The global food system has long been susceptible to price volatility. This susceptibility can be triggered by multiple factors including; extreme weather events, production outcomes, dependence on emerging export markets, reliance on imported instead of domestically grown product and financial contagion such as exchange rate volatility, monetary policy decisions, shifting cost of capital and commodity arbitrage.
The emergence of commodity derivatives as a portfolio hedge has arisen due to the seemingly uncorrelated returns against other asset classes. Whilst the impact on price volatility of commodity derivatives is yet to be agreed on by the market, anecdotal evidence indicates amplified volatility from such ‘commodity financialisation’. Regardless of the underlying causes, price volatility isn’t going away and should be regarded as a natural component of the globalisation and the interdependence of markets.
A major cost of this extreme price volatility is disruption to financial planning at the farm gate and of course perceived underlying property value. However, this should only be of concern to those who take a short term view on investment or who are highly leveraged and may be forced to sell if their loan-to-value ratio exceeds acceptable thresholds. The figure above shows the volatility in world dairy prices over the past 22 years. Notwithstanding some extreme fluctuations, prices are steadily trending upward. There is a direct relationship between commodity demand and underlying property value. Those who adopt a short-term or ‘lemming-like’ approach to dairy sector property investment run a high risk of reduced (or even negative) return on investment – especially those who take on excess debt. Those investors who adopt a long-term or counter-cyclical approach and make their investments near or below the long-term trend line, will enjoy superior returns.
Ina recent commentary, I traversed global population trends and forecasts. The planet’s population clicked past 7 billion in October 2011 and is forecast to increase more than 40% by 2100 to in excess of 10 billion. That additional 3 billion mouths will inevitably cause significant pressure on available global food production, agri-sector investment and commodity prices. It should be of little surprise then that a major scramble for control of the global food supply value-chain, by both corporate oligopolies and sovereign states, is already well underway.
In its report ‘World agriculture: towards 2015/2030’ the United Nations Food & Agriculture Organisation (FAO) highlights some of the big issues confronting the sector. FAO estimates that over the coming 30 years, developing countries will need an additional 120 million ha just for crops. Although analysis of soils, terrains and climates suggests that an extra 2.8 billion hectares may be suitable for rain-fed production, only a fraction of this can be realistically brought into production – as a high proportion is required to maintain forest cover or is logistically inaccessible. In the Middle East and North Africa, 87% of suitable land was already being actively farmed in the year 2000 and in South Asia the figure was 94%. Furthermore, land degradation in these localities threatens future productivity. Water and irrigation are crucial to global food supplies and will be a major constraining factor. South Asia is expected to be using some 40% of its renewable fresh water resources by 2030 – whilst the Middle East and North Africa are expected to be using nearer to 60% by that date.
In addition to production related price pressures, rising incomes are changing traditional diets. For example, between the mid-1960s and 2000, per capita consumption of dairy products rose by 60% (meat rose by 150%). By 2030, FAO predicts that consumption of livestock related products could rise by a further 44%. In developing countries, demand will grow faster than production – and this will necessitate continued importation.
You can review the latest dairy sector and farm property statistics by downloading our Autumn AGRI-RECAP release.
