Tag Archives: agriculture
OECD-FAO Agricultural Outlook 2013-2022: Higher Energy Inputs Mean Higher Agricultural Commodity Prices
June 11th, 2013 This post concerns a 120-page PDF report combining efforts from the OECD and the FAO, from which I’ve excerpted some key projections on food commodity prices and how they are expected to be impacted by rising input costs, especially crude oil and fertilizer costs. Note that I’ve zeroed in on these subjects by choice, as there are many other subjects covered in the report. I’ve highlighted a few sentences in red, but there are many additional nuggets in the paragraphs below, beginning with the report description and overview. OECD-FAO Agricultural Outlook 2013-2022: The nineteenth edition of the Agricultural Outlook, and the ninth prepared jointly with the Food and Agriculture Organization of the United Nations (FAO), provides projections to 2022 for major agricultural commodities, biofuels and fish. Notable in the 2013 report is the inclusion of cotton for the first time and a special feature on China. Higher costs and strong demand are expected to keep commodity prices well above historical averages with a high risk of price volatility given tight stocks, a changeable policy environment and increasing weather-related production risks. China is projected to maintain its self-sufficiency in certain key food commodities while increasing its trade and integration in world agricultural markets. Overview: Market tightening in recent years has been accompanied not only by an increase in the level of agricultural prices but also by a resurgence of commodity and food price volatility, reminiscent of the situation of the 1970s. In these circumstances, prolonged periods of low agricultural product prices driven by ever increasing productivity improvements in a context of low oil and energy prices seem now a feature of a bygone era. Instead, with energy prices high and rising and production growth declining across the board, strong demand for food, feed, fibre and industrial uses of agricultural products is leading to structurally higher prices and with significant upside price risks. The frequency of short term price surges and bouts of high volatility, accentuated in some cases by policy choices, have catapulted agriculture and its future prospects into renewed prominence. The factors external to agriculture that will shape global demand and supply for agricultural commodities include slowing population growth and changing population demographics, macroeconomic shocks and the speed of recovery to sustained global economic growth, the increasing co-movement of agriculture with energy and financial markets, and enhanced climatic uncertainties. Overall, the increasing scarcity of arable land, water constraints and rising input and energy costs in agriculture all serve to highlight the critical importance of achieving higher agricultural productivity in a more sustainable manner both at the farm level and upstream and downstream sectors of the food supply chain. As a result of rising energy, higher operational expenses, and rising input constraints of land and water necessary for expansion, global livestock inventories and livestock product supplies of meats and dairy products expand less rapidly over the projection period than in the past decade. Oil and energy prices are assumed to increase over the coming decade and to remain historically high reflecting steady global economic growth. By the end of the projection period in 2022, the price of crude oil is assumed to be around USD 145 per barrel, with an average growth over the period of 2.6% p.a. and slightly above that for consumer price inflation. High energy and oil prices will have effects on both demand and supply of agricultural products, through higher agricultural supply costs and increased demand for agricultural feedstocks used for biofuels production. With prices of fertilisers and other farm chemicals and machinery costs closely related to oil prices, any rise in oil prices is expected to quickly translate into increasing production costs. In addition, some inputs such as water are becoming increasing constrained in availability to agriculture and more costly to procure needed supplies. Higher energy and oil prices and rising costs of other inputs are factored into the commodity price projections through higher agricultural supply costs. Higher production and supply costs will reduce the profitability of capital and input intensive agriculture and this development can be expected to further slow the growth in production. At the same time it will likely encourage production growth in countries with less intensive farming practices due to higher net returns, such as pasture-based dairy and meat operations. An exception will be countries such as the United States and Brazil, in which exchange rate depreciation will help to offset some of these cost disadvantages to preserve the competitiveness of their agricultural production on world markets. Overall, the increasing scarcity of arable land, water constraints and rising input and energy costs in agriculture all serve to highlight the critical importance of achieving higher agricultural productivity in a more sustainable manner both at the farm level and upstream and downstream sectors of the food supply chain. This will be required to ensure the increasing food supplies needed by an expanding global population and to reduce upside price pressures over the longer term. Slower output growth is expected to be a feature of agricultural production in both the developed and developing countries’ agriculture sectors in the coming decade. Developed and the large emerging economies in particular are projected to enter a period of lower yield and production growth for most crops. This will also apply to livestock sectors of meats and dairy, but with the downward adjustments perhaps less pronounced in some cases than for crops. For livestock production, these developments reflect a combination of moderately rising feed costs, higher energy costs and a growing scarcity of inputs such as water and suitable land. However, the projected growth in global agricultural production will still be sufficient to outpace the increase in global population with output per person estimated at 0.5% p.a. Short term supply response to changing prices has been faster in the past in the developed countries with their highly capital and input intensive farming practices and capacity to adjust variable input usage rapidly. Nonetheless, agricultural production over the longer term is projected to continue to grow more rapidly in the developing countries and this will further increase their share of global agricultural output to 2022. China: Budgetary transfers for producers have been growing constantly since the end of the 1990s and are provided mostly through direct payments for grain producers, payments compensating increase in prices of agricultural inputs, in particular fertilisers and fuels, payments enhancing use of improved seeds and through subsidies for purchases of agricultural machinery. A positive feature of these transfers is that to an increasing extent they are provided through direct payments at a flat rate per unit of land which is effective in supporting farmers’ income and have limited influence on production and trade. Ethanol production is expected to increase 67% over the next ten years with biodiesel increasing even faster but from a smaller base. By 2022, biofuel production is projected to consume a significant amount of the total world production of sugar cane (28%), vegetable oils (15%) and coarse grains (12%). There is much more of interest in the report. Continue reading
Surge Of Investment In Farming Threatens £5trn Catastrophe
TOM BAWDEN FRIDAY 09 AUGUST 2013 The threat posed to agriculture by environmental hazards such as climate change and water scarcity is now so great that it could wipe as much as £5 trillion off the value of the world’s farm land, equipment and stock in any one year, a heavyweight study is warning. Agriculture in the UK and worldwide is under huge financial and physical stress. A surge of investment on the back of a boom in the global food commodities market meets an increasingly precarious physical environment for farming – creating a dangerous asset bubble that threatens to burst, according to the Oxford University research. As a result, the total value of the world’s estimated $14trn worth of “farmland assets and agricultural capital stock” could see trillions of dollars wiped off its value in a single year – with a one in 20 chance that the figure could hit $8trn (£5.2trn) the report said. “Potential losses at this scale would be catastrophic and no private insurer could cope. This is going to be an issue in the UK and globally,” said Ben Caldecott, programme director at the University of Oxford’s Smith School, adding that he was not able to quantify the risk for Britain. The research team based their risk estimates on traditional insurance methodologies and stressed that an $8trn devaluation would only result from an environmental catastrophe. “It could be a tipping point in biodiversity decline or habitat degradation making agricultural zones significantly less productive. Or, more likely, a combination of things coming together,” he said. But the chance of smaller, but still enormous, write-offs across the global agricultural industry in the coming years is high, as, for example, increasing cases of drought and flooding make land less productive and the influx of investors becomes an exodus. This would have far-ranging and unexpected consequences across the world, the report finds. “For example, the Arab Spring has demonstrated how water supply constraints in North Africa, coupled with extreme weather in Russia can affect food security and prices and contribute to governmental collapse and broader geopolitical tension,” the report said. The report doesn’t predict which parts of the world would be hit hardest by environmental hazards, how they might suffer or what it would mean for food supplies and future investment in farming. However, farming experts said any environmental misfortune big enough to prompt huge write-downs would clearly have a huge impact on food supplies, as well as future investment in farming. It could also hit people’s pensions because many of the investors that have piled into the agriculture sector in recent years have been pension funds. Farmland is increasingly bought as an investment, to be managed by another party, rather than by farmers. Financial institutions see it as an opportunity to improve their returns by switching their money from flagging stock markets into fast growing agricultural land and food production. But Mr Caldecott warns they could be in for a shock because many have based their decision on whether to buy into farming on financial models that largely ignores the dangers posed by environmental risk factors. “The amount of value potentially at risk globally is significant,” Mr Caldecott said, drawing an analogy between the financial crisis that is still hurting the global economy and the problems faced by agriculture. “The financial crisis has highlighted how the relationship between the owners of an asset and the actual physical asset can become disconnected in the chase for increasing financial returns,” Mr Caldecott said, referring to the packaging up of thousands of high-risk US subprime mortgages into bonds that resulted in huge banking losses that are widely regarded to have triggered the recession. “It also highlighted how investments which can be viewed as completely rational within one set of analytical and institutional structures can nevertheless be completely irrational outside those structures. The orthodoxy of not valuing environmental externalities is one such set structure that is coming under increasing pressure for change,” he added. The environmental risk factors include increasing weather variability and water scarcity, loss of biodiversity and ecosystem services, increased risk of agricultural diseases, viruses and pests and overfishing. The report notes, for example, that “in a warmer climate, there will be an increased risk of more intense, more frequent and longer lasting heatwaves… models project increased summer dryness and winter wetness in most parts of northern, middle and high latitudes.” Economic factors include greenhouse gas and land use regulations, which are designed to help the environment, but will reduce the value of farmland, at least in the short term. The growth in agricultural land values has been phenomenal, recording a four-fold increase in the past 10 years, and is still growing fast in most parts of the world since. In the UK, prime arable farmland – a benchmark – has more than tripled to £8,000 an acre in the past decade, according to Savills, recording a 6 per cent rise in the first half of 2013 alone. Continue reading
Are We Facing A Multi-Trillion Dollar Agri-Bubble?
Ben Caldecott warns that climate change and water scarcity could leave the agricultural sector with huge stranded assets By Ben Caldecott 09 Aug 2013 The boom in agricultural commodity prices has sparked significant interest in agriculture as an investment opportunity. After declining in real terms throughout the 1980s and 1990s, international food prices began rising in 2002 and this began the longest commodity boom since 1945. Low returns in equities and bonds, exacerbated by the financial crisis, have also encouraged investors to look to new areas in search of higher risk-adjusted returns. As new resources have flowed into agriculture, investment has risen in several emerging markets such as Brazil, Nigeria, China, India and parts of Europe. Even the more established agricultural powerhouses of North America, Russia and Australia are experiencing resurgent conditions. This has helped to push up global farmland asset values by more than 400 per cent since 2002. ‘Stranded assets’, where assets suffer from unanticipated or premature write-offs, downward revaluations or are converted to liabilities, can be caused by a range of environment-related risks. If and when environment-related risks materialise they can result in stranded assets across the agricultural supply chain. This could be at a sector or asset-specific level, such as with respect to processing facilities, or be felt across an entire commodity or region, potentially resulting in significant financial losses, degraded ecosystems and social upheaval. The University of Oxford’s Smith School of Enterprise and the Environment has published new research today that maps out these risks in agriculture and shows how they might affect agricultural assets. This is particularly relevant now given how much capital has been invested into the sector over a relatively short period of time. The risks investigated range from the spread of pests and diseases through to changing biofuel regulations. The research systematises the different risks that could affect assets across the agricultural supply chain and completes a high-level assessment of where and how risks might affect these assets. A high-level Value at Risk assessment (VaR is a measure of risk used in the capital markets and by financial regulators) has also been completed to give an indication of the magnitudes of capital exposed. As part of the VaR analysis we set out three scenarios to test to what extent declining natural capital could place the stock of invested capital in agriculture at risk globally: the first scenario represents current levels of natural capital, the next a medium level of loss of natural capital, and third a situation of extreme loss of natural capital. Each of these scenarios represents escalating levels of risk. Under the extreme loss of natural capital scenario, we found that the loss measured by the 0.5 per cent VaR could almost double from $6.3trn to $11.2trn. In other words, there is a 0.5 per cent chance of the annual loss being more than $11.2trn. The research also found that under the same scenario, but at the five per cent VaR, there is a 1/20 chance of the annual loss being greater than $8trn. At both the 0.5 per cent and five per cent VaR there is clearly significant potential for asset stranding. The 0.5 per cent VaR is of interest to the insurance sector as this corresponds to the Solvency II regulation, which requires insurers to determine their solvency capital requirements at this level of risk. The speed at which risks materialise is also important to understand, with fast-moving risks being harder to manage than slower-moving ones. For example, regulatory change is often fast moving, but, at the other end of the spectrum, physical risks such as climate change tend to manifest themselves more slowly. As well as the speed of change, understanding when risks are likely to materialise is essential. Risks can be classified along a continuum from the short term to the very long term. For example, biofuel regulation is part of current problem agendas facing many governments. At the other end of the spectrum, classic problems of the commons such as declining ecosystem services, water quality and land degradation are longer-term risks. Such problems often take a long time to manifest themselves, and are difficult to remedy once they have occurred. In addition to investigating the timing aspects of environment-related risks in agriculture, the research has evaluated how asset stranding might affect different types of agricultural asset to indicate sensitivity to each risk factor. The research has applied this evaluation to natural assets (e.g. farmland water), physical assets (e.g. animals, crops, on-farm infrastructure ), financial assets (e.g. farm loans, derivatives), human assets (e.g. know-how, management practices) and social assets (e.g. community networks) respectively. There are three main conclusions that are emphasised throughout the research from Oxford’s Smith School. First, environment-related risk factors are material and can strand assets throughout the agricultural supply chain. The amount of value potentially at risk globally is significant. Second, the potential challenge of stranded assets in agriculture is currently being exacerbated by an ongoing agricultural boom, which is feeding off high commodity prices and poor investment returns elsewhere in the economy to push farmland values to record highs in many markets. Third, understanding environment-related risks that can induce asset stranding can help investors, businesses and policy makers to develop effective risk management strategies, which can improve resilience and minimise value at risk. Businesses, investors and governments are increasingly facing complex risks, embedded in local markets, but with global consequences. Environment-related risks in agriculture are of this nature and can have knock-on effects elsewhere in society. For example, the Arab Spring has demonstrated how water supply constraints in North Africa, coupled with extreme weather in Russia, can affect food security and prices and contribute to governmental collapse and broader geopolitical tension. So while it may be impossible to completely prevent or accurately forecast how environment-related risks might materialise, much of recent history has reminded us that people do not make reasonable preparations for risks that have been foreseeable. Investors, businesses and policy makers need to take steps today to better manage environment-related risks across the agricultural supply chain. This will be key to ensuring the sector’s long-term environmental, as well as economic, sustainability. Ben Caldecott is a co-author of the report, Stranded Assets in Agriculture: Protecting Value from Environment-Related Risks, which can be downloaded here Continue reading
