Agricultural Investments – The New Big Thing, the Next Big Bubble?
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Diana Olteanu-Veerman, Green Investments Ltd. Contributed to this report.
Population a Geometric Function, Food an Arithmetic One
The extraordinarily rapid economic growth, experienced in Asian economies in recent years, especially through the global financial crisis, has now been accepted almost as a given fact that is going to continue. Living in Asia, the prevailing psychology is very much that it will continue more or less as it has gone for the past decade.
There is a growing body of opinion that is beginning to question the viability of this assumption.
Compound growth of the kind that we have seen in recent years is not sustainable, so the argument goes, as natural resource availability (energy, metals, raw materials, food) will limit the potential for geometric growth.
Some of this thinking has no doubt been prompted by recent surges in commodities prices, raising questions of supply limitations and crimping the ability of nations to continue the recent levels of growth. While much has been written in financial circles of the role of commodities (metals, minerals, gold) in this phenomenon, probably because there are legions of listed companies in this sector, there has been relatively little written in financial circles of these implications for food. This is possibly because there is a relative paucity of listed vehicles available for investing in the basic necessity of life – Food.
Given that Asian countries are fast growers and large population centres, some study of the implications of the interplay of economic growth, food demand and urban/rural development in the global economy could provide fertile ideas for investment over the coming decade. And this is an area where there may be relatively few easily accessible investment vehicles at the present time.
For as long as there have been commentators on the food/population question, there has been no shortage of doomsdayers who have predicted Armageddon-like outcomes of starvation, inability to feed our growing populations, massive degradation of food sources. However, to date at least there have been few sustained periods of famine, and those that have occurred have been relatively isolated geographically. The reality is that we have continued to feed ourselves, and done so with increasing amounts of protein per person on the planet. It is not even that a status quo situation has eventuated, the world’s population has been increasingly well fed in quantitative terms at least. Many may argue that the growth of processed foods, consumption of fats, sugars, salts are all unhealthy developments in nutrition terms, but the fact of the matter is that the world is consuming substantially more protein per person than it did 50 years ago.
“I think I may fairly make two postula. First, That food is necessary to the existence of man. Secondly, That the passion between the sexes is necessary and will remain nearly in its present state”
“Assuming then my postula as granted, I say, that the power of population is indefinitely greater than the power in the earth to produce subsistence for man. Population, when unchecked, increases in a geometrical ratio. Subsistence increases only in an arithmetical ratio. A slight acquaintance with numbers will shew the immensity of the first power in comparison of the second. By that law of our nature which makes food necessary to the life of man, the effects of these two unequal powers must be kept equal. This implies a strong and constantly operating check on population from the difficulty of subsistence.”
So postulated Thomas Malthus in his 1798 publication of “An Essay on the Principle of Population”.
The geometric versus arithmetic distinction between growth of population and food is pivotal. It is true that the “natural animal instincts” of mankind could produce geometric population growth IF UNCHECKED! The reality is that there are numerous checks on unfettered population growth over the centuries’ wars, natural disasters, pestilence, Church dictate, and probably most importantly – economics and social change. When I grew up my parents and their age set were typically one of 6 – 8 children, and their parents were from similar sized families or even larger. My generation, family sizes are typically much smaller, 2 – 3 children with families of four children something of a rarity. This has probably been driven by marriages taking place later in life, a culture of women taking to the workplace much more readily, the economics of educating children, and perhaps a deeper desire to give children the best possible start in a very competitive life.
Government policies can also play a big role in directing population growth: witness the one child policy in China and they routinely adjust income tax policies to incentivize or disincentivise family size.
Despite all the natural and less than natural checks to population, those animal spirits keep doing their job, and we have still seen population growing geometrically.
Around 1680, it was estimated that global population amounted to around half a billion souls. That population had doubled to around 1 billion 150 years later around 1830. It took only 100 years to double again, around 1930. In the following 81 years global population has grown 4.5 fold to around 7 billion estimated by the end of 2011.
As Robert Kunzig remarked in “Population 7 Billion” (January 2011)
“ Before the 20th century, no human had lived through a doubling of the human population, but there are people alive today who have seen it triple. Sometime in late 2011, according to the UN Population Division, there will be seven billion of us.”
The UN demographic team’s best estimate is for global population to grow by another 2 billion even by 2045. The end result will be dictated by people’s own choices about family size, by natural events, and government policies. Already it is estimated that around 1 billion people don’t have enough to eat on a daily basis. Given growing environmental degradation, deforestation, declining water tables, depleting fish stocks, questions will increasingly arise as to how this population will be fed.
To be fair, commentators since even before Malthus have been predicting apocalyptic consequences of population growth and limited ability to feed such population growth. Malthus’s observation that geometric population growth could not be sustained based on his theory that food production could increase only arithmetically has not worked out – population HAS grown geometrically, and mankind HAS found ways to feed itself. There may be significant parts of the global population that are mal-nourished but widespread starvation is rare.
Asia already hosts the two largest countries in the world, India and China, and the total Asian population accounts for 60% of the world total. By 2030 it is estimated that 1 in 6 people on the planet will live in India.
The grim realities are that the world has been able to feed itself, at least so far, by drawing down its natural capital, to such an extent that the availability of resources may now be limited or compromised. Water tables are being drawn down, and/or polluted, soil is being eroded, farmland is being lost to urban development, climate change and global warming threaten our environment and ability to feed ourselves.
It is probably fair to say that the last 150 years belong to the “Carbon Era”. Carbon based fuels have allowed the world to grow geometrically providing not only the energy needed for such economic development, but has also being at the core of the growth of food production, with fossil fuels providing the lion’s share of fertilizers for the “green revolution” and much of the yield and productivity improvements seen in global agriculture over recent decades. There are many observers of the oil industry who postulate that oil production is likely to cap out at around 93-95 million barrels per day as easy to access oil supplies are run down and the ability to obtain oil from more difficult sources is argued to be unable to make up supplies. Today, consumption is running at around 88 million barrels per day.
If such prognostications are correct, we have a real problem on the energy front, and by association, on the food front insofar as a great deal of fertilizers used in food production are derived from fossil fuels of one kind or other and there is massive use of fuel for food transportation between producers and consumers.
The use of fertilizers, together with improved farming techniques, irrigation, new seed types, better animal breeds has allowed the world to feed its geometrically rising population – at least so far.
However, productivity of grain production, for example has been on a declining trend for decades – the rate of incremental output per hectare of land under cultivation has been declining (See Figures 4 and 12).
GDP Growth Drives Protein Demand
This global picture provides the context for some assessment of the prospects for demand for food, and particularly protein, in Asia in the coming years. Given that Asia comprises a huge part of the global population and is at the high end of the economic growth curve, it is clear that its demand for protein and food generally may have a big impact on global food production and food prices.
Over time, there has been observed a general correlation between per capita income and consumption of protein, especially in the developing markets.
Figures 5 and 6 show the patterns of meat consumption versus GDP per capita in PPP, and nominal terms. While there is a lot of difference between countries, there is a general trend of increasing meat consumption with increasing GDP per capita. The US and France top the charts with consumption of more than 120 kg and 100 kg respectively per person per year. Germany and the UK are in a similar place in the charts, while Japan’s meat consumption falls on the low side of the curve – probably due to its likely much higher consumption of fish and other seafood. Brazil and Argentina, emerging markets with high propensity for beef consumption sit above the correlation curve. China also already has high meat consumption, mainly driven by consumption of pork and chicken.
We have undertaken some rough forecasts of potential meat consumption for China, India and Indonesia using different assumptions. For example, we take population forecasts and GDP forecasts as a basis for meat/protein consumption forecasts. In addition we take a more qualitative approach which considers where each country is right now on the global meat consumption/GDP curve, and consider where it might be on the curve say in 5-10 years. For example, China’s meat consumption per capita is higher than for most other emerging economies, significantly above the trend line. If it reverts to trend, it implies very little change in per capita consumption over the coming decade. If however, China’s consumption pattern converges say to where Taiwan is right now, a significant rise in demand is implied.
The forecasts for the big three Asian countries are contained in Figure 6 and 20.
Having set some rough demand side parameters, the key issue now is to identify how (or if) such demand might be met.
Figures 7 and 8 show world animal protein production since 1960, both in total and on a per capita basis. What stands out in the data is how modest the increases in production of beef, sheep and goats have been as a protein source. Global beef production has increased by about 1.3 times over this 50 year period, while pork production has gone up by about 4 times and poultry by around 9 times.
Figure 8 suggests that the pace of growth of animal protein production per capita has slowed in recent years to around 1.5% per annum, from 2% – 4% and more in preceding decades. For beef production, annual production growth has been negative for 28 of the past 48 years, while for pigs and poultry, negative annual growth occurred on only 6 out of 48 occasions.
What is most surprising to me is the huge increase that farmed fish has made to the world’s protein supply, from virtually nothing in 1960, to now sit just behind beef production in the global rankings at more than 50 million tons (Figure 7). The total production rankings are also reflected in the per capita production numbers. Globally, we are consuming almost twice as much pork per head of population as we did in 1960, more than 4 times more chicken per capita and about 7 times more fish.
World Animal Protein Production
The question of how this meat is being produced is fascinating. Figure 9 shows the pattern of change in global grazing livestock – livestock that roams the countryside, feeding off grass. The total population of grazing sheep is today very little changed from 1960, while grazing cattle have increased by only about 40% over this time. Although beef production is up by around 1.3 times in tonnage terms, grazing livestock are up by only about 40%.
This suggests that either beef cattle are a lot bigger today than they were in 1960, or a significant proportion of beef are now being produced in ways other than grazing on farmlands.
Although we cannot be precise from the data available here, it is clear that grazing livestock made up a much higher proportion of protein production 50 years ago than it does today.
China’s Grazing Livestock Has Broadly Kept Pace with Global Trends
Just a note on grazing livestock in China, where sheep and goat counts have more than doubled over this 50 year period, slightly more than the global rate of meat production increase from these sources. For beef, China’s headcount has roughly doubled, in line with global beef production increases.
World Grazing Livestock
What is noteworthy in China is that there has been a marked slowdown in grazing animal headcounts in recent years, and an outright fall in sheep and cattle headcounts. It is hard to say if this is the beginning of a trend or just a “blip” in the cycle.
Fish Making Up a Much Greater Share of Protein Production, But Overfishing of Oceans is Apparent
Another observation we make on the data concerns fish usage. While farmed fish has shown extraordinary growth in production, particularly in the past 25 years, the global wild fish catch has been basically flat since the late 1980’s, having increased more than four fold in the period from 1950 to the mid 1980’s. On a per capita basis the global wild fish catch has decreased by about 20% since its peaks.
This is probably telling us what we know – that we have been over-fishing our oceans and the security of our natural wild fish resources are under significant threat. Hence the initiating of various attempts at regulating fishing on a global, or at least international basis, with countries in Asia being amongst the biggest culprits in raping the earths’ oceans.
Grain Production the Key to Meeting Protein Demand Growth
Given the shift away from grazing animals as key sources of protein, it is increasingly clear that grain fed animal protein has been very much in the ascendancy, and likely to become even more significant if current trends of grazing land and headcount are continued. So far grain production has broadly met the rising protein demands, but it is not at all clear that it can continue to do so given the likely growth in demand for meat based protein in the developing world. The reasons are numerous:
- Grazing livestock is increasing much more slowly than protein demand, producing more burden on other farming methods and other meat protein sources (pigs, poultry, fish).
- The pace of increase of global animal protein per person has slowed to a 1% – 2% pace in recent years from typically 2-4% previously (See Figure 8).
- Global beef production per person has been in a declining trend since the late 1970’s, but poultry and farmed fish have been rising steeply.
- World grain yields (tons per hectare) are still rising, but the pace of growth since around 1990 has slowed to an average of 1.3% per year compared to 3.5% average productivity growth from 1950 to the late 1980’s (See Figure 12).
- World grain area harvested has been essentially flat for 20 years, and if anything seems to be on a declining trend (See Figure 14).
- Arable land per person has been falling for 50 years and is now approximately half the level of early 1960’s (See Figure 13).
- Area for grain harvest per capita is down from 1950 to present in virtually every country, Australia being the only exception amongst major grain producing countries (See Figure 15).
- Growth of fertilizer consumption, important for improved productivity, has slowed sharply from the early 1990’s (Figure 16).
- Grain stocks as represented by days of consumption are at levels 20% – 30% below stock levels of the 1990’s (Figure 17).
The USDA’s early 2011 report on “World Agricultural Supply and Demand Estimates” paints a picture of lower production of most important grains in the U.S. in 2010, with lower stock inventories in most cases. The transition of China moving from a net exporter of such grains as corn and soybeans to large net importer is a big factor behind tightening global supplies of key grains.
In this scenario it is quite reasonable to conclude that pinch-points in supply versus demand may emerge in the global food chain in the coming years. This seems to be reflected in the recent spikes in food prices around the world in the past few years. Some might argue that this is a blip in the data, perhaps driven by excess liquidity attracting financial investors into these markets, which hitherto had been driven very largely by actual users and traders of the underlying basic commodities. Some might argue that technological advances will provide new advances in crop strains, improving productivity. The genome project may provide new strains of animals, able to absorb foodstuffs more efficiently, grow more quickly, prove more resistant to disease.
These may all happen, but it does not appear likely to significantly change the current muted growth potential in the very near term.
Here we review the food consumption and production trends in the three big population/high growth countries in Asia: China, India, and Indonesia.
In terms of meat consumption all three countries have experienced growth in meat consumption per capita since 1995. India had a slower growth and current meat consumption is relatively low, right at the bottom of the global heap at about 5kg per person per annum and may be explained also by India’s high rates of vegetarianism in the population rather than only low affordability/low GDP/capita. But Indonesia’s consumption at 11kg per person per annum is also on the low side. Again, low consumption might be partly explained by cultural/religious factors that do not permit pork in the diet, one of the easy forms of animal protein to raise. China’s meat consumption, on the other hand is already large for its state of economic development. China’s propensity for pork and chicken, which are relatively easy to raise and are less land intensive to produce, probably accounts for the country’s relatively high meat consumption.
Grain production in China, a major factor in chicken and pork production, has risen fourfold since 1960, but had a very sharp drop in the early part of this decade (See Figure 18). Productivity in grain production has also been good, but a potentially worrying long term trend of flat to down land area for grain harvest suggests that problems may be brewing. For example, productivity (as measured by tons of grain per hectare) increased at an annual average rate of close to 10% from 1960 to around 1984, but slipped back subsequently to around 1.5% per annum (See Figure 19).
Without a substantial increase in land devoted to grain production (unlikely), a substantial increase in grazing land (unlikely) or a major improvement in grain productivity, China is likely to be a growing importer of grains and protein/meat in the coming years if it is to satisfy the potential growth in demand.
While meat may not be on the menu for many Indian families, milk certainly is. As a key source of protein, milk production in India has shown a more than fourfold increase in production since 1960. A possibly worrying trend for India has been the dramatic fall in grain production per ton of fertilizer used.
We have made an attempt to identify where the big three Asian countries might be in the meat consumption stakes in the future based on the broad general relationships between GDP and meat consumption The estimates are far from scientific, but hopefully give some perspective on the dimension of the incremental demand for meat and grains. Figure 20 lays out our forecasts of potential meat consumption per person for 2016 and 2020, in approximately FIVE/TEN years out from now.
Figure 20: Meat Consumption per Capita for China, India and Indonesia – 2016-2020 Forecasts
|Meat Consumtion Per Capita (kg/year)|
|Population (bn people)|
|Total Meat Consumption (million tonnes/year)|
|Total Meat Consumption|
Based on the IMF forecasts of GDP for China, India and Indonesia for 2016 and on analysts’ estimates for the 2020 GDP numbers, we plotted where these three countries with large populations may be on the meat consumption/GDP curve (as per Figure 6). This reflects the cultural bias in meat consumption as China is placed slightly higher above the curve and India and Indonesia slightly lower. We have assumed a deviation from the curve for China much smaller than the current one and the deviations for India and Indonesia are similar to the existing ones. We believe this represents a relatively conservative estimate of potential incremental demand for meat. On this basis we forecast meat demand rising from almost 80 million tones currently to almost 140 million tonnes by 2020.
This may also produce substantial rises in costs of agricultural land and inputs to the food production process, like fertilizers, seeds etc.
There is little reliable international information on agricultural land indices, but there is some empirical evidence from the US and the UK that agricultural land is becoming more expensive.
For example, Knight Frank, international real estate consultants, calculate that average farmland prices in England increased by around 13% in 2010, and forecast 2011 is likely to see another rise of about 7% or so. Farmland prices in the US also have been in a strong uptrend in a clearly recessionary environment. According to “Farmland Forecast”, the Farmland Price Index in the US has risen approximately 120% from its low point of Q1 2009, with continued indications of further strength.
Figure 22 plots Knight Frank’s estimates of average farmland prices around the world. Not all farmland is created equal, accounting for much of the variations across countries. For example dry land in Brazil is a very different proposition compared to England’s more intensive and wetter arable land, or New Zealand’s dairy lands. But interestingly, the great majority of counties saw farmland prices rising in 2010, in some cases very sharply during what is a recessionary economic climate in many countries.
Some analysts also note the defensive qualities of farmland investment, in that correlations with housing prices are not close.
Robert Shiller, Yale University economist suggest that farmland could be the next “bubble candidate”.
“But, farmland, at least in certain places, seems to have the most contagious ‘new era’ story right now. It was recently booming, up 64% in real terms in the U.S. in the decade ending with its price peak, in 2008. And the highly contagious global warming story paints a scenario of food shortages and shifts in land values in different parts of the world, which might boost investor interest further.
Moreover, people nowadays easily imagine that the housing and farmland markets always move together, because prices in both boomed in recent memory, in the early 2000’s. But, from 1911 to 2010 in the U.S., the correlation between annual real growth of prices for homes and farmland was only 5%, and the largest data on farm prices have not shown anything like the decline in home prices.”
While there are huge numbers of ways to play rising demand and prices in most other goods and services through numerous public listed markets, the ways to play rises in core foodstuffs and agricultural land are relatively limited.
We have distilled a list of potential ways that investors who buy into the rising food prices/agricultural land price theme might focus their attention on. They are set out in more detail in Table 1&2. We are not recommending that our readers put in buy orders for these stocks and funds, but rather recommend that potential investors perhaps use this as a starting list to undertake their own research on the subject. While the global trends will eventually reward the long term investor, the short term momentum and weather cycles may drive the market in a different direction, as the 5 years overview of the DAXglobal agribusiness index performance indicates. (Figure 24). We have undertaken only limited research ourselves on the stocks and funds presented on Tables 1 and 2.
While there are numerous investment options in Asia, they are not always straightforward and may suffer from lack of liquidity and credible corporate governance. There are however, several listed companies in the US and Europe on the value chain of agricultural production, with large operations or sales in Asia that are likely to benefit from the current trends. Some of these companies together with some larger Asian companies are listed in Table 1.
There are also other investment vehicles, ETFs, ETNs and funds that can give access to the agricultural company universe or even more specifically to livestock products, grains and other agricultural commodities. We listed some of the most liquid ones in Table 2 on page 19.
Table 1: Investment Vehicles – Stocks
|Agricultural and Dairy Stocks|
|Adecoagro||AGRO:US||Primary producer of agricultural commodities (crops, cattle, dairy, etc.) in South America.|
|Cresud||CRESY:US||Producer of agricultural commodities and dairy in South America.|
|Dean Foods||DF:US||Dairy and soy related products and fertiliser products in the US.|
|Brasil Foods||BRFS:US||Brazilian company that produces and sells meat and dairy.|
|Viterra||VT:CN||Canadian and Australian based company with large food ingredients operations.|
|Graincorop Ltd||GNC:AU||Largest Australian flour supplier, grain handling and storage.|
|Goodman Fielder Ltd||GFF:AU||Australian manufacturer of oil spreads and dairy goods|
|Asian Based Companies|
|People’s Food Holdings||PFH:SP||Singapore based company producing, processing and distributing meat (pork and poultry) mainly in China.|
|Great Wall Enterprise||1210:TT||Animal nutrition products, poultry and fish farming, sells in China and other Asian countries.|
|Maeil Dairy Industry Co.||005990:KS||Korean dairy company with exports to China, Russia, other Asian countries and the Middle East.|
|China Mengniu Holdings||2319:HK||Large producer and distributor of dairy goods, based in Hong Kong with operations in China.|
|China Modern Holdings||1117:HK||Dairy farming company sells raw milk to product manufacturers in Asia.|
|Seeds, Animal Feeds & Fertilizer Stocks|
|Potash Corporation of Saskatchewan Inc.||POT:US||Produces and sells potash and other fertilizers in US and Canada. Listed in both US and Canada.|
|Agrium||AGU:US||Produces and sells crop nutrients and other fertilizers in Canada. Listed in both US and Canada.|
|Mosaic||MOS:US||Produces crop and animal feed nutrients, based in the US.|
|CF Industries Holding Inc.||CF:US||Produces nitrogen and phosphate fertilizer products in the US.|
|Nutreco NV||NUO:NA||Dutch Company specialized in animal nutrition and fish feed globally. Listed on Euronext.|
|The Andersons||ANDE:US||Grain and corn transportation and storage in the US.|
|Archer Daniel Midlands||ADM:US||Produces seeds, animal feeds and does corn processing in the US.|
|Bunge Ltd||BG:US||Stores and transports seeds, grains and animal feed internationally.|
|Asian Based Companies|
|Wilmar International Ltd||WIL:SP||Singapore based agribusiness, including fertilizer products with operations in China.|
|Global Biochem Technology Company Ltd||809:HK||Manufactures and sells corn refined, ethanol-based and other biochemical and biological agri-products in mainland China.|
Table 2: Investment Vehicles – ETFs, Funds, ETNs
|PowerShares DB Agriculture ETF||DBA||Probably the most liquid instrument in the sector. Holds futures contracts to track the DBIQ Diversified Agriculture Index and is exposed to several agricultural commodities, including cattle and hogs.|
|Market Vectors Agribusiness ETF||MOO||Exposure to companies that derive at least 50% of their revenues from agriculture. Replicates closely the DAXglobal Agribusiness Index, with 46% chemicals, 28% agriproducts and 16% agricultural equipment.|
|Global X Farming ETF||BARN||Launched 1 June, 2011; larger exposure to emerging markets (Singapore at 15%, Malaysia at 12% and China at 7%, US only 31%).|
|Global X Fertilizers/Potash ETF||SOIL||Launched 26 May, 2011, replicating the Solactive Global Fertilizers/Potash Index. Country breakdown includes 20% US, 14% Israel, 12% Canada and 9% Australia, tracking the largest and most liquid global listed companies involved in the fertilizer industry.|
|IQGlobal Agribusiness Small Cap ETF||CROP||Tracks the IQ Global Agribusiness cmall cap index, with focus on smaller agriculture companies, with international exposure.|
|PowerShares Global Agriculture Fund||PAGG||Tracks the Nasdaq OMX Global Agriculture Index focusing on the largest and most liquid companies in the space. Good exposure to US, Canada, Singapore, Malaysia and Switzerland.|
|Jefferies TR/CRB Global Agriculture Fund||CRBA||Concentrated fund with about 60% non-US exposure, including companies that do fertilizers, chemicals, seeds and equipment.|
|iPath Dow Jones UBS Livestock Subindex TR ETN||COW||Tracks unlevered returns on two livestock commodities contracts (lean hogs and cattle) as per the Dow Jones UBS Commodity Index TR.|
|ELEMENTS Linked to the Rogers International Commodity Index – Agriculture ETN||RJA||Twenty commodities: wheat (20%), corn (14%), cotton (12%), soybeans (9%).|
|iPath Dow Jones AIG – Grains ETN||JJG||Thee commodities: soybeans (46%), wheat (30%), and corn (24%).|