The Sector
Growing world population, rising incomes in the developing world and the increasing use of biomass for industrial applications and biofuels will drive substantial growth in demand for agricultural crops. The world's population is growing by almost 80 million each year, which is approximately 150 more mouths to feed every minute (US Census Bureau, January 2009). High oil prices and the desire for energy independence have led to a strong pursuit for biofuels worldwide, and therefore energy crops such as rapeseed, sugar and corn are in high demand. The world's appetite is changing too. Improving diets in developing nations will also contribute towards a surge in prices. As global wealth increases, so does a desire for a better standard of living, which in turn affects eating habits. As per capita incomes rise in India, China and other emerging economies, millions of people will be increasing their calorie intake and will be adding meat, milk and eggs to their daily fare. That will have a positive impact on demand due to the considerable quantities of grain used to feed livestock.
On the supply side, climate change, fundamental limits to further cropland expansion and severe pressures on existing production, make keeping up with rising demand increasingly challenging. Land is scarce and will become scarcer. The amount of agricultural land on a worldwide basis per person is shrinking. In 1950, there were 0.5 hectares of arable land per person. Today, the number is only 0.25 hectares. Agricultural land is a diminishing resource, especially in more developed countries where cities are rapidly expanding. Every minute, in the US alone, two acres of farmland is being taken out of production and turned to other uses, mostly for development (American Farmland Trust, 2008). In addition, some 12.3m to 19.7m acres of agricultural land, out of a worldwide total of 3.7 billion, falls fallow each year as a result of deteriorating quality; expanding deserts and soil depletion (Bloomberg, February 2007.
Due to climate change related extreme weather events affecting yields, food production is becoming more volatile. Climate change effects could lead to a global decline in agriculture productivity of between 1% and 10% by 2030 (US National Oceanic and Atmospheric Administration, 2008). Rising temperatures and soil erosion are expected to restrain agricultural production growth in traditional producer countries e.g. US, Germany and France.
Many regions across the globe already suffer from water shortages. 63% of the combined population of BRIC countries is already living under water stress. Demand for water is projected to increase by 70-90% by 2050 and water scarcity could be responsible for yield losses in the range of 1.7-12% in major cereal producing regions by 2050. The debate has already started concerning “Water, the New Oil”.
Demand for agricultural commodities is outpacing supply. Grain consumption has exceeded production for 7 out of the last 8 years. Global grain stockpiles have been in relentless decline bottoming out at 68 days of total supply in 2008. This was accompanied by a year on year rise in soft commodity prices over the period. This trend has resumed (post the 2008 correction) in spite of a reduction in demand as a result of the global financial crisis.
The gap between demand and supply is widening. Even today, 1 billion people go to bed hungry. The business of feeding the world is therefore growing bigger. The strong demand for food is pushing this sector to become a major investment theme. Countries producing and exporting crops on a large scale to meet growing demand will enjoy favourable returns. With limited land and water resources, this will drive up prices of agricultural commodities and strongly positions agricultural land for long-term appreciation.
