Agriculture's new 'golden age'. Food is the new oil. This is the perspective from Canada which is a deep freezer. Now picture a country stretching north-south with 200 days of sun lots of fresh water and a plethora of technologies and tradition in agribusiness...
Agriculture's new 'golden age'.
ADRIAN WYLD/THE CANADIAN PRESS
After decades when every year seemed to be a struggle for the agricultural sector, farmers have watched with amazement the past year's skyrocketing in global prices for wheat (up 287 per cent), corn (up 149 per cent), coffee, peas, lentils, soybeans, rice, canola, dairy products and other cropland commodities.
Canadian farmers are poised to reap a bountiful reward for their crops this year in what Robert Moskow, agricultural analyst at Credit Suisse SA, describes as a new "golden age" of agriculture. The hard red spring wheat in which Canadian Prairie farmers specialize is a premium variety, now commanding about $18 (U.S.) a bushel, up from a range of $3 to $6 until two years ago. Durum wheat, another Prairie mainstay, used in pasta, is also commanding record prices.
The U.N. Food and Agriculture Organization (FAO) global price index leapt 40 per cent in 2007. Ottawa now estimates that average Canadian farm income will jump 16 per cent this year, and gross crop receipts will eclipse the 2006 level by 40 per cent.
The main drivers of the spike in prices, similar to the sudden buoyancy in dot-com stocks in the late 1990s, are North American government policies encouraging biofuel and biodiesel production, and rising protein demand among increasingly affluent consumers in China, India and other dynamic developing world economies. At roughly 300 million people, India's middle class is equal in size to the entire U.S. population.
Compounding matters are lengthy droughts in major wheat-producing regions, notably Australia and Ukraine. As a result, average global wheat inventories have fallen to a 30-year low, and U.S. stockpiles have dropped to 1948 levels.
The U.S. and Canada have kept their export gates open. But China, Kazakhstan and other nations have imposed export controls to protect domestic inventories, further constricting the global supply.
As if to punchline the new sexy status of farm commodities, Richard Branson has unveiled a new fuel for his Virgin Atlantic jets. The experimental fuel, used last month in the first commercial jetliner flight powered by biofuel, is an 80/20 blend of regular jet fuel and coconut oil from the babassu palm of Brazil.
Apart from farmers in the North American heartland, though, there's a scarcity of folks who are pleased about the startling food-price run-up. Earlier this month, the FAO warned that soaring food prices are a "crisis" for three dozen nations, mainly in South Asia, Africa and Central America. Riots over food shortages and sharp price hikes already have hit Mexico and Senegal.
Last month, 45 U.S. food-processing groups, representing firms whose raw material costs have gone through the roof, demanded that the U.S. agriculture secretary release farmers from their contractual obligation to maintain a portion of their land for wildlife preservation. The U.S. baking industry's trade association, representing firms such as Kellogg Co., Sara Lee Corp. and Interstate Bakeries Corp., plans a march on Washington by the firms' employees later this month to press for a reduction in U.S. wheat exports.
U.S. President George W. Bush got the message. "If you look at what's happened in corn out there, you're beginning to see the food issue and the energy issue collide," Bush said at a press conference last Thursday. "The best way to deal with [renewable fuels] is to focus on research and development that will enable us to use other raw materials [than corn] to produce ethanol."
Peter Brabeck, CEO of Nestlé SA, the world's largest food company, foresees a struggle between the food and biofuel industries over arable land as fresh water supplies diminish.
"We will not find sufficient water to produce all the crops," Brabeck said while reporting his firm's financial results last week. "There will be a fierce fight for arable land."
Arable-land acreage is indeed shrinking, even factoring out its conversion to production of fuel feedstock. Several million hectares of farmland disappear each year, as growing economies convert it into residential subdivisions and industrial parks. Declining fresh-water supplies further diminish the amount of land available for farming.
Farmers, for their part, have endured rising fuel, fertilizer and equipment costs. Some farmers, anxious to increase crop yields with more efficient equipment, are finding showrooms bare of certain high-demand tractors, harvesters and other equipment, for which waiting lists have lengthened. While still coming out further ahead than in previous years, farmers' own rising costs have cut into their bonanza. And livestock producers have been hit with the same price shock as food processors, enduring steep increases in corn and other animal feed.
Most food economists are convinced that higher prices are here to stay, although probably not at the current nosebleed levels. That would be a relief to, among others, the $30 billion U.S. pizza industry, which has been hit with unprecedented hikes in flour and cheese costs. While packaged-food companies are caught in a squeeze, unable to pass along higher costs to shoppers due to recessionary trends in the U.S., some 5 per cent of China's official inflation rate of about 6 per cent is attributed to spiralling food prices.
Some of the price escalation is due to speculation, a byproduct of the global credit crisis, in which investors have sought a safe haven in agricultural commodities. Eugene Kub, a commodity market analyst at DTN agricultural consultants in Omaha, Neb., gave financial news channel CNBC a sense last week of the significant role of speculators in the current overheated market. Since the latest harvest, Kub said, "Speculators are coming in and there was a large inflow of money, particularly in January. That's just sparked this incredible rally."
Speculation, as we learned from the dot-com bust, and more recently the collapse in U.S. home prices, tends to be short-lived. Farmers in major grain-producing regions in Europe and Australasia obviously are hoping for an end to drought conditions.
Europe's venerable Common Agricultural Policy (CAP), which exists to prop up farm receipts, has long encouraged farmers to take cropland out of production. Confronted with the prospect of food inflation, Brussels will likely pressure EU member nations to revisit the notorious CAP, long vilified by foreign-aid advocates as a protectionist device that denies developing world farmers access to the lucrative market of 350 million Europeans.
Corn-based ethanol already has proved itself a dubious alternative to traditional fuels – more energy is required to produce it than it expends, prodding researchers to work on corn alternatives such as switchgrass.
Even farmers, the principal beneficiaries of high food prices that will largely insulate them from recessionary trends elsewhere in the economy this year, haven't succumbed to potentially ill-founded euphoria. Sudden drought, unseasonal rainfall and insect infestations are among the disasters that routinely destroy what seemed a promising crop. They're not inclined to let market volatility go to their heads.
"It's gone up so fast," Nebraska corn and soybean farmer Brad Beckworth told the Wall Street Journal, which last month reported that a Kansas corn farmer celebrated his good fortune by splurging on his first new washing machine in 30 years. "What's to say it won't go down fast, too?"
TAKING STALK
The amount the price of various agricultural crops has risen since Jan. 1, 2006:
Wheat, +287 per cent.
Corn, +149 per cent.
Coffee, +139 per cent.
Soybeans, +129 per cent.
Rice, +60 per cent.
The amount the share price of several key agricultural firms has risen in the past year:
Mosaic Co., +319 per cent.
Potash Corp. of Saskatchewan Inc., +140 per cent.
Monsanto Co., +105 per cent.
Deere & Co., +50 per cent.
Agrium Inc., +28 per cent.
Sources: Natixis Bank, France; Google Finance
SOWING SUCCESS
• The trend: An unprecedented price boom in agricultural commodities is raising production costs for everyone from cereal marketers to pizza parlours.
• Causes: Drought, speculation, and rising demand from China, India and other rapidly growing economies.
• Impact: Canadian farm receipts are soaring, but bread, milk and other staples are becoming even less affordable in the poorest developing nations.
With policies promoting biofuel and biodiesel, and exploding demand from developing world consumers, farmers are reaping a rare bounty
Mar 02, 2008 04:30 AM
David Olive
Business Columnist
It's becoming a cliché in the world's commodity trading pits: Food is the new oil. |
