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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
The Great Deceleration
The emerging-market slowdown is not the beginning of a bust. But it is a turning-point for the world economy Jul 27th 2013 WHEN a champion sprinter falls short of his best speeds, it takes a while to determine whether he is temporarily on poor form or has permanently lost his edge. The same is true with emerging markets, the world economy’s 21st-century sprinters. After a decade of surging growth, in which they led a global boom and then helped pull the world economy forwards in the face of the financial crisis, the emerging giants have slowed sharply. China will be lucky if it manages to hit its official target of 7.5% growth in 2013, a far cry from the double-digit rates that the country had come to expect in the 2000s. Growth in India (around 5%), Brazil and Russia (around 2.5%) is barely half what it was at the height of the boom. Collectively, emerging markets may (just) match last year’s pace of 5%. That sounds fast compared with the sluggish rich world, but it is the slowest emerging-economy expansion in a decade, barring 2009 when the rich world slumped. This marks the end of the dramatic first phase of the emerging-market era, which saw such economies jump from 38% of world output to 50% (measured at purchasing-power parity, or PPP) over the past decade. Over the next ten years emerging economies will still rise, but more gradually. The immediate effect of this deceleration should be manageable. But the longer-term impact on the world economy will be profound. Running out of puff In the past, periods of emerging-market boom have tended to be followed by busts (which helps explain why so few poor countries have become rich ones). A determined pessimist can find reasons to fret today, pointing in particular to the risks of an even more drastic deceleration in China or of a sudden global monetary tightening. But this time a broad emerging-market bust looks unlikely. China is in the midst of a precarious shift from investment-led growth to a more balanced, consumption-based model. Its investment surge has prompted plenty of bad debt. But the central government has the fiscal strength both to absorb losses and to stimulate the economy if necessary. That is a luxury few emerging economies have ever had. It makes disaster much less likely. And with rich-world economies still feeble, there is little chance that monetary conditions will suddenly tighten. Even if they did, most emerging economies have better defences than ever before, with flexible exchange rates, large stashes of foreign-exchange reserves and relatively less debt (much of it in domestic currency). That’s the good news. The bad news is that the days of record-breaking speed are over. China’s turbocharged investment and export model has run out of puff. Because its population is ageing fast, the country will have fewer workers, and because it is more prosperous, it has less room for catch-up growth. Ten years ago China’s per person GDP measured at PPP was 8% of America’s; now it is 18%. China will keep on catching up, but at a slower clip. That will hold back other emerging giants. Russia’s burst of speed was propelled by a surge in energy prices driven by Chinese growth. Brazil sprinted ahead with the help of a boom in commodities and domestic credit; its current combination of stubborn inflation and slow growth shows that its underlying economic speed limit is a lot lower than most people thought. The same is true of India, where near-double-digit annual rises in GDP led politicians, and many investors, to confuse the potential for rapid catch-up (a young, poor population) with its inevitability. India’s growth rate could be pushed up again, but not without radical reforms—and almost certainly not to the peak pace of the 2000s. Many laps ahead The Great Deceleration means that booming emerging economies will no longer make up for weakness in rich countries. Without a stronger recovery in America or Japan, or a revival in the euro area, the world economy is unlikely to grow much faster than today’s lacklustre pace of 3%. Things will feel rather sluggish. It will also become increasingly clear how unusual the past decade was (see article ). It was dominated by the scale of China’s boom, which was peculiarly disruptive not just as a result of the country’s immense size, but also because of its surge in exports, thirst for commodities and build-up of foreign-exchange reserves. In future, more balanced growth from a broader array of countries will cause smaller ripples around the world. After China and India, the ten next-biggest emerging economies, from Indonesia to Thailand, have a smaller combined population than China alone. Growth will be broader and less reliant on the BRICs (as Goldman Sachs dubbed Brazil, Russia, India and China). Corporate strategists who assumed that emerging economies were on a straight line of ultra-quick growth will need to revisit their spreadsheets; in some years a rejuvenated, shale-gas-fired America may be a sprightlier bet than some of the BRICs. But the biggest challenge will be for politicians in the emerging world, whose performance will propel—or retard—growth. So far China’s seem the most alert and committed to reform. Vladimir Putin’s Russia, by contrast, is a dozy resource-based kleptocracy whose customers are shifting to shale gas. India has demography on its side, but both it and Brazil need to recover their reformist zeal—or disappoint the rising middle classes who recently took to the streets in Delhi and São Paulo. There may also be a change in the economic mood music. In the 1990s “the Washington consensus” preached (sometimes arrogantly) economic liberalisation and democracy to the emerging world. For the past few years, with China surging, Wall Street crunched, Washington in gridlock and the euro zone committing suicide, the old liberal verities have been questioned: state capitalism and authoritarian modernisation have been in vogue. “The Beijing consensus” provided an excuse for both autocrats and democrats to abandon liberal reforms. The need for growth may revive interest in them, and the West may even recover a little of its self-confidence. From the print edition: Leaders Continue reading
Farm Bill 2013: Is This Big Agriculture’s Last Gasp?
Sean McElwee in Politics Farm Bill 2013: Is This Big Agriculture’s Last Gasp? The farm bill’s original failure to pass Congress ( it has since been approved by the House without food-stamp aid ) has largely been viewed in light of immigration reform and congressional dysfunction, but it also underlies another specter: the weakening farm lobby. Since our nation’s founding, farmers (originally slave-owners) have had an unequal voice. The Senate, for instance, is made up of two representatives from every state, no matter how large or small. The Electoral College was designed to give small states a voice, and with the development of primaries, farm states like Iowa have become more and more important. Even Republicans, the so-called party against government waste, have traditionally been afraid to touch farm subsidies (just food stamps!). Since Reagan, the Republican Party has been the party of wealth. Reagan happily doled out tax cuts along with spending cuts, but suspiciously, the tax cuts only went to rich people and the spending cuts only hurt poor people. Similarly, Bush’s tax cuts for the rich turned a projected $5 trillion surplus to a $5 trillion deficit, which Republicans like Paul Ryan argue should be paid for by, you guessed it: cutting Medicaid. So here’s a quiz. If the farm bill contains huge subsidies for rich farmers (like Bon Jovi) and food stamps to protect poor people, which half will the Republicans cut? Answer: One of the most effective anti-poverty programs in history. Seriously. Now that I’m done trolling the PolicyMic conservatives, let’s address the real meat of the story here — the farm lobby. The failure of the farm bill indicates that the great hydra agriculture lobby may have only a few ugly heads left to rear. What’s the problem with the farm lobby? Don’t farmers need representation too? Don’t farm subsidies help keep the food market stable? Yes and yes. But, American farm policy may be one of the most incoherently developed and rigidly path-dependent systems in the world. P.J. O’Rourke once noted, “Farm policy can be explained. What it can’t be is believed.” Many of us don’t remember when farming was a killer lobby, able to fight off any representative who questioned the billions funnelled to them. In a supposedly “free-market” country, our ag policy is run like Russia during central planning. Huge tariffs protect the American sugar manufactures from Brazilian competition, to the tune of $3.5 billion a year. That also drives up the demand for high-fructose corn syrup, giving us something to do with the corn we massively overproduce . The big story for the farm bill is that the U.S. government is trimming direct payments and replacing them with an expanded crop insurance program. Crop insurance protects farmers from dramatic drops in the price of crops, but the premiums rarely add up to the payouts. Last year, the crop insurance program paid out $17 billion, three-quarters of which was paid for by Uncle Sam. As any economist knows, such programs (private gain with public risk) encourage moral hazard, and the result is that farmers have taken more risk “by farming on flood plains or steep hills.” The crop insurance program overwhelmingly helps wealthier farmers, but that fact that the lobby couldn’t keep direct payments indicates a level of atrophy. There are other indications of the weakening farm lobby. For instance, last year, the U.S. was hit by its worst drought in 50 years, which was likely exacerbated by climate change . Farmers’ groups sought a bill that would provide relief, but while the bill made it out of committee, it was never brought to a vote on the House floor . Of course, the grand narrative of the bill (i.e. that the Republicans in the House are insane) is also accurate. They’re clearly crazy-level congresso-terrorists, something data showed us long ago and that other conservatives have been hammering them for. The chaos surrounding the farm bill is certainly a reminder that this is the most polarized Congress in a long time , and a harbinger of more inaction (immigration, student loans, tax reform). But it’s also a reminder that while we consume more food, few, if any of us remain attached to nature and very few of us farm. It’s an indication that what used to be a broadly bipartisan issue has now become an area for savage political fighting . That will have increasing political implications in the years to come. Picture Credit: ThinkProgress Continue reading
