  Between 1997 and 2008, the amount of arable ground suitable for farming in China dropped by around 30 million acres, not only due to growth in urban regions but also due to pollution issues that have rendered ground unusable. In response, between 2005 and 2011, China invested on average $1 billion per week in direct foreign investment primarily pertaining to natural resources[ii].  Additionally, as of 2010, there were at least forty-five private equity firms in existence with the goal of raising at least $2 billion; specifically for investment in African Agriculture. 

Of course, this is not the only area on the globe with potential for expansion. The dissolution of the Soviet Union left the collective farm system in disarray, but investment money appears to be finding its way into that region as well.  In the Former Soviet Union nations, it is estimated that there are currently at least 74 million acres of ground that used to be in production that now sits idle due to lack of investment. That would be comparable to all the acreage currently planted to soybeans in the United States.  Certainly, there will be many problems to address before production will increase, such as lack of infrastructure, backlash from citizens and unstable governments; the same could have been said about Brazil 40 some years ago.  Add to this the fact that genetics are providing varieties that can produce in climates not previously possible, and it would appear that we have the elements in place to take world production into a new realm. 

The question that remains is, can this unfold fast enough to meet the growing human population needs of this planet?    A number of bullish forecasts for rising commodity prices and food shortages have been predicated via projections by the United Nations.  The organization estimates that the current population of the world stands at 7.2 billion people, and predicts that this will rise to 9.3 billion by 2050, and over 10 billion by the end of the century.  These statistics have largely been unchallenged. 

 

But what if they are mistaken?  Sanjeev Sanyal, a global strategist for Deutsche Bank, published a very interesting study challenging this accepted wisdom[iii].  According to his research, the Total Fertility Rate (TFR), which is the average number of live births per women over her lifetime, has been dropping rapidly in not only developed nations but also in under-developed.   It is well documented that the most populous nation in the world, China, has been experiencing a negative population trend for a number of years.  But even the second most populous country, India, has seen its TFR drop from 5.9 in 1950 to 2.6 today, which is barely above the replacement rate of 2.1.  To compound the trend for these nations is the fact that both have boy/girl ratios in favor of boys, which also skews reproductive rates lower.  Mr. Sanyal believes that the world population will peak at 8.7 billion by 2055 and then decline to 8 billion by the year 2100.  That is a significant deviation from the UN projections.  This is not all bad news for agricultural demand, as part of this reflects rising income levels.  Historically, rising income also increases demand for meat protein in diets, which requires more grain for the production of such.   

We tend to look at historical data as a very large aggregate.  It is easy to think that the population of the world has just continually become larger, and while that is an undeniable truth, the growth is not linear—there have been major periods of contraction as well.  The cycles of population ebb and flow just like all other natural phenomena.  While both still important, the question for the future profitability of agriculture would seem to be tied more to the pace in the growth in wealth for underdeveloped regions of the world than the growth of population.


[i] McMahon, P. (2013). Feeding Frenzy. London, UK: Profile Books, Ltd.

 

[ii] Moyo, D. (2012). Winner Take All. New York, New York, Perseus Books Group.

 

[iii] Project Syndicate. (n.d.). The End of Population Grwoth. Retrieved from Project Syndicate: www. project-syndicate.org/commentary/the-end-of-population-growth.

 www.thehueberreport.com/freetrial

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