More hunger ….; Are agri/food prices more likely to rise or fall?

While prices have stabled/reduced, we all can remember (or hope not to remember) 2008’s extra-ordinary price hike of food/agri products due to the imbalance in supply and demand. We blamed the commodities like corn, energy etc.; however, the prospect for rising prices is still relevant today. I believe, there is a structural change story in the agricultural sector that will probably continue to affect food price, let alone world’s continued hunger issue. The bottom line is that we think agricultural prices are more likely to rise than fall.

While we recognize global demand for agricultural produce will likely suffer a cyclical downturn this year (a contraction of 1–2% in near-term) as both food and biofuel demand falls; however, the degree of the likely supply-side contraction will outstrip because falling planted acreage, lower fertilizer application and adverse weather conditions may drive a 3–4% fall in crop production over the near-term that is in contrast to the optimistic view of supply held by the USDA. Global population growth is expected to be 1.2% p.a over the mid-term (say 5 yr.) and continued increase in calorific intake and shift in dietary trends (greater meat consumption), which adds a further 1% p.a to global food demand. The UN estimates that some 1.9bn hectares of land worldwide have been affected by land degradation. The main causes are soil erosion, loss of nutrients, damage from inappropriate farming practices and the misuse of agricultural chemicals. Urbanization is eating into
agricultural land and reducing the workforce available to farm it. The average population size of the world's 100 largest cities grew from around 0.2m in 1800 to 0.7m in 1900 to 6.2m in 2000. Currently, half the world’s population lives in urban centers, compared with less than 15% in 1900. By 2030, the UN forecasts that 60% of the world’s population will live in urban areas. A major exporter like Brazil is increasing agri production; however, there is limit due to the major cap being poor infrastructure.

In the medium term, the supply/demand balance is expected to be fairly well matched (i.e. relative down-cycle again). All the participants in the value chain tend to be clearly very pro-cyclical when it comes to financial performance (e.g. crop processors and producers, Crop protection and seeds producers, fertilizer company, food retailer, Agri machinery producers), the key question is, what are we doing different now, structurally, to deliver cost-effective food/agri supply to feed the world’s growing population?