The Land Commodities Global Agriculture & Farmland Investment Report 2009

A Mid-Term Outlook

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Executive Summary

Chapter 1 An Introduction to the Relationship between Agricultural Commodity Prices, Cropland Availability and Farmland Values

Chapter 2 Agricultural Productivity and Commodity Prices in a Historical Context

Agriculture in a Historical Context

The Recent Commodity Boom – A Cyclical Normality or a Fundamental Shift?

Chapter 3 The Resource Scarcity Debate – Is the Planet’s Carrying Capacity at or Near a Tipping Point?

The Malthusian Debate

The Current State of the Debate

Technological Innovation and its Implications with Respect to Farmland Values in the Foreseeable Future

Chapter 4 Commodity Price Forecasts and the Implications for Farmland Values

The Challenge of Predicting Future Commodity Prices

Commodity Price Forecasts According to the United Nations, OECD and World Bank

Chapter 5 The Limiting Effects of Diminishing Returns and the Implications for Global Food Production

Chapter 6 Population, Economic Growth and Other Demand Drivers

Increases in Food Demand Due to Population and Economic Growth

The China Factor

The Importance of Livestock, Meat and Other Animal Products

Shifts in Dietary Preference and the Effect on Food Demand

Forecasts of Future Demand for Meat and Animal Products

Trends in Urbanisation and the Effect on Food Demand

Food Wastage Trends and the Implications for Food Demand

Increased Market Volatility and Low Food Stocks and the Implications for Commodity Prices

The Effects of Rising Demand on Policy Decisions and the Implications for Agricultural Commodity Prices

Chapter 7 Constraints to Current Supply and Limitations to Further Increases in Agricultural Productivity

Impacts of Climate Change and Human Induced Disasters

Impacts of Water Scarcity

Impacts of Drought

Impacts of Species Infestations

Loss of Cropland and Reductions in Agricultural Productivity Due to Land Degradation

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Loss of Cropland Area Due to Urban Development

Limitations to Future Cropland Expansion and the Implications for Future Increases in Production Capacity

Ecological Constraints to Cropland Expansion

Global Carrying Capacity and the Implications for Cropland Expansion

Socio-political Constraints to Cropland Expansion

The Limitations of Neo-colonialism and the Implications for Future Increases in Production Capacity

Forecasts of Future Expansion of Total Global Agricultural Land

Chapter 8 Price Elasticity of Demand for Food and the Implications for Future Agricultural Commodity Prices and Farmland Values

Chapter 9 Fossil Fuel Shortages and the Potential Consequences for the Agricultural Economy

Trends in Biofuel Consumption and the Increasing Correlation between Energy and Food

Peak Oil and the Implications for Agricultural Commodity Prices and Farmland Values

Supply Side Implications of Peak Oil and Gas

Chapter 10 Farmland as an Asset Class

Investor Appetite for Farmland under Current Market Conditions

A Note about the Perils of Assumptions Based on Historical Data

Farmland as a Portfolio Diversification Tool

Farmland as an Inflation Hedge

High Level of Capital Security and Low Level of Risk

Farmland’s Superior Risk- Adjusted Returns

A General Look at Farmland’s Performance against Other Asset Classes

Investment Appeal in Times of Market Turmoil

Farmland as a Real Estate Investment

Fiscal Advantages of Farmland Investment

Chapter 11 Investing In Agriculture – Guidance for Investors

A Comparison of Agricultural Investment Strategies

A Discussion about Portfolio Weightings in Farmland Investment

Things to Consider When Choosing a Direct Farmland Investment

Risk Considerations in Direct Farmland Investment

Current Market Conditions and the Implications for Investment Timing

Liquidity and Investment Horizons in Farmland Investment

Choice of Geographic Location - Factors to Consider

Chapter 12 Conclusion

Executive Summary

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Population growth, resource scarcity and climate change are the three defining economic trends of our modern times. Individually, each constitutes a major issue, but they are all the more potent by virtue of being inextricably linked. Over time, their paths will increasingly converge and their effects on global commerce will become ever more pronounced. Any sector positioned at the nexus of their convergence will offer investors the best mid-term opportunity and the potential for stellar returns over the long-term.

Agriculture is one such sector. With more mouths to feed, increasingly affluent populations in developing countries demanding a higher protein, more resource intensive diet and the emergence of biofuels, world demand for agricultural commodities is soaring. Yet on the supply side, keeping up with rising demand is becoming increasingly challenging due to climate change, fundamental limits to further growth and a plethora of pressures on existing production.

Per capita production of grain has been in decline since the mid 80’s and per capita availability of agricultural land since well before that.1 In 2008 this state of affairs culminated in the lowest global grain stocks for over 40 years and the most pronounced increase in agricultural commodity prices on record.2 Although the second half of 2008 saw a downward correction in grain prices, they have since resumed their upward trend despite the worst global recession in two generations. World food production sits at the cusp of a new era characterised by simultaneously (and in many cases exponentially) increasing pressure from both supply and demand forces.

Every day the total population of planet earth increases by over 200,000 people.3 There are 1,402 million hectares of arable land, 138 million hectares of perennial croplands and 3,433 million hectares of pasture lands feeding the current population of 6.7 billion (2009).4,5 The total of 4,973 million hectares of agricultural land amounts to an average of 0.74 hectares per person. In addition to industrial crops like cotton and rubber, each of these 0.74 ha units must produce almost all the food each person consumes.

Based on these figures, and assuming the same conditions and levels of agricultural productivity, an additional 148,460 hectares of land are required daily to feed the 200,000 new arrivals. To put this into perspective, 148,460 hectares (1,485 km2) is an area roughly the size of Greater London (1,580 km2) or twice the size of New York City (789 km2), Tokyo (617 km2) and Singapore (701 km2).6 Whilst this is a much simplified calculation, it clearly demonstrates the extreme demand pressure being placed upon the world’s agricultural land resources. In reality, the world is not adding anything like this amount of agricultural land on a yearly, let alone daily basis. Indeed, for the last three consecutive years the record shows that total global agricultural land area (and the arable subcomponent) has actually diminished.7

These startling figures dramatically illustrate the challenge of feeding the world’s exponentially growing population with an arithmetically growing farming base. The consequent, increasing scarcity of farmland has resulted in rapidly rising farmland prices across almost all regions of the world. Farmland values are driven by the relationship between demand on the one side, driven primarily by the profitability of agricultural enterprise, and supply of productive farmland on the other. More specifically, rising demand for agricultural commodities will exert demand side pressure on farmland values, whilst the restrictions on cropland expansion will exert supply side pressure.

The interrelationships between supply and demand for farmland are complex. Demand for land increases when commodity prices rise. In response, supply increases if further land is brought under cultivation. However, there are many other factors at play. For example, efficiency increases or yield enhancing technologies might mean that less land is required to produce the greater supply of commodities required in the future. On the other hand, losses in productivity from climate change and land degradation could have the opposite effect.

The core objective of this document is to assess prevailing and emerging trends in supply and demand in the agricultural sector. The intention is to provide the reader with a clear understanding of the interrelationships between these forces and what this might mean for the investment prospects of farmland as an asset class in the mid to long-term.

It is important to recognise that, to be successful, farmland investment should be considered a long-term strategy. Whilst an understanding of short-term trends is important for identifying purchasing opportunities, this document attempts to cut through the prevailing market noise of fluctuating commodity prices (which are dictated primarily by short-term supply and demand relationships). The objective is to gain a clear understanding of the longer term trends required to assess the best opportunities for reliable, long-term investment performance.

Current economic conditions in terms of credit availability and market sentiment have depressed asset prices in an almost arbitrary manner across the board. This is creating unique buying opportunities for farmland in many key markets. At the same time, the long-term fundamentals of rising population and increasingly strained food resources will weigh in favour of farmland values in the long-term. As this document will demonstrate, there is substantial evidence to support the view that under current conditions both demand and supply factors will exert strong upward pressure on farmland values in the foreseeable future (meaning at least the next 10 to 20 years).

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The document begins with a brief look at the dynamics of supply and demand for farmland and how this affects farmland values. It highlights the fact that both farmland incomes and values are rising in step with agricultural commodity prices despite rising input costs. Chapter 1 also looks at the fundamental principles governing patterns in cropland expansion. It describes the observed tendency of farming economies to exploit the most productive land first, meaning that in many farming regions, only marginal land remains undeveloped.

Chapters 2 and 3 look at agricultural productivity and commodity prices in a historical context. The impression is of an agricultural economy which has displayed a long-term cyclical trend throughout recent history. It has alternated between periods of supply tension characterised by rising commodity prices and periods of supply expansion characterised by falling commodity prices.

Chapter 4 discusses the implications for commodity prices in the foreseeable future. The recent surge in commodity prices was unique in many respects. Despite increased speculation in commodities, this chapter demonstrates how the unprecedented rises were supported by real fundamentals of rapidly rising demand and against a backdrop of comparatively fixed supply, leading to the historic lows seen in global food inventories in 2008.

A comparison of a number of forecasts illustrates the general consensus amongst the majority of industry experts that commodity prices will continue to rise in the mid-term and that last year’s fall in the price of some commodities is a temporary dip in the long-term rising trend. Indeed, a historical look at the commodity super cycle indicates that the world is at the beginning of a supply tension phase. Chapter 5 looks in more detail at the fundamental indicators supporting this view such as diminishing returns from the application of pesticides and fertilisers resulting in decreasing per capita grain production (set against a backdrop of decreasing per capita availability of cropland).

Chapters 6 and 7 analyse in more detail the fundamental tug of war between growing demand on the one hand and constraints to supply growth on the other. Agriculture sits at the centre of this struggle. The greater the tension, the higher agricultural commodity prices, farm incomes and farmland values will rise. Per capita income continues to grow, especially in developing countries. As incomes rise, people typically demand more meat in their diet. Because it requires 3-10 kg of grain- based livestock feed to produce each kg of meat, there is a real demand multiplier as incomes rise.8

On the supply side, additional land capable of growing food economically and sustainably is limited. As most of the most productive and economically viable land is already being used, expanding the supply of irrigated land is difficult and expensive. Diminishing global water supplies and the loss of land due to rising urbanisation, land degradation

and desertification are further reducing the supply of land suitable for crop production.

Extreme weather events caused by climate change are already having a noticeable effect on food production. That is what is happening now. As for the future, whilst they may disagree on detail, the various climate forecasting models are unanimous with respect to global warming’s increasingly negative impacts on global food production. In early 2009 the United Nations summed up the potential combined effects as follows:

“Land degradation and conversion of cropland for non-food production including biofuels, cotton and others are major threats that could reduce the available cropland by 8–20% by 2050. Species infestations of pathogens, weeds and insects, combined with water scarcity from overuse and the melting of the Himalayan glaciers, soil erosion and depletion as well as climate change may reduce current yields by at least an additional 5–25% by 2050.”9

This represents a total potential drop in agricultural production of 45% by 2050. Whilst this is happening, global population is forecast to be roughly 50% over today’s levels by 2050.10 When combined with increases in global GDP, this will result in a doubling of global food demand during that period.11 Whether or not a 45% drop in agricultural production is accurate, there seems little doubt that the effects this number quantifies will at least severely hamper efforts to meet the growing demand for food.

A future of such fundamentally discordant market conditions is hard to comprehend, especially when considered in the context of an already overstretched food supply. At the present time, demand growth is already outstripping supply growth by a factor of almost two to one. Demand for agricultural commodities is currently rising at 2.5% annually whilst supply is rising by less than 1.5%.12

Chapter 8 goes on to highlight how even the existing disconnect between supply and demand could be substantially surpassed in the not too distant future. It discusses the potential for high oil prices to produce a step change in demand acceleration as a result of the use of grain-based feedstocks, such as wheat and maize (corn), for the production of transport fuels.

The use of grains for the production of biofuels has increased by over 200% since the year 2000.13 Maize can be profitably transformed into ethanol at conventional oil prices in excess of $50 per barrel.14 Thus, should oil prices remain high, or continue to rise further in the foreseeable future, demand creation from the biofuels sector has the potential to outstrip food demand, even in the short to mid-term. The implications for farmland values are clearly apparent.

Looked at together, these convergent trends lead to the inescapable conclusion that the upward pressure on agricultural commodity prices will not be letting up any

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time soon. Chapter 9 looks at the extent to which this may result in rising agricultural commodity prices in the coming years. Food demand is by its very nature price inelastic. After all, no matter what the price of food is, we all need to eat it. Adjusted for inflation, current agricultural commodities prices remain well below previous highs. Despite the appearance of rising prices, food expenditures as a percentage of total consumer spending remain near all-time lows. These factors imply significant scope for further increases in agricultural commodity prices, and with them, farmland values.

For example, when the non-food component of food costs (e.g. processing, packaging etc) in the United States is taken into account, a 500% increase in food commodity prices would only result in a doubling of US consumer spending on food (on a percentage of total expenditure basis), taking food expenditures to 20% of total consumer spending from its current level of 10%.15

Chapter 10 discusses farmland’s attributes as an asset class. Farmland is a stable income producing asset which has, throughout history, been the most basic repository of wealth and value through good times and bad. A large number of studies across a range of markets and timescales have demonstrated that farmland has consistently produced superior total and risk adjusted returns compared to other asset classes.

The asset class also has a number of features that make it particularly appealing under current market conditions. Farmland returns have a low or negative correlation with traditional asset classes such as stocks and bonds and only a modest positive correlation with commercial real estate. This makes farmland an attractive diversification tool that can help reduce the impact of broader market volatility. Additionally, farmland values generally increase faster than the rate of inflation, making farmland an effective inflation hedge and capital preservation vehicle. This may be especially appealing to investors concerned about inflationary government policies of low interest rates and quantitative easing. These characteristics, combined with underlying supply and demand fundamentals, have resulted in farmland in many parts of the world outperforming almost all other asset types during the recent financial crisis.

The document rounds up in Chapter 11 with a discussion about farmland investment practice. It compares direct farmland investment with other mechanisms for investing in the agricultural sector. Recent events have highlighted some of the risks and inefficiencies of the current market paradigm. Investors are concerned about a lack of transparency in accounting standards and corporate fraud making it difficult to properly assess the true value of assets. They have become disillusioned with the institutionalised greed of the financial world where managers in complex and opaque investment structures charge extortionate fees when the markets perform well

but leave clients with the losses when they underperform. In contrast, the simplicity of direct freehold ownership of ‘renewable resource real estate’ holds a refreshing appeal for a growing number of investors.

There is also some discussion about appropriate portfolio weightings. Surprisingly, despite being on the rise, farmland has yet to generate a level of interest among asset managers commensurate with its importance in the economy or its historically proven investment potential. Given its superior performance and portfolio optimisation potential, the lack of recognition can only be attributed to a deficiency of knowledge and expertise on the part of the mainstream asset management community. This of course is a positive thing for investors with the foresight to get into a sector still dominated by non-speculative agricultural buyers, because speculative pressure on prices remains lower than in many other asset classes.

Finally, the document finishes with the conclusion that this point in the agricultural business cycle represents a textbook investment opportunity both from the perspective of timing and fundamentals. Looking back through history at the agriculture super cycle, each early period of productivity growth was based upon cropland expansion. The last bout of supply growth, however, stemmed primarily from the Green Revolution. This was so successful at increasing farm yields that per capita grain production actually increased (despite rapidly rising population) for some years prior to recommencing its decline in the mid 80’s. As a result, this period was accompanied by a prolonged downward trend in the real prices of food commodities.

Now humankind finds itself at the bottom of the hill again. The next cyclical growth phase won’t come from cropland expansion. The Green Revolution finds itself staring down the cul-de-sac of diminishing returns. How will we increase production in step with a doubling of demand by 2050 in the face of numerous supply pressures? This is an interesting and perhaps even scary question. What is certainly the case is that humankind will be paying a lot more for food whilst we figure out the answer.

(Note: For readers seeking a more in depth analysis than this

document is intended to provide, over 200 data sources are

referenced throughout its 12 chapters. All of these are detailed

in the bibliography at the back of the document (with internet

addresses wherever possible). In addition, the Land Commodities

website, www.landcommodities.com/farmlandresearch details a

number of useful research resources.)

CHAPTER 1

An Introduction to the Relationship between Agricultural Commodity Prices, Cropland Availability and Farmland Values

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As with all assets - from commodities to real estate - farmland values are dictated by the relationship between supply (measured by the per capita availability of farmland) and demand (for the limited supply available). The recent global financial crisis has shown that other market factors such as the availability of credit (which influences demand by enabling it) and negative buyer sentiment can also have an effect in the short-term.

Over the long-term however, supply and demand fundamentals will dictate trends. In the words of legendary long-term value investor, Warren Buffett: “In the short-term, the market is a voting machine, in the long-term the market is a weighing machine”.16 Buffet actually made his first ever investment in farmland. With savings from his two paper rounds, he spent $1,200 on 40 acres of Nebraska farmland, which he leased to a tenant farmer.17

On the demand side of the equation, farmland values are driven primarily by the profitability of agricultural enterprise. The greater the income yield a farmer is able to earn from farming activities, the higher the price they will be prepared to pay for the land upon which that yield is derived. This relationship applies for both farmer landowners and investor landowners. Tenant farmers will be prepared to pay higher rents on land if the financial incentive to do so exists and investors will be prepared to pay a higher price for land as yield ratios improve.

36% Rise in UK farm income between 2007 and 2008.

The profitability of an agricultural enterprise is dictated by the relationship between input prices such as fertilizers, pesticides, herbicides and fuel (all of which influence yield per unit of land area) and the output value of the crops these inputs produce. Thus, agricultural commodity prices play a crucial role in dictating land value. It is this

relationship between agricultural commodities and farmland values which goes a long way to explaining the marked gains in farmland prices in recent years, particularly during 2007 and 2008 when commodities were experiencing unprecedented highs.

Figure 1.1 which compares farmland prices in the United Kingdom with the global price of a mixed basket of agricultural commodities illustrates the relationship between the two. Over the last 5 years farmland values have risen in line with agricultural commodity prices. As a result of the rise in food commodity prices, per capita farm incomes rose by 36% between 2007 and 2008 (despite rising input prices) thus supporting higher farmland prices.18

Figure 1.1: Trends in UK farmland and food prices from Q3 2004 to Q2 2009

2004

2005

2006

2007

2008

2009

110%

90%

140%

170%

200%

UK Farmland Index

Global Food Price Index

Source: Knight Frank Farmland Index, 2009;

International Monetary Fund, 2009

On the supply side, if there is a high level of availability of farmland in a particular market, then prices will likely be lower compared to a market with more limited availability. In any given market, the most productive land is taken into production first as this land provides agricultural enterprises with a higher level of income. For two different regions in which land characteristics are broadly similar, the availability of farmland explains much of the variation in farmland prices.

“Land is scarce and will become scarcer as the world has to double food output

to satisfy increased demand by 2050. With limited land and water resources,

this will automatically lead to increased valuations of productive land.”

Joachim von Braun, Director General at the International Food Policy Research Institute, 2009

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As an example, the agricultural land-supply curve for Canada shown in Figure 1.2 demonstrates this effect. Despite a large availability of land (6.5 million km2) only a small proportion is able to produce premium yields (due to factors affecting productivity, such as sunlight, temperature, water availability and soil conditions). Competition for this land will be highest and it will be the most valuable, whilst less productive land will be less valuable.

As the most productive land is developed first, in a mature farming region, land currently under cultivation generally commands higher prices than land yet to be brought into production. This land use pattern was first formalised in 1817 by the great theoretical economist David Ricardo whose “theory of rent” stated that: “Those lands favoured by location or other attributes command higher prices [rents] and are quickly appropriated and exploited.”19

In order for land at the less productive extremity of the land-supply curve to be brought into production, commodity prices and agricultural enterprise profits would need to be high enough to justify the Greenfield development costs whilst taking into account the diminished returns from lower productivity. As shown in Figure 1.2, average yield rates for the first million square kilometres of land are over 50% higher than those of the second million. At the right hand extremity, yields are extremely low. In reality, the situation in Canada is that most of the viable land has already been exploited. The majority of the remaining land is either protected ecosystems such as natural parks or forests or unable to produce viable yields at prevailing commodity prices (due to being too cold, too dry etc).

Figure 1.2: Land productivity and supply curve for Canada

Source: Integrated Model to Assess the Global Environment (IMAGE),

Netherlands Environmental Assessment Agency, 2006; Food and

Agriculture Organisation, 2009

0

0.0

0.1

0.2

0.3

0.4

Yield

Land area (million km2)

Agricultural Land use in 2007

2 4 6 8

Pric

e (1

,000

yen

/are

)

Re

nt

(ye

n/a

re)

1955 1960 1965 1970 1975 1980 1985 1990 1995 2000

500

600

700

800

900

1000

600

800

1000

1200

1400

1600

1800

2000

Price Rent

Figure 1.3: Trends in land prices and rental rates in Japan between 1955 and 2000

Source: Tokyo University of Agriculture and Technology and Newcastle University (UK), Published in Agricultural Economics, 2008

CHAPTER 1

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David Ricardo’s definition of rent applies equally to the profits that are derived from farming activity by a farmer landowner or the sum paid by a tenant farmer for the use of the land (as these are paid to the landowner by the tenant from the surplus cash flow, or profit, remaining after production). This means that there is also proportionality between rental rates paid by tenant farmers and land values (see Figure 1.3 which shows the long-term relationship between rental rates and land prices in Japan).

Figure 1.3 also demonstrates the fact that land values can trend away from rental rates in densely populated regions such as Japan. This is because farmland prices can also experience upward price pressure from development speculators thus driving prices beyond pure agricultural value. In the UK for example, the average value of an acre of arable land in the South East of England in 2008 was £8,214, whereas the average value of an acre of residential building land (i.e. land with authorisation for residential development) was £3,300,000.20,21 This price differential can encourage the market to pay prices over and above the level dictated by agricultural earnings in more densely populated regions.The land use pattern observed in a given region like Canada also applies on a global scale. In recent years the planet as a whole has experienced a slower rate of expansion in cropland area compared to periods in the past when higher quality land was more abundantly available. Throughout early human history the aggregate amount of agricultural land increased at the same rate as the population.

The land use pattern observed in a given region like Canada also applies on a global scale. In recent years the planet as a whole has experienced a slower rate of expansion in cropland area compared to periods in the past when higher quality land was more abundantly available. Throughout early human history the aggregate amount of agricultural land increased at the same rate as the population.

This direct proportionality between cropland expansion and rising population has collapsed in recent years (see Chapter 2, Agricultural Productivity and Commodity Prices in a Historical Context, which talks in more detail about how productivity growth has been maintained despite lower rates of cropland expansion). As Figure 1.4 shows, the expansion rates for total global arable land have levelled off quite markedly since the early 60’s. Indeed, in the last three years for which data is available, the amount of arable land has actually decreased.

This makes perfect sense when considered in the context of Ricardo’s theory of rent. Less productive land is brought into cultivation only when farm profitability rises. As this occurs, previously developed more productive land will increase in value relative to newly developed less productive land. This means that in a future where less productive land is brought into production, investors who had the foresight to acquire more productive land in the past will benefit more than new investors.

Despite this apparently simple relationship between farm profits (or rents), farmland availability and farmland values, predicting the future is a lot more complex than it seems because agricultural commodity prices are also set by supply and demand. Therefore, assessing the future outlook for farmland values relies on a clear understanding of trends in agricultural commodity prices. This presents its own challenges.

Agricultural commodities are renowned for their cyclical behaviour. During a good harvest year, global grain stocks are high, creating a supply surplus relative to demand, and commodity prices fall. This reduces the financial incentive to farmers to invest in planting more of that particular crop during the next planting season. This in turn results in lower

CHAPTER 1

1,450,000

1,400, 000

1,350, 000

1,300, 000

1,250, 000

1,200, 000

Total arable land (1,000 Ha)

1961

1966

1971

1976

1981

1986

1991

1996

2001

2007

Figure 1.4: Trends in total global arable cropland area between 1961 and 2007

Source: Food and Agriculture Organisation of the United Nations, 2009

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harvests in the next phase of the cycle thus reducing global grain stocks and causing commodity prices to rise once more. These higher prices incentivise further investment in production and the cycle begins again.

For this reason, predicting land values in the short-term is challenging, but as farmland investment is a mid to long-term strategy, longer term trends in supply and demand for commodities are of more interest to the farmland investor. Returns, particularly the capital growth component, are linked to long-term agricultural commodity trends rather than short-term price volatility. It is the long-term fundamentals of food demand growth and food supply constraints which are likely to result in a continuation, and perhaps an acceleration of, the historical upward trend in farmland asset values.

On a very basic level, the mere fact that global population continues to increase whilst the carrying capacity of the planet remains intrinsically finite, gives an instinctive sense that prices must rise over time. Although this simple generalised view appears logical, answering more specific questions about the implications for future capital values and rental yields on farmland is more challenging. In order to properly assess how quickly farmland values may rise in the future and to what levels, answers would be required to a number of questions such as:

What factors might act to change supply of agricultural 1. commodities and to what extent will this affect prices?

What levels of global economic growth will occur in 2. the future and to what extent will this affect demand?

To what extent will climate change, in particular severe 3. weather events, affect yields in the future?

To what extent might oil supply shortages increase 4. demand for biofuels or raise input costs?

How much land is currently being used for agriculture 5. and how much more productive land is available for future cropland expansion?

At what rate is productive farmland being lost to 6. urbanisation, land degradation, water shortages and other effects?

What constraints might there be to the utilisation of 7. any remaining land appropriate for agriculture?

What affect would constraints on further cropland 8. expansion or losses of existing cropland have on farmland values?

CHAPTER 1

This document seeks to answer these questions. Once all of the facts have been laid out, it is hard not to accept the conclusion that the outlook for farmland values, at least for the foreseeable future, is strongly bullish.

CHAPTER 2

Agricultural Productivity and Commodity Prices in a Historical Context

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Agriculture in a Historical Context

As things stand today, humanity is using roughly half of the planet’s ‘usable’ surface for agriculture. In other words, half of the entire surface which is not water, desert, tundra, rock, ice or inhabited space (towns, cities, roads, industry etc).22

At first sight that doesn’t seem too bad. If we are only using half the ‘usable’ land, surely we should be able to support a further expansion of population and demand. As this section will demonstrate, things are not that simple, the reason being that the majority of the remaining usable land is not nearly as ‘usable’. It is either occupied by crucial natural ecosystems, located in areas of conflict, or simply unable to provide financially viable crop yields at prevailing commodity prices.

Prior to the arrival of modern agriculture, the planet supported a population of roughly 4 million humans who lived as hunter-gatherers.23 This is about half the population

of present day London.24 Then, some 10,000 years ago, we began the process of domesticating various plants and animals and so civilisation was born.25

This momentous turning point in our history, which allowed the development of the first complex societies, has culminated in the industrial civilisation we have today. Whereas in the past growth in global agricultural production resulted mainly from increases in the area of cropland under cultivation, most of the growth over the last half century is the result of increasing yields.26, 27

Given that the world’s population has more than doubled during this period28, it can safely be said that the majority of the world’s population is currently being fed in large part by relatively recently developed agricultural practices. This package of processes and technologies, known as the ‘Green Revolution’, is typified by substantial yield increases from new crop strains and greater inputs of fertilizers, pesticides and water.

“The best sector in the world that I know right now is probably agriculture.

Everybody should become a farmer. Farming is going to be one of the greatest

industries of our time for the next 20 to 30 years. I’m convinced that farmland

is going to be one of the best investments of our time”

Jim Rogers, 2009 (Jim Rogers cofounded the Quantum Fund with George Soros which gained more than

4,000% in 10 years, while the S&P rose less than 50%.)

All developing countries

South Asia

East Asia

Near East/North Africa

Latin America and the Cabean

Sub-Saharan Africa

World

0% 25% 50% 75% 100%

Yield increases Arable land expansion Increased cropping intensity

Figure 2.1: Share of crop production increases by region of the world

Source: Food and Agriculture Organisation of the United Nations, 2006

16

The doubling of global cereal production between 1961 and 1991 was due primarily to the Green Revolution.29 Expanding cropland played a comparatively minor role. According to the Food and Agriculture Organisation of the United Nations, the roughly 100% increase in world crop production between 1961 and 1991 was achieved mainly through a combination of increased yield per unit area (78% contribution) and greater cropping intensity (7% percent contribution) with a relatively minor contribution from increased cropland and rangeland area (15% contribution).30, 31

The Recent Commodity Boom – A Cyclical Normality or a Fundamental Shift?

In 2008, the world saw record prices for agricultural commodities preceded by consecutive year on year price rises from 2000 onwards. However, this is not the first time this has happened. As Figure 2.3 which shows the real price of food (i.e. adjusted for inflation) indicates, agricultural commodities have experienced similar price spikes before, most notably in the recent past, during the oil crisis of the early 70’s.

Another thing that Figure 2.3 reveals is a long-term decline in the real price of food, beginning around the 50’s and continuing till roughly the year 2000. This trend seems counterintuitive; after all, the global population has more than doubled during that period, increasing from 2.5 billion in 1950 to roughly 6.1 billion in the year 2000. Figure 2.3 shows the average price of food fell by roughly 50% during the same period.32

4%

3%

2%

1%

0%

CottonWheat Rice

Maize

Soybeans

Area increase

Yield growth

Figure 2.2: Share of crop production increases by crop type

Source: World Bank, 2009

1900

330

280

230

180

130

80

240

220

200

180

160

140

120

100

80

1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2008

Index reference: 1977-1979=199

1917 Just before World War I

1951 Rebuilding after World War II 1974 Oil crisis

Figure 2.3: Changes in the real prices of major agricultural commodities from 1900 to 2008

Source: World Bank, 2009

CHAPTER 2

17

It is only when you scratch beneath the surface, however, and look at the relationship between supply and demand that this trend starts to makes more sense. Whilst population has exploded and with it demand, production and thus the supply of food has increased at a greater rate. The combination of yield improvements brought about by the Green Revolution (with the full package of related technologies including improved crops strains and the increasing use of irrigation and petrochemical inputs) and to a lesser extent the expansion of croplands, has resulted in a near tripling of production over the same period.33

In other words, supply expansion kept up with, and even exceeded, demand expansion until the mid 80’s. This can be seen clearly in long-term per capita grain production, which rose from just over 280 kg per person per year in the early 60’s and peaked at roughly 380 kg per person per year in the mid 80’s (see Figure 2.4; note that much of the additional cereal production was actually used as animal feed to support the growing per capita production of meat). The big question is, were the soft commodity price spikes of 2008 a flash in the pan or the first act in a longer trend of higher, or even much higher, commodity prices?

The recent agricultural commodity price boom had a number of unique features. The magnitude of the mid-2008 price rise was the most extreme seen in the last hundred years. Lasting over 5 years, it was the longest and strongest upward trend in prices on record, even exceeding the price spikes seen during the First and Second World Wars.

Furthermore, the price rises seen in the 12 months prior to the 2008 peaks were completely unprecedented. As Figure 2.5 indicates, for the three major grain commodities, maize rose by 75% in the 12 months prior to its June 2008 peak, wheat by 121% in the 12 months prior to its March 2008 peak and rice by 215% in the 12 months prior to its April 2008 peak.

75% Rise in maize prices in the 12 months preceding June 2008.

121% Rise in wheat prices in the 12 months preceding March 2008.

215% Rise in rice prices in the 12 months preceding April 2008.

1960 1965 1970 1975 1980

40

30

20

380

340

300

1985 1990 1995 2000 2005

Cereal (left axis)

Production per capita (kg)Meat (right axis)

Figure 2.4: Global trends in cereal and meat production from 1950 to 2009

Source: Food and Agriculture Organisation of the United Nations, 2009

CHAPTER 2

18

Figure 2.5 : Grain prices 12 months prior to 2008 peaks

Source: International Monetary Fund, 2009

Whilst remarkable, are these price rises in themselves sufficient to suggest that things are different now and that this is the beginning of a new era of higher commodity prices? It has been pointed out by some commentators that many commodity and asset prices behaved in a similar fashion leading up to 2008 and that perhaps this was a feature more of speculation in the financial markets than any change in underlying fundamentals.

Trading volumes in derivative markets for agricultural commodities certainly boomed in recent years. Between February 2005 and February 2008 open interest in maize increased from 0.66 million contracts to 1.45 million. During this period trading volumes increased by 85% and the non-commercial traders’ share in opening interest in long positions increased from 17% to 43% (i.e. speculation from investors more than doubled). For wheat, contracts increased from 0.22 million to 0.45 million, trading volumes increased by 125% and the non-commercial traders’ share of opening long interest rose from 28% to 42%.34

68 Days Number of days worth of grain remaining in global stocks at the lowest point in 2008.

Clearly commodity speculation has increased in recent years, but despite all the greed underwritten by cheap capital and the new-found appetite of major institutional investors to gamble on commodity prices, there were some very persuasive fundamentals fuelling the frenzy. The most important indicators of the relationship between supply and demand in grain commodities markets are the levels of global grain stocks. It is primarily this data which sets short-term prices in the global commodity markets. When grain stores are low, this indicates supply is low relative to demand and when grain stocks are high this indicates that grain is being produced at a faster rate than the rate of consumption.

As Figure 2.6 shows, average global grain stocks reached historic lows in 2008. At the most extreme point (when commodity prices were at their highest) average global grain stocks reached 18.7% of annual global utilization, equivalent to 68 days worth of global supply, well below the long-term average.35 In other words, there was just over 2 months worth of food in the world’s pantry.

APR 07

MAY 07

JUN 07

JUL 0

7

AUG 07

SEP 0

7

OCT 07

NOV 07

DEC 08

JAN 08

FEB 08

MAR 08

MAY 07

JUN 07

JUL 0

7

AUG 07

SEP 0

7

OCT 07

NOV 07

DEC 08

JAN 08

FEB 08

MAR 08

APR 08

JUL 0

7

AUG 07

SEP 0

7

OCT 07

NOV 07

DEC 08

JAN 08

FEB 08

MAR 08

APR 08

MAY 08

JUN 08

500

375

250

125

0

US Dollars per Metric Ton

US Dollars per Metric Ton

US Dollars per Metric Ton

1100

825

550

275

0

300

225

150

75

0

Wheat

Rice

Corn

19

62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 080%

10%

20%

30%

40%

50%Wheat Rice Coarse grains Total, wheat equivalent

These historic lows signalled to speculators that the relationship between supply and demand had become extremely tight. In this they were right. What many of the investment professionals making the trading decisions appear not to have allowed for is the cyclical nature of agriculture. These unprecedented commodity highs stimulated global investment in production and the reality of the agricultural commodity cycle once again made itself felt. As a result, many speculators who got into the market during the highs experienced painful losses.

Notwithstanding these normal cyclical fluctuations, unlike many of the asset bubbles of recent years, the agricultural commodities frenzy was driven by fundamentals. Supplies were limited and demand was booming due to population growth, changing eating habits in emerging market economies and new demand creation from biofuels. Extensive media coverage of these indisputable trends of greater competition for limited resources further stoked the speculative flames.

In the words of the World Bank Global Economic Prospects 2009 report:

“The recent commodity boom was the largest and longest

of any boom since 1900. The current boom in agricultural prices is different in this regard, because it reflects a demand shock rather than a supply shock, meaning that prices have risen even as overall production (including that destined for biofuels) has increased.

The magnitude of commodity price increases during the current boom is without precedent. The real U.S. dollar price of commodities has increased by some 109 percent since 2003, or 130 percent since the earlier cyclical low in 1999. By contrast, the increase in earlier major booms never exceeded 60 percent. The current price boom is unusually long. The U.S. dollar price of internationally traded commodities has been rising for more than five years, much longer than the price booms of the 1950’s and 1970’s. Only the 1917 boom saw a sustained increase in commodity prices over a similarly long period (four years).”36

Whilst there is support in the fundamentals for the price peaks of 2008, we come back to the same question: was all the talk of commodity super cycles that became so prevalent in recent years merely a greed-fuelled misinterpretation of normal cyclical behaviour in agricultural commodity prices, or were the Wall Street and City speculators on to something?

Figure 2.6: Ratio of global grain stocks to usage rates

Source: US Department of Agriculture Foreign Agricultural Service, 2008

CHAPTER 3

The Resource Scarcity Debate – Is the Planet’s Carrying Capacity at or Near a Tipping Point?

21

The Malthusian Debate Is the planet’s capacity to feed its growing population through increases in agricultural output approaching a tipping point? The history of calling the market on resource scarcity goes back a long way and the road is littered more with the corpses of pessimists than of optimists. In 200 AD, Roman theologian and thinker, Quintus Tertullianus called things slightly too early when he wrote:

“We are burdensome to the world. The resources are scarcely adequate to us.... Truly, pestilence and hunger and war and flood must be considered as a remedy for some nations, like a pruning back of the human race”. 37

In contrast, a more resource optimistic perspective is given in an even earlier text, the Old Testament:

“And God said unto them. Be fruitful, and multiply, and replenish the earth, and subdue it: and have dominion over the fish of the sea, and over the foul of the air, and over every living thing that moveth upon the earth.” (Genesis 1:26:28) “I will make thee exceedingly fruitful, and I will make nations of thee.” (Genesis 17:6) “I will multiply thy seed as the stars of the heaven, and as the sand which is upon the sea shore.” (Genesis 22:17)

Whilst both of these texts are prescient in their own way, they are certainly contradictory. One suggests that there are theoretical and practical limits to the carrying capacity of the planet, the other suggests that the earth’s resources are limitless.

The debate has continued as the centuries have worn on. One of the most notable participants was the British cleric and economist Thomas Malthus, credited by Darwin with providing the fundamental insight motivating his theory of evolution which is, put simply, that the scarcity of resources leads to the survival of the fittest.38 In 1798, in An Essay on the Principle of Population Malthus advanced the theory that population tends to increase geometrically, while food production can only be expected to grow arithmetically. As he put it: “The power of population is indefinitely greater than the power in the earth to produce subsistence for man.”39

0.42 hectares Per capita availability of arable land in 1960

“ ‘No room, no room’ they cried. ‘There’s plenty of room!’ said Alice.”

Lewis Carroll, Alice’s Adventures in Wonderland

0.22 hectares Per capita availability of arable land in 2006

Around the same time, in 1776, Adam Smith, the father of modern economics stated: “Every species of animals naturally multiplies to the means of their subsistence, and no species can ever multiply beyond it”.40

So, if so many great thinkers have been discussing the limits to growth for so long, is there anything different about today’s circumstances? Malthus has been criticised for raising these concerns prematurely during the 18th century and it has been said by some of his critics that mankind’s population, which has grown from less than 1 billion people during Malthus’ time to over 6 billion at the present41, is proof positive that he did not take proper account of mankind’s ability to innovate and develop new technologies which reset the boundaries to growth.

This debate will likely go on for the rest of human history. Fortunately, all the farmland investor needs to assess is the current state of the debate, particularly with respect to land availability and the supply / demand scenario for food over, say, the next 20 years.

The Current State of the Debate

More has changed since Malthus’ time than the population. In 1798, when Malthus published his paper, the total area of land being cultivated and grazed worldwide was estimated to be around 672 million hectares. This would expand to 4,919 million hectares by the year 2000.42 In other words, there was still a lot of room for expansion of cropland at the time Malthus’ wrote his seminal paper.

During that era nations were exploring the globe and colonising other regions. From the early 18th century onwards, settlers were colonising large new territories such as North America, South America, South Africa and Australia. As the barriers to expansion, such as hostile indigenous populations and lack of infrastructure were steadily broken down, land used for crops and ranching expanded rapidly, predominantly at the cost of forests and natural grasslands.43

22

Inevitably, however, the rate of expansion of agricultural lands began to decline as the availability of the most accessible and productive lands diminished. As Figure 3.1 shows, the growth in arable land has tailed off in recent years. As Figure 3.2 shows, the rate of population growth has not.

In 1961 the world population was 3.081 billion. In 2006 it was 6.593 billion, an increase of 114.0% in just under 50 years. Over the same period the total amount of arable land (i.e. the land upon which cereals are grown; excludes lower quality grazing land) globally increased from 1.281 billion hectares to 1.411 billion hectares, an increase of only 10.1% in the same period. As Figure 3.3 shows, this has resulted in half the amount of arable land being available to each human on the planet in 2006 (0.22 per person) compared to 1961 (0.42 ha per person).

Figure 3.1: Total global arable between 1700 and 2007 Figure 3.2: Global population between 1700 and 2008

1,600,000

1,400, 000

1,200, 000

1,000, 000

800, 000

600, 000

400,000

200,000

0

Arable land (1,000 ha)

1700

1725

1750

1775

1800

1825

1850

1875

1900

1925

1950

1975

2007

8000

7000

6000

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1000

0

Global population (Millions)

1700

1725

1750

1775

1800

1825

1850

1875

1900

1925

1950

1975

2008

Source: Arable land figures between 1961 and 2007 - Food and Agriculture Organisation of the United Nations, 2009; Arable land figures between 1700

and 1960 - Integrated Model to Assess the Global Environment (IMAGE), Netherlands Environmental Assessment Agency, 2006; Population figures -

United Nation Population Division, 1999, 2007

0.50

0.45

0.40

0.35

0.30

0.25

0.20

0.15

0.10

0.05

0

Arable land per capita (Ha)

1960 1970 1980 1990 2000 2006

200%

175%

150%

125%

100%

75%

50%

25%

0%

1700 1750 1800 1850 1900 1950

Population in millions

Agricultural Land Mha

2000

Source: Food and Agriculture Organisation of the United Nations,

2009; United Nations Population Division, 2006

Source: Integrated Model to Assess the Global Environment (IMAGE),

Netherlands Environmental Assessment Agency, 2006; United Nations

Population Division, 2007

Figure 3.3: Trends in per capita availability of arable land between 1961 and 2006

This implies that whilst in the more distant past there may have been enough space to expand cropland, this will be less the case in the future. Indeed, looking at Figure 3.4 which plots the rate of change in the global population against the rate of increase in the area of agricultural land, this is glaringly apparent. In the earlier portion of the graph, human population and farmland increased roughly in step with each other. During the 50’s the two trend lines diverge very markedly. This is the point at which the Green Revolution took over from cropland expansion as the dominant means by which the human carrying capacity of the planet has increased. However, as later sections will show, the productivity gains delivered by the Green Revolution are now also in decline.

Figure 3.4: Percentage change (50 year average) in agricultural land and population between 1700 and 2000

23

The second thing that was very different during Malthus’ time was the level of CO2 and other greenhouse gasses which had barely begun to be altered by human activity. It would be another 63 years before the first oil well was drilled in the United States in Titusville, Pennsylvania, on August 28, 1859.44 Much of the currently ‘unused’ land remaining on the planet is forestland which provides vital carbon sequestration services. In other words, global warming was not a known constraint to further expansion of agricultural land during Malthus’ time as it is today (see Chapter 7, Constraints to Current Supply and the Limitations to Further Increases in Agricultural Productivity).

There have also been a number of relatively recent developments which make the global commodity price spikes of 2008 somewhat different to those of the early 70’s. In accordance with the law of diminishing returns, the rate of production gain due to rising yields has dropped off in recent years whilst population has continued to increase (see Chapter 5, The Limiting Effects of Diminishing Returns and the Implications for Global Food Production). This has had the consequence that since the mid 80’s per capita cereal production has been on a prolonged downward trend (see Figure 3.5) as has the per capita area of arable land under cultivation.45

In other words, with regard to land supply, and agricultural productivity, the world turned a corner sometime in the early part of the last century and the 80’s respectively, from a state of increasing supply of food and farmland availability relative to the population to a state of decreasing supply relative to the population. This is extremely significant. We are now living in an era, where for the second time in recent human history, per capita food supply is in decline (the first time being prior to the Green Revolution when there was widespread starvation in Asia and Africa), and this is all taking place at a time when climate change threatens to constrain both further expansion of agricultural land as well as yields on existing lands.

This relationship between demand growth and constraints to supply growth are key components to an understanding of the prospects for future farmland values and agricultural enterprise profits. These are discussed further in the following chapters of this document.

Figure 3.5: Long-term trends in average per capita cereal production

380

360

340

320

300

280

Per capita cereal production (kg)

1960 1970 1980 1990 2000

Source: Food and Agriculture Organisation of the United Nations,

2009; United Nations Population Division, 2007

Technological Innovation and its Implications with Respect to Farmland Values in the Foreseeable Future

Assuming that population will continue to increase and that growth in the area of global cropland is unlikely, any letup in the trend of declining per capita food production will have to be achieved by increasing yields. As mentioned above, the evidence is that production gains from yield increases are now entering the realms of diminishing returns. Achieving yield increases on the scale delivered by the Green Revolution will depend on the development and large scale adoption of new technologies.

Humanity’s tendency to innovate in times of need is one of the primary reasons that past assessments of the limits to growth have proven unreliable. If new technological breakthroughs as fundamental as those of the Green

24

Revolution were to come along and deliver the same kind of productivity gains, each unit of farmland would become much more productive and agricultural land values would, in turn, rise steadily.

This is an entirely possible outcome if the precedent set by human history is anything to go by. However, if such technologies were to be developed they would need to represent a fairly fundamental change in current practices given that the Green Revolution in its current form relies so heavily on petrochemical inputs which are in short, and potentially declining, supply (see Chapter 9, Fossil Fuel Shortages and the Potential Consequences for the Agricultural Economy).

What is most certainly true is that the shift in production practices that such a sea change would represent will be costly to roll out on a global scale and thus an economic incentive will be required in order for this to take place. That economic incentive will only be powerful enough to bring about such wholesale change if food produced under the old paradigm becomes sufficiently profitable for the agricultural industry to take the required action.

The alternative is that we do not get another ‘get out of jail free card’ from science and technology, and the 9 billion plus people that will be on the planet by 2050 will have to make do with the agricultural production capacity possible using current technology and diminished resources. The result will be increasing competition for the limited resources the planet has to offer, including the farmland upon which food production depends.

It is beyond the scope of this document to explore in depth the resource scarcity / limits to growth / human innovation debate. However, what is clear is that agricultural commodity prices and farmland values are likely to rise in at least the mid-term as competition for grains intensifies, both from more mouths to feed globally and from a shift to higher protein (more grain costly) diets in developing countries.

The market will either respond to the resultant economic incentive of higher food prices by creating new technologies to increase production, or it won’t. Either way the farmland investor is in a strong position. If production increases are made possible by new technologies, the value of farmland will go up due to the increased earning potential from rising yields. Regardless of the fact that new technologies might increase supply to the point that eventually commodity prices may fall, this outcome would still be good news for farmland investors in mid-term because it would take the market some time to adopt these new technologies on a large enough scale to bring supply in line with rising demand.

Conversely, if substantial production increases (at least proportionate to demand increases) are not achieved, then agricultural land prices will also rise as commodity prices continue to increase along with the profitability of farming, and in turn, farmland rental rates. Either way, this suggests that the mid-term, and quite possibly the long-term, outlook for agricultural land values remains bullish regardless of technological developments.

CHAPTER 4

Commodity Price Forecasts and the Implications for Farmland Values

26

“The use of foodstuffs to make energy substitutes — corn and sugar for

ethanol and palm oil and soy oil for biodiesel — has created a fresh layer of

demand. Supply is inelastic. It’s not easy to increase the acreage to produce

crops. Effectively your supply curve is fixed and your demand curve is moving

to the right.”

Edward Hands, Portfolio Manager at Commerzbank

The Challenge of Predicting Future Commodity Prices

If someone somewhere has a mathematical model which accurately predicts commodity prices based on all of the complex interactions between supply and demand, they are probably making large amounts of money speculating on commodities. Of course, the existence of such a model is highly improbable. Besides assessing numerous economic variables, it would also need to include a highly accurate global meteorological forecasting model on both macro and local levels. As we all know from listening to weather forecasts on the television, even a reliable model to accurately predict weather conditions over 48 hours pushes the boundaries of modern computing technology.

Agricultural commodity traders in the city of London spend much of their time looking at news feeds from the Met Office and continuously flashing numbers on screens regarding everything from planting rates to harvesting rates. Fortunately the farmland investor need not listen obsessively to short-term market noise in order to earn a return. Predicting short-term price fluctuations is challenging, speculative and is prone to human modelling errors. This is why long-term investment strategies have been proven time and time again to produce competitive returns.

Being in this category, the farmland investor need only assess longer term trends based on deeper fundamentals of supply and demand, an endeavour less subject to unpredictable seasonal changes in market conditions. Nevertheless, understanding commodity prices provides land investors with useful insights into both supply and demand relationships and investment timing (i.e. identifying the most opportune moments and markets in which to make acquisitions).

110 million Number of additional people driven into poverty by high food prices in 2008

Recent events have clearly demonstrated the sensitivity of populations across the globe to high commodity prices. During the 2008 price surges, 110 million additional people were driven into poverty and 44 million additional people were classified as undernourished. This triggered riots from Egypt to Haiti and Cameroon to Bangladesh and Mexico.46 Although prices have fallen since the peak in July 2008, they are still at or above the historical 10 year average for many key commodities. The fact is the underlying supply and demand tensions are little changed from those that existed just a few months ago when these prices reached all-time highs.47

45 million Number of additional people classified as malnourished in 2008

Commodity Price Forecasts According to the United Nations, OECD and World Bank

So, what does the future hold for agricultural commodity prices? There are numerous forecasts of commodity prices. However, this document will restrict itself to some of the more credible and conservative examples. One such set of forecasts was produced jointly by the Organisation for Economic Co-operation and Development (OECD) and United Nations Food and Agriculture Organisation (FAO). According to their Agricultural (FAO-OECD) Outlook Report for 2008 to 2017:

“On the demand side, changing diets, urbanisation, economic growth and expanding populations are driving food and feed demand in developing countries. Globally, and in absolute terms, food and feed remain the largest sources of demand growth in agriculture. But stacked on top of this is now the fast growing demand for feedstock to fuel a growing bioenergy sector. While smaller than the increase in food and feed use, biofuel demand is the largest source of new demand in decades and a strong factor underpinning the upward shift in agricultural commodity prices.”

27

The report goes on to say: “As a result of these dynamics in supply and demand, the Outlook suggests that commodity prices – in nominal terms – over the medium-term will average substantially above the levels that prevailed in the past ten years. There is strong reason to believe that there are now also permanent factors underpinning prices that will work to keep them both at higher average levels than in the past and reduce the long-term decline in real terms. Prices will remain at higher average levels over the medium-term than witnessed in the past decade.”

Figure 4.1 shows the OECD-FAO forecasts for world agricultural commodity prices in the period 2008 to 2017 compared with prices for the period 1998-2007. These price rises may seem impressive. However, as Figure 4.2 shows, given that the price peaks seen in 2008 were well above the OECD-FAO forecasts for the next 10 years, the evidence from actual prices suggests that their forecasts are at the conservative end of the scale.

Figure 4.2: Comparison of OECD-FAO commodity price forecasts for the period 2008-2017 with actual 2008 price peaks (Price units: US$ / metric ton)

Commodity Average Price 1998 - 2007

Actual Price Rise in 2008 OECD-FAO Forecasts

2008 Price Peak

% Increase Over 1998-2007 Average

OECD-FAO Forecast Average Price 2008 - 2017

% Increase Over 1998-2007 Average

Wheat 153 440 187% 234 53%

Rice 249 1015 307% 343 38%

Corn 107 287 169% 177 66%

Source: OECD and FAO Secretariats, 2008; International Monetary Fund, 2009

Furthermore, as Figure 4.3 indicates, even when comparing average April 2009 prices, the OECD-FAO forecasts look conservative. This is especially pertinent given the fact that the current price levels are already touching or exceeding the OECD-FAO forecasted 10 year average despite the world being in the throes of the worst contraction in global GDP growth since the Second World War.

Figure 4.3: Comparison of OECD-FAO commodity price forecasts for the period 2008-2017 with actual prices in 2009 (Price units: US$ / metric ton)

Commodity Average Price 1998 - 2007 Actual April 2009 Average Price % Increase Over 1998-2007 Average

Wheat 153 233 53%

Rice 249 577 132%

Corn 107 169 58%

Source: OECD and FAO Secretariats, 2008; International Monetary Fund, 2009

Wheat Coarsegrains

Rice Oilseeds Veg.oils

100%

80%

60%

40%

20%

0%

Figure 4.1: Forecasted nominal world commodity prices, percentage growth between average 1998-2007 prices and average 2008-2017 prices

Source: OECD and FAO Secretariats, 2008

28

The discrepancy between OECD-FAO forecasts and actual prices might be explained by the fact that the forecasts are based on a number of assumptions regarding future supply and demand which are extrapolated from past data. As is noted in various parts of this document, data from recent years suggests shifts in a number of fundamental trends, so predicting future prices based on long-term averages of historical data may produce forecasting inaccuracies. For example, the OECD-FAO model assumes production increases across all commodity categories with yield increases being the primary source of productivity gains, and the remainder coming from cropland expansion.

With respect to yield growth the OECD-FAO model bases its forecasts on: “historical trends in technology growth [being] assumed to continue into the medium-term future”. Although it does acknowledge that: “A key question is the long-run capacity of supply. One argument which reiterates messages of climate change and water overuse, suggests that yields are peaking, and sees little scope for further supply increases. Another argument emphasizes the potential of human innovation to continue or even quicken yield trends, particularly when motivated by a high price, and the unrealized potential of countries that are still in [the early] stages of development.”

Data from the last couple of decades, however, suggests a tailing off of productivity gains. As the following sections of this document will explain, even in a best case scenario there are numerous constraints to cropland expansion. At worst there is the potential for the contraction of croplands

due to land degradation, urban expansion and climate change effects. Extreme weather events and permanent changes in rainfall patterns can be expected to lead to desertification and loss of croplands and the ecosystem services upon which agriculture depends.

Further forecasts of demand come from simulations run on the World Bank’s ENVISAGE forecasting model, which predict a 1.5% annual rise in demand for agricultural commodities during the 30 years between 2000 and 2030, resulting in a 56% increase in demand during the period. In their Global Economic Prospects 2009 report, the World Bank ran a number of simulations to quantify possible outcomes. The variance in the ENVISAGE model forecasts demonstrate the sensitivity of commodity price forecasts to rates of supply growth.48

Figure 4.4 shows the average annual growth rate in yield for agricultural commodities from 1965 to 2006. For the world as a whole, wheat yields rose by an average of 2.0% during that period, rice by 1.7%, maize by 1.8% and soy by 1.5%. Against a background of rising demand of 1.5% (assuming this estimate is correct), the ENVISAGE Model predicts that: “should global agricultural productivity rise by only 1.2 percent a year on average instead of the 2.1 percent projected in the baseline, then prices, rather than declining, can be expected to rise by as much as 0.3 percent a year relative to manufactures [thus] reversing the trend decline of the past 100 years.”49

Figure 4.4: Average annual percentage increase in yield growth in key agricultural commodities between 1965 and 2006

Category Wheat Rice Maize Soybeans

World 2.0% 1.7% 1.8% 1.5%

Income level

High income 1.6% 0.9% 1.6% 1.3%

Middle income 2.0% 1.9% 2.6% 2.8%

Low income 2.6% 2.0% 1.1% 1.4%

Region

East Asia and the Pacific 3.8% 1.8% 2.9% 1.9%

Europe and Central Asia 0.1% 0.0% 0.8% -0.1%

Latin America and the Caribbean 2.0% 2.5% 2.6% 1.3%

Middle East and North Africa 2.5% 1.2% 2.7% 3.0%

South Asia 2.6% 2.1% 1.6% 1.5%

Sub-Saharan Africa 2.2% 0.7% 0.7% 3.2%

Source: World Bank, 2009; US Department of Agriculture, 2009

29

There are a number of factors, dealt with

separately in the following sections, which could

compromise the various assumptions upon which

forecasts such as those from the OECD, FAO and

World Bank are based. Any one of these factors

individually has the potential to place the price

increases these forecasts foresee firmly at the

conservative end of the scale. In combination,

the effect could be even more substantial.

CHAPTER 5

The Limiting Effects of Diminishing Returns and the Implications for Global Food Production

31

“Is the current food crisis just another market vagary? Evidence suggests

not; we are undergoing a transition to a new equilibrium, reflecting a new

economic, climatic, demographic and ecological reality.”

Japanese Prime Minister, Taro Aso, 2009

Going forward, the big questions are: how much further expansion in agricultural production can be achieved (both in terms of yield and total cropland area), at what rate can this expansion take place and for how long can that expansion continue? If the expansion can take place as easily, cheaply and rapidly for the next half century as it has done for the last half century, perhaps the prospects for agricultural investment aren’t as bullish as the demand side fundamentals suggest. Alternatively, it may be that, as far as expansion is concerned, the low hanging fruit has already been plucked from the productivity tree.

In fact, the numbers suggest just that. The evidence indicates that the law of diminishing returns is asserting its inevitable effect on world food production. Indeed, this has become increasing apparent in recent years. The law of diminishing returns refers to how the marginal contribution of a factor of production usually decreases as more of that factor is used. Wikipedia conveniently provides an explanatory example routed in agriculture:

“Suppose that one kilogram of seed applied to a plot of land of a fixed size produces one ton of crop. You might expect that an additional kilogram of seed would produce an additional ton of output. However, if there are diminishing marginal returns, that additional kilogram will produce less than one additional ton of crop (on the same land, during the same growing season, and with nothing else but the amount of seeds planted changing). For example, the second kilogram of seed may only produce a half ton of extra output. Diminishing marginal returns also implies that a third kilogram of seed will produce an additional crop that is even less than a half ton of additional output. Assume that it is one quarter of a ton.

A consequence of diminishing marginal returns is that as total investment increases, the total return on investment as a proportion of the total investment also decreases. For example, if the return from investing the first kilogram of seed is 1 t/kg, the total return when 2 kg of seed are invested might be 1.5/2 = 0.75 t/kg, while the total return when 3 kg are invested would reduce to 1.75/3 = 0.58 t/kg.”

The same logic applies to finite resources such as land, fertilizers, pesticides and any other variable external input, such that each additional unit of the variable input yields smaller and smaller increases in output. The return curve

is first linear and then begins to decline towards zero. For example, for each additional kg of fertiliser applied (above 0 kg) yield increases linearly up to the point where diminishing returns begin. After that point the line curves towards the horizontal, and may even become negative if applications reach toxic levels, the result being that both unit and total returns decrease.

3.5% Average annual gain in cereal production in the 60’s

0.5% Average annual gain in the 90’s

32

Whilst humans can control the level of variable inputs (to the extent that the resources to manufacture agrochemicals, primarily oil and gas remain in abundant supply), we are less able to control the level of fixed inputs such as the space required to grow crops. In the production system known as planet earth, the most fundamental of fixed inputs is the availability of agricultural land.

The reality is that data supporting the increasing emergence of diminishing returns is already being observed. The rate of gain in global cereal production has decreased over recent years as Figure 5.1 indicates, having averaged a 3.5% increase per year during the 60’s and decreasing to just over 0.5% during the 90’s. This is all the more notable given that the world’s population was increasing rapidly, rather than decreasing, during this period.

This is despite the fact that, as shown in Figure 5.2, the global use of nitrogen fertilizers during the period increased by approximately 700% and water use doubled. Import data for pesticides suggests similar increases (see Figure 5.3). Whereas, in the four decades between 1960 and 2000, the actual increase in cereal production was 167%.50

In other words, to achieve each unit of production gain it took a much higher increase in the use of variable inputs, roughly fourfold in the case of Nitrogen fertiliser.

What throws the situation into starkest contrast, however, are trends in the nitrogen-fertilization efficiency of crop production. This is a measure of the yield per unit of fertiliser applied. Figure 5.4 shows that the amount of nitrogen fertilizer application per unit of cereal production has increased approximately fourfold between 1960 and 2000, and that production gains due to the use of fertiliser bottomed out from roughly 1980 onwards.

Figure 5.1: Average annual production increases during the four decades between 1960 and 2000

Figure 5.2: Total global nitrogen fertiliser use between 1960 and 2000

Source: Food and Agriculture Organisation of the United Nations, 2009

Source: Food and Agriculture Organisation of the United Nations,

2002; Tilman et al, 2002

1960-1970 1970-1980 1980-1990 1990-2000

4%

3%

2%

1%

0%

Average annual production increase

80

60

40

20

0

0.28

0.24

0.20

0.16

0.12Nit

rog

en &

ph

osp

ho

rus

fert

ilize

r(1

06 to

nn

es; W

orl

d-U

SSR

)

Glo

bal

irri

gat

ion

(10

9 h

a)

1960 1970 1980

N H2O P

1990 2000

Figure 5.3: Total global pesticide production and imports between 1940 and 2000

Source: Food and Agriculture Organisation of the United Nations,

2002; World Health Organisation, 2002; Tilman et al, 2002

3

2

1

0

12

10

8

6

4

2

0

Glo

bal

pes

tici

de

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du

ctio

n(1

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nn

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Glo

bal

pes

tici

de

imp

ort

s(1

996

US$

bill

ion

)

1940 19601950 1970 1980 1990

Pesticide productionPesticide imports

2000

33

This data implies that future gains in productivity due to increased application of fertilisers will be lower than the rates of increase seen in the past.51 This is true not only of the developed world but also in the developing world. As Figure 5.5 shows total fertiliser application has approximately doubled in the developing world over the last 20 years, taking them to levels close to the developed world.52 Aside from Sub-Saharan Africa where there are a number of other factors limiting production growth, these statistics cast some doubt on the notion that a large component of future productivity increase will result from increases in fertiliser use in the developing world.

These trends have taken place in the presence of another greater trend, that of population increase. This explains the fact that the per capita production of grain has been in decline since the early 80’s (Chapter 3, The Resource Scarcity Debate – Is the Planet’s Carrying Capacity at or Near a Tipping Point), roughly the same point in time as productivity gains due to nitrogen fertiliser bottomed out.

Figure 5.4: Trends in the nitrogen-fertilisation efficiency of crop production between 1960 and 2000

Source: Food and Agriculture Organisation of the United Nations,

2002; Tilman et al, 2002

80

60

40

20

0

Nit

rog

en e

f�ci

ency

of

cere

al p

rod

uct

ion

(meg

ato

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es c

erea

l/meg

ato

nn

es f

erti

lizer

)

1960 1970 1980 1990 2000

Developing countries

Sub-Saharan Africa

Latin America

East and Southeast Asia

South Asia

0 30 4010 20 50 60 70 80 90 100

1962 1982 2002

Fertilizer applied (kilograms per cultivated hectare)

Figure 5.5: Fertiliser use by region of the world

Source: Food and Agriculture Organisation of the United Nations, 2008; M. World Bank, 2007

One of the primary reasons for this is the ‘fixed input’ component of the agricultural productivity equation: farmland. Humans have historically exploited the most productive areas of the planet first. In other words, as noted in a recent research report by Dr. David Tilman, a leading expert on global resource competition: “Most of the best quality farmland is already used for agriculture, which means that further area expansion would occur on marginal land that is unlikely to sustain high yields and is vulnerable to degradation.”53, 54, 55

According to the United Nations, water related issues alone may account for an estimated 1.5% reduction in world food production by 2030 and at least 5% by 2050.56 Under a ‘business-as-usual’ scenario water withdrawals are

700% Rise in the use of nitrogen fertilisers between 1960 and 2000

167% Increase in cereal production during the same period

34

expected to increase in 59% of the world’s river basin areas by 2025. Furthermore, studies indicate that the increase in water demand will outweigh the improvements in water-use efficiency assumed in many forecasting models.57

This begs the question, what potential is there to expand irrigated land? As Figure 5.6 indicates, the trend for the expansion of irrigated land has flattened off in recent years despite the rise in demand for food and the accompanying financial incentive. During the last decade (1998 to 2007), the average annual rate of expansion in the area of agricultural land equipped for irrigation was 0.6%, whereas during the 60’s the average annual rate of increase was 2.1%; over three times higher. This is due in part to the fact that the areas most suitable for irrigation have already been brought into cultivation.58

Like the best rainfed lands, the best irrigated lands are developed first. There is a development cost associated with putting in place irrigation infrastructure. The law of diminishing returns has been making itself felt here as well, meaning that the average cost per unit of production of developing irrigation infrastructure has increased over time (as has the unit cost per hectare).59 Due to higher irrigation development costs and already stretched water supplies in many regions, it is assumed that the downward trend in the new development of irrigated cropland will continue in the future.60

The broad trend is for the most developed nations and those with the highest population densities to be at a more advanced stage in the exploitation of available lands. This is not only true of Europe and the United States, but also of Asia where, according to UN estimates, 95% of the potential cropland is already being utilized.61, 62

Notwithstanding the fundamental limits to growth imposed by water supplies, higher commodity prices will be required in order to provide the economic incentive to develop new greenfield irrigation projects in the future.

In the words of the World Bank report Global Economic Prospects 2009:

“Yield gains associated with the green revolution are waning in many countries. Productivity levels in much of Africa and Europe and Central Asia are also declining; they are only one half those of best-practice developing countries, even after having controlled for differences in climate and soil. Unless large-scale agricultural investment and knowledge creation and dissemination are stepped up, food production in many of these countries will not keep pace with demand.

Simulations suggest that if productivity growth in developing countries disappoints, global food prices will be higher, and many developing countries—especially those with rapidly growing populations—will be forced to import more-expensive food from high income countries”

2.1% Average annual increase in global irrigated land area during the 60s

0.6% Average annual increase over the last decade

1.1% Average annual decline in global per capita cereal production between 1990 and 2007

Figure 5.6: Trends in global area of land equipped for irrigation

Source: Food and Agriculture Organisation of the United Nations, 2009

1961 1970 1980 1990 2000 2007

5000

4837

4675

4512

4350

An

nu

al r

ate

of

chan

ge

(mill

ion

s)

35

Indeed, developing countries have moved from a state of production surpluses pre the 80’s to an increasing state of production deficits and import reliance. In China it would appear that the revolution is over (the Green Revolution that is). Despite the fact that China now uses three times the global average amount of fertiliser per unit of cropland, and 75% of its cropland is under irrigation, their national average yields are below world average yields.63

As Figure 5.7 indicates, average annual yield growth for wheat, rice and soybeans in the developing world during the period 2000 to 2008 was roughly half that for the period 1965 to 1999, providing further evidence of diminishing returns. Furthermore, despite the moderate increases in yield, this hides the fact that global per capita productivity actually declined by an average of 1.1 % a year between 1990 and 2007.64

The reality of diminishing returns has implications for many of the medium-term agricultural commodity price forecasts (see Chapter 4, Commodity Price Forecasts and the Implications for Farmland Values) which are based on historical productivity increases. The implication is that using more recent data would produce lower future productivity estimates.

Figure 5.7: A comparison of recent and historic aver-age annual yield growth in the developing world

Source: World Bank calculations based on US Department of

Agriculture Data, 2009

Wheat Rice Maize Soybeans

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0

1965-1999 2000-2008

Annual % change in yields, 1965-99, 2000-08

CHAPTER 6

Population, Economic Growth and Other Demand Drivers

37

“The fundamentals remain in place for a long-term boom in the prices of

everything ag-related. The simplest metric to consider is the amount of

farmland per person worldwide: In 1960 there were 1.1 acres of arable

farmland per capita globally, according to data from the United Nations. By

2000 that had fallen to 0.6 acre. And over the next 40 years the population

of the world is projected to grow from 6 billion to 9 billion. The farmland

phenomenon is almost certainly still in the early stages and is playing itself out

in many ways around the globe.”

Fortune Magazine, 2009

Increases in Food Demand Due to Population and Economic Growth

The total number of people living on the planet today (approximately 6.8 billion) represents a little more than 5% of all the people who have ever lived.65 1 billion people were added to the world’s population in the last 12 years.66

The rate of population increase is forecast to remain at high levels for the foreseeable future and the world’s population is projected to be roughly 40% higher than today’s level by 2050.67

Estimates for growth in grain demand and the resulting impact on agricultural commodity prices vary, but the consensus is for a projected doubling of global grain demand during that period.68 This is due not only to population increase but also to the shift towards higher protein diet. This shift is driven primarily by rising incomes in the developing world. Global average annual income is projected to increase by just under 300% from US$ 5,300 to US$ 16,000 by 2050 (a 2.4-fold increase in global per capita real income). 69, 70, 71, 72

1 billion Increase in the world’s population in the last 12 years

225,000 Number of people added to the world population every day over the last decade

Projections from the Food and Agriculture Organisation of the United Nations suggest that an additional 120 million ha, an area twice the size of France, will be needed to support growth in food production under a ‘business as usual scenario’ up to the year 2030. This represents a demand increase for irrigated land of 56% in Sub-Saharan Africa alone (from 4.5 to 7 million ha) and rainfed land by 40% (from 150 to 210 million ha).73

These figures assumes above average levels of agricultural productivity (i.e. the upper yield percentiles on a historic basis). Furthermore, they do not compensate for lower productivity rates due to diminishing returns, climate change driven severe weather events, the need to replace cropland loss due to land degradation, urbanisation and other factors, let alone the actual availability of new cropland with the same productivity of existing cropland.74, 75

Given that the combined effect of population increase and economic growth is expected to result in a more than fourfold increase in global GDP in the next half century, the forecast doubling of grain demand during that period

38

might be considered conservative.76 Even so, sustaining food production at current levels, let alone doubling global food production again in the next 50 years as mankind has done over the last 50, will certainly be a major challenge. Aside from the limiting effects of the law of diminishing returns, this will be particularly difficult to achieve in a sustainable manner without compromising human health and the environment. 77, 78, 79, 80, 81, 82

Figure 6.1: Actual and projected human population growth in developed and developing countries from 1750

1750 1800 1850 1900 1950 2000 2050

0

2

4

6

8

Developed countries Developing countries

Source: United Nations Population Division, 2007

If the statistics of population growth aren’t astounding enough it should be noted that in the past population forecasters have tended to underestimate future population growth. As Figure 6.2 shows, the revised population estimates produced by the United Nations Population Division in 2006 included higher estimates for most countries, with the result that population estimates for developing countries have increased by some 35 million people for the 1990–92 benchmark period, while the revised population estimates are some 53 million higher than previous estimates for 2003–05. Given that estimated dietary energy requirements remain broadly constant, any upward revision of population forecasts has a proportionate effect on assumptions regarding food demand.83

Figure 6.2: Difference between 2002 and 2006 United Nations population estimates for developing countries

60

20

40

0

53

2003-2005

53

1999-2001

44

1994-96

35

1990-92

Source: United Nations Population Division, 2007

Under the United Nations’ latest revision, the world’s population, and hence demand for food and the land to produce it on, is forecast to increase to 9.2 billion by 2050, an addition of roughly 2.5 billion people from today’s level. The world’s human population has increased nearly fourfold in the past 100 years with a net increase of 225,000 new people per day during the last decade.84 To put this in perspective, this is the equivalent of adding the total population of Greater London (7,556,900 people85) to the world’s headcount every month, an entire Singapore (4,839,400 people86) every 22 days or an entire Emirate of Dubai (2,262,000 people87) every 10 days.

The greatest impact of the recent food crisis has been on the more impoverished households spending 50–90% of their income on food. According to the World Bank, the emerging world food crisis could lead to an increase in the mortality rate of infants and children under five years by as much as 5–25% in several countries.88

900 million Number of malnourished people in the world

17% Percentage of people in the world malnourished

39

Figures 6.3 and 6.4 clearly demonstrate the recent increase in both the total number of undernourished people in the developing world and the proportion of undernourished people. The total number of undernourished now stands at over 900 million whilst the proportion of undernourished turned a corner in 2003, ending a declining trend and returning to levels not seen since the late 90’s.

Figure 6.3: Number of undernourished people in the developing world, 1990-92 to 2007

Millions

900

1000

800

700

6001990-92 1995-97 2003-05 2007

Source: Food and Agriculture Organisation of the United Nations

Figure 6.4: Proportion of undernourished people in the developing world, 1990-92 to 2007

20

18

16

14

12

10

8

1995-971990-92 2003-05 2007

Percentage

Source: Food and Agriculture Organisation of the United Nations

Population forecasting models are based on observations from historical data which show that as countries develop population growth rates typically decline and life expectancy increases. It is the discrepancies between actual trends in developing nations compared with historical trends in developed nations (upon which forecasts are based) which explain the recent upward revisions in the United Nations’ population forecasts.

40

Another trend of population dynamics relates to long-term trends for ageing. A consequence of trends in age demographics is that as the proportion of adults relative to children increases, food needs rise. As the population pyramids for China in Figure 6.5 illustrate, adult population increased relative to the number of children between 1990–02 and 2003–05. This trend is most pronounced in countries with already large populations and/or countries with high population growth rates.

Figure 6.6 clearly illustrates the challenge of maintaining supply growth at the same level as demand growth in a world of changing age demographics. During the period 1995-97 to 2003-05, whilst the per capita dietary energy requirement has increased due to changing age demographics, the per capita dietary energy supply has decreased. This is in contrast to 1990-92 to 1995-97 when the relationship between age demographics and food supply was more favourable.

Figure 6.6: Trends in per capita dietary energy requirements and supply in India

0.6

Change (%)

0.5

0.4

0.3

0.2

0.1

0.0

-0.1

-0.2

1990-92 to 1995-97 1995-97 to 2003-05

Change in per capita minimum dietary energy requirements

Change in per capita dietary energy supply

Source: Food and Agriculture Organisation of the United Nations, 2006

Figure 6.5: China’s changing population structure

1990Males Females

Millions Millions

80 60 40 20 0 0 20 40 60 80

Age80+

75-79

70-74

65-69

60-64

55-59

50-54

45-49

40-44

35-39

30-34

25-29

20-24

15-19

10-14

5-9

0-4

Population growth rate = 1.54%Proportion under 15 years = 28%

2005Males Females

Millions Millions

80 60 40 20 0 0 20 40 60 80

Age80+

75-79

70-74

65-69

60-64

55-59

50-54

45-49

40-44

35-39

30-34

25-29

20-24

15-19

10-14

5-9

0-4

Population growth rate = 0.68%Proportion under 15 years = 22%

Source: United Nations Population Division, 2006

41

The China Factor

From the perspective of demand growth, China is by far the most important player on the world stage. Under Deng Xiaoping’s market-oriented economic development policies, economic output quadrupled in China between 1978 and 2000. With a population of 1.338 billion (July 2009 est.), roughly one in five people on the planet is Chinese. This huge and growing population (still rising at an annual rate of 0.655%) of increasingly affluent consumers lives in a country smaller than the United States which supports less than a quarter of China’s population at 307 million (July 2009 est.). Measured on a purchasing power parity (PPP) basis that adjusts for price differences, China in 2008 had the second-largest economy in the world after the US.89

As a nation, China is a growing net importer of food, placing an increasing strain on global food supply. China is now formally included by the Food and Agriculture Organisation of the United Nations in the list of countries suffering from “sever localised food insecurity”.90

Exacerbating China’s food security picture is the continued loss of domestic arable land because of erosion and economic development and the increasing impact of the use of arable land for biofuels. Food security is now high on the Chinese government’s agenda and in 2008 they announced a $5 billion plan to develop agricultural assets in Africa.91

Figure 6.7: Total Chinese cereal production between 1960 and 2007

100

1961 1970 1980 1990 2000 2007

200

300

400

500

Metric tons of grain (millions)

Source: Food and Agriculture Organisation of the United Nations, 2009

This has had the effect of ending China’s long-term upward trend in cereal production. Indeed, as Figure 6.7 illustrates, the recent trend actually shows a decrease in annual production. With 43% of the labour force employed in agriculture, the demographic trend produced by the ‘one child’ policy which has resulted in one of the most rapidly aging populations in the world, is all the more alarming.92 It is interesting to note that the one child policy has now been revoked, due in large part to its demographic repercussions. The effect this is likely to have on actual population growth in the coming years is unknown.

Demand growth in China is being driven primarily by economic growth, changing eating habits and increasing urbanisation of the population. It has been a common misperception during the global credit crunch that the country’s historical GDP growth, which averaged 10.8% from 2004 to 200893, was based almost entirely on export growth. Whilst this may have been true in the past, it is less true now.

In fact, despite a precipitous drop in global demand dropping off a cliff and exports tumbling by 17% in the year to March, the Chinese economy has surprised many observers by shrugging this off. During the same period the March to March year-on-year increase in industrial production is 8.3% up from an average of 3.8% in the previous two months. Retail sales were 16% higher in real terms than the previous year and fixed investment has soared by 30%.94

As Figure 6.8 shows, investment bank forecasts for 2009 GDP growth have been revised upwards from around the 6% mark to well above 8%, with Goldman Sachs revising their real, inflation-adjusted GDP growth to 8.3% (versus 6.0%) and to 10.9% for 2010.95 In June (2009) the OECD upped its estimate to 7.7% for 2009 and 9.3% for 2010.96

Figure 6.8: Changes in Chinese GDP growth forecasts

0

4

8

12

16

2007 2008

Forecast

2009

Year on year Quarter-on-quarter annualised

Source: JP Morgan, 2009

$5 billion Amount of money China is investing in agriculture in Africa

42

These forecasts are supported by the fact that China is one of the only major economies where bank lending has actually increased during the credit crunch, soaring by 30% in the year March to March. Additionally, housing sales rose by 36% in value. China was also in less of a credit bubble than most developed nations prior to the credit crunch, being in a much better position from the perspective of consumer debt to GDP ratios. It is one of the few countries in the world where bank credit has fallen relative to GDP over the past five years. Banks have an average loan-to-deposit ratio of only 67%, which is low by international standards, and less than 5% of banks’ loans are non-performing.97

Earlier in 2009, most economists thought a return to historical levels of Chinese GDP growth was impossible at a time of deep global recession, but many are now acknowledging that a fairly quick return to robust demand for food commodities is a very real possibility. This view is supported by the facts on the ground. In the first four months of 2009, China imported a record 13.9 million tons of soybeans.98

The Importance of Livestock, Meat and Other Animal Products

Livestock and the protein products derived from the various animals humans farm, including 1.5 billion cattle and 1.9 billion sheep and goats, is one of the most significant components of the planet’s agricultural economy in assessing future resource use and demand for agricultural land.99

The total area occupied by grazing land is equivalent to 26% of the ice-free terrestrial surface of the planet.100 As Figure 6.9 shows, pastureland area has grown to an even greater extent than cropland area in the last 100 years. In addition, the cropland area dedicated to feedcrop production amounts to 33% of total arable land. In all, livestock production accounts for 70% of all agricultural land and 30% of the usable land surface of the planet.101 This makes the livestock component of the demand equation rather important in assessing the world’s growing requirement for agricultural land.

13.9 million tons Record amount of soybeans imported into China in the first four months of 2009

Figure 6.9: Estimated changes in land use from 1700 to 1995

0

25

1700 1800 1900 1980

50

75

100

Pasture CroplandForestOther

Perc

enta

ge

of

tota

l la

nd

are

a

Source: Goldewijk and Battjes, 1997

Demand increases rapidly as the number of mouths to feed rises with population growth. But more importantly, rising incomes, especially in emerging economies means millions of new meat eaters come to the table annually. The recent decades of unparalleled global economic expansion, most pronounced in developing and emerging economies, has resulted in the proliferation of a new middle class that has purchasing power beyond their basic needs. This has resulted in a shift in these populations towards a higher protein diet. As Figure 6.10 shows, there has been a doubling of per capita meat consumption in developing countries since the early 80’s.

Figure 6.10: Trends in domestic per capita consumption of meat and other food types in developing countries between 1980 and 2003

250

Index, 1980 = 100

300

100

50

01980 1985 1990 1995 2000 2005

200

350

150

Meat Horticulture Cereals

Source: Food and Agriculture Organisation of the United Nations, 2007

43

Traditionally livestock production was supported by locally available feed resources such as free roaming grazing lands, crop and food waste. As demand for meat, dairy produce, eggs and other animal products has increasingly exceeded their supply, so the livestock industry has come to rely to an increasing extent on grain-based feedcrops.102

According to the United States Department of Agriculture, in modern intensive livestock farming where the majority of feed is grain based, 7kg of grain are required to produce one kilogramme of beef.103 On a global average basis, given that part of the production is based on other sources of feed, such as rangeland and organic waste, 3 kg of grain is required to produce 1 kg of meat.104 It also requires about 16,000 litres of water to produce 1 kg of meat if all components of the value chain (including feed) are taken into account.105 As Figure 6.11 indicates, this has resulted in a more than twofold rise in the use of animal feed even in developing countries since the early 80’s.

Due to the crucial requirement for feedcrops in modern livestock farming, any increased demand for meat results in an acceleration of demand for crop and rangeland area (as well as water). At least 35–40% of all cereal produced in 2008 was used as feed for livestock.106 This leaves an estimated 43% of cereal production available for human consumption after losses from harvest, post-harvest and distribution are taken into account.107

7 kilograms Weight of grain required to produce 1 kg of beef

16,000 litres Volume of water required to produce 1 kg of beef

35-40% Proportion of global grain production used as animal feed

100

1961 1966 1971 1976 1981 1986 1991 1996 2001

300

500

700

900

1100

1300

1500

1700

Ind

ex:

1961

=10

0

Total milk productionTotal ruminant meat production

Total pig and poultry meat productionCereals used as feed Total meat production

Figure 6.11: Comparative growth rates for production of selected animal products and feed grain use in developing countries between 1961 and 2001

Source: Food and Agriculture Organisation of the United Nations, 2006

44

As Figure 6.12 illustrates the amount of meat being consumed is increasing rapidly, especially in the developing world where per capita meat consumption has doubled between 1980 and 2002 and total meat consumption has nearly tripled. Even the developed world has shown increases on both with a roughly 20% increase in total consumption.

Shifts in Dietary Preference and the Effect on Food Demand

Given that nearly half of the world’s grain supply is utilised as animal feed, meat consumption has a major influence on global demand for land capable of producing the cereal crops on which livestock production has become increasingly dependent.

The link between increased wealth, measured as per capita income, and the increase in the proportion of animal products in diets is a well documented trend. In percentage terms, the effect of increased income on diets is greatest among lower and middle-income populations which currently consume the lowest percentage of animal products. Figure 6.13 shows that this is true at the individual as well as at the national level.108

84% Forecasted increase in the consumption of meat in the developing world between 2002 and 2030

191% Increase in the consumption of meat in the developing world between 1990 and 2002

Figure 6.12: Past and projected trends in consumption of meat and milk in developing and developed countries

Food demand Developing countries Developed countries

1980 1990 2002 2015 2030 1980 1990 2002 2015 2030

Annual per capita meat consumption (kg) 14 18 28 32 37 73 80 78 83 89

Annual per capita milk consumption (kg) 34 38 46 55 66 195 200 202 203 209

Total meat consumption (million tonnes) 47 73 137 184 252 86 100 102 112 121

Total milk consumption (million tonnes) 114 152 222 323 452 228 251 265 273 284

Source: Food and Agriculture Organisation of the United Nations, 2006

45

Figure 6.13: The relationship between meat consumption and per capita income in 2002

Source: Food and Agriculture Organisation of the United Nations, 2006; World Bank, 2006

0

20

40

60

80

100

120

140

Per capita income (US$ PPP)

USA

Japan

Thailand

India

Brazil

China

RussianFederation

Per

cap

ita

mea

t co

nsu

mp

tio

n (

kg)

0 5000 10000 15000 20000 25000 30000 35000 40000

High-income countries Low-income countries

Roots and tubers 11Cereals 55

Others 11

Olis and fats 9

Sugar and products 5

Meat and offal 3

Pulses, nuts and oil seeds 6

Roots and tubers 1

Cereals 45

Others 19

Olis and fats 13

Sugar and products 11

Meat and offal 8

Pulses, nuts and oil seeds 3

On a global basis meat production increased from an average of 27 kg meat per capita in the period 1974 to 1976 to 36 kg per capita in 1997 to 1999.109 Meat now accounts for around 8% of the world calorie intake.110 The average American consumer currently eats over twice as much meat as a Chinese consumer yet the Chinese population is more than 4 times the size of America’s, so demand growth in China could be enormous.

As Figure 6.14 illustrates, there also remains great potential for increased meat demand on a global basis given that low-income countries which account for 5.1 billion of the world’s population consume less than half as much meat (as a percentage of dietary energy intake) as high-income countries which account for only 1.3 billion of the world’s population.111

Figure 6.14: Dietary diversity by source of dietary energy in 2007

Source: Food and Agriculture Organisation of the United Nations, 2008

46

Some have argued that one solution to rising demand for grains might be to attempt to encourage consumers to eat less meat in order to alleviate some of the effects on an increasingly strained system. Quite aside from the fact that statistical data shows the opposite is happening, politically, this would be very difficult to achieve as the livestock industry is very socially significant. It accounts for 40% of agricultural GDP, employs 1.3 billion people globally, creates livelihoods for one billion of the world’s poor and provides roughly one-third of humanity’s protein intake.112

Attempts to curb the booming demand for animal products have generally proved ineffective, especially given the trend towards urbanisation discussed below.113 With fast food chains such as McDonalds, Kentucky Fried Chicken and Burger King using meat products at the core of their menus, this looks unlikely to change. Indeed, the consumption of mass produced fast foods is actually increasing rapidly in urbanised areas.114, 115, 116

Forecasts of Future Demand for Meat and Animal Products

As Figure 6.15 indicates, a modest increase in the consumption of animal products in industrialised nations from roughly 825 kilocalories per person per day today, to just under 900 kilocalories per person per day is forecast by 2050. Whilst the increase in meat consumption is expected across all groups, the change in eating habits in developing economies is much more pronounced and it is primarily these economies which will dictate future demand for meat.

Figure 6.15: Past and projected food consumption of livestock products

For past, three-year averages centered on the

indicated year. Livestock products include meats,

eggs, milk and dairy products (excluding butter).

0

100

200

300

400

500

600

700

800

900

1000

1962 1970 1980 1990 2000 2015 2030 2050

Kca

lori

es/p

erso

n/d

ay

East Asia

Sub-Saharan Africa

Industrialized

Transition

Latin America and the Caribbean

South Asia

Near East/North Africa

Projections

Source: Food and Agriculture Organisation of the United Nations, 2006

Given that changing eating habits are primarily driven by rising incomes and changes in social circumstances, such as the global trend towards urbanisation, there is great further potential for demand increase. As Figure 6.16 indicates there is still a relatively small proportion of the world’s population in the ‘high income’ bracket. On average, China and India which have the two fastest growing middle class populations in the world, aren’t yet in the ‘middle upper’ income band, but instead still remain in the ‘middle lower’ income band.

50% Forecasted proportion global cereal production used to feed livestock by 2050

47

Figure 6.16: Global demographic spread of income groups on a country by country basis in 2008

Source: World Bank, 2008

Gross National Income (GNI) percapita in 2007 (current USD)

High income

Middle, upper

Middle, lower

Low income

$11,500 or more

$3,700 - $11,500

$900 - $3,700

$900 or less

389% Forecasted increase in meat imports to Asia between 1999 and 2030

Many in India and China are still living either in poverty or in the low-income category so there is great scope for demand increase from changing eating habits in the future. In this sense developing countries are currently engaged in a catch-up process as their diets come to resemble more closely those of the developed world. This ‘nutrition transition’, already being observed in the developing world, is characterised by a shift from widespread undernourishment to higher calorie, more varied diets involving a higher level of animal products.117

The nutrition transition often culminates in over-nutrition and a growth in the level of obesity. Surprisingly, this is particularly true in the developing world where public health education is less prevalent. The World Health Organization (WHO) estimates that there are 300 million obese adults and 115 million suffering from obesity-related conditions in the developing world.118 The effect of changing diets is further exacerbated by a trend towards reduced physical activity in urban compared to rural populations.119

As can be expected, estimates of the future demand increases for animal products are wide ranging as there are many interrelated factors to take into account in any forecasting model. Some of the more conservative estimates from a number of credible sources are detailed below:

1. Pingali 2004, Food and Agriculture Organisation of the United Nations Working Paper “Net imports [to Asia] of [vegetables, milk and dairy products] increased by a factor of 13 over the last 40 years, rising from a deficit of US$1.7 billion in 1961/1963 to US$24 billion in 1997/1999. Between 1997/1999 and 2030, the cumulative increase in imports of these products is expected to be 154% and 17% for vegetable oils and oilseeds, while meat imports are expected to increase by 389%.”120

2. Food and Agriculture Organisation of the United Nations 2006\ “As nearly half of the world’s cereal production is used to produce animal feed, the dietary proportion of meat has a major influence on global food demand. With meat consumption projected to increase from 37.4 kg/person/year in 2000 to over 52 kg/person/year by 2050, cereal requirements for more intensive meat production may increase substantially to more than 50% of total cereal production.” 121

3. Food and Agriculture Organisation of the United Nations 2003; 2006 “Cereal products are increasingly used as feed for livestock, estimated to be at least 35–40% of all cereal produced in 2008 and projected to reach nearly 45–50% by 2050 if meat consumption increases.” 122

4. Food and Agriculture Organisation of the United Nations 2006a “The growth in demand for animal products over the coming decades will be significant. Although the annual growth rate will be somewhat slower than in recent decades, the growth in absolute volume will be vast. Global production of meat is projected to more than double from

48

229 million tonnes in 1999/2001 to 465 million tonnes in 2050, and that of milk to increase from 580 to 1,043 million tonnes. The bulk of the growth in meat and in milk production will occur in developing countries.” 12

5. Joint OECD and Food and Agriculture Organisation of the United Nations Agricultural Outlook 2008-2017 (2008) “Increasing world livestock production will continue to be the driving force behind the consumption of oilseed-derived protein meal, with most of the growth taking place in non-OECD countries. Comparing 2017 with the 2005-07 base period, oilseed meal consumption in the developing region will rise by almost 50%, with China accounting for roughly half the growth alone, to satisfy its burgeoning livestock sector.” 124

The overall mid-term trend that is emerging is for the homogenization of food tastes across the globe as poorer nations’ eating habits come more closely to resemble those of richer nations. Time and again, it has been demonstrated that there is a high income elasticity of demand for meat and other animal products.125 In other words, rises in average incomes translate into rapid increases in demand for livestock products with the result that the difference in average consumption figures for meat, milk and eggs that currently exists between developed and developing countries will reduce over time.

Trends in Urbanisation and the Effect on Food Demand

Another important factor determining demand for food is urbanization. Urbanization has an impact on patterns of food consumption due to the fact that in cities people typically consume more food away from home, and consume higher amounts of precooked, fast and convenience foods, and snacks. 126, 127, 128 This has the effect of increasing the consumption of animal products as rural populations move into urban areas.

Figure 6.17: Changes in historical and projected com-position of human diet and the nutritional value

Kilocalories percapita/day

0

500

1000

1500

2000

2500

1964-66 1997-99 2030

Other

Pulses

Roots andtubers

Meat

Sugar

Vegetableoils

Othercereals

Wheat

Rice

Source: Food and Agriculture Organisation of the United Nations,

2008 and 2009

6.18: Urbanization rates and urbanization growth rates

Region Urban population as percent of total population in 2005

Urbanization growth rate (Percentage per annum 1991–2005)

South Asia 29 2.8

East Asia and the Pacific 57 2.4

Sub-Saharan Africa 37 4.4

West Asia and North Africa 59 2.8

Latin America and the Caribbean 78 2.1

Developing countries 57 3.1

Developed countries 73 0.6

World 49 2.2

Source: Food and Agriculture Organisation of the United Nations, 2006

49

In 2005 (the latest year for which statistics are available) 49% of the world population were living in cities, however urbanization rates are 73% in developed countries and 78% in Latin America, whereas they average 57% in developing countries (see Figure 6.18). This means there is still great latitude for growth of urban populations along with the resultant growth in food demand. This is especially true of South East Asia and Sub-Saharan Africa where much of the world’s population growth is taking place. These regions currently have below average urbanisation rates with 37 and 29 percent urbanization respectively. Virtually all population growth forecast for these regions between 2000 and 2030 will be in urban areas. 129, 130

As Figure 6.19 shows, world urban population is forecast to almost double by 2030. By then the number of people living in urban areas is forecast to increase from today’s figure of just over 3 billion people to roughly 5 billion people.131, 132

Historically there is a clear link between urbanisation and increased consumption of animal products (see Figure 6.20). Studies for China clearly show that an increase in urbanization has a positive effect on per capita consumption levels of animal products.133 Between 1981 and 2001 human consumption of grains dropped by 7% in rural areas of China and dropped by 45% in urban areas, whilst meat and egg consumption increased by 85% and 278% respectively in urban areas and 29% and 113% in rural areas.134

Food Wastage Trends and the Implications for Food Demand

Another hugely important factor to take into account regarding growing incomes and increasing urbanisation is the fact that these trends are accompanied by an increase in the quantity of wasted or discarded food.135 This is not due only to general wastage at the household or retailer level but also right through the supply chain down to the level of production. Rural subsistence farmers produce their own food which they eat themselves and therefore, given that there are fewer steps in the value chain between production and consumption, the level of wastage is lower.

85% Increase in the consumption of meat in urban areas of China between 1981 and 2001

278% Increase in the consumption of eggs in urban areas of China between

1981 and 2001

Figure 6.19: Past and projected global rural and urban populations from 1950 to 2030

Figure 6.20: Consumption function of animal products at different levels of urbanization in China

Figure 6.21: Food losses for different commodities

Source: Food and Agriculture Organisation of the United Nations, 2006

Source: Rae et al., 2008; Food and Agriculture Organisation of the

United Nations, 2006

Rural

1950 1960 1970 1980 1990 2000 2010 2020 2030

Urban

0

1

2

3

4

5

6

Bil

lio

n p

eop

le

Projections

100

400 600 800 1000 1200

150

200

250

300

350

400

450

500

Real PCE/person (1980 US$ppp)

U=30%

U=25%

U=20%

Co

nsu

mp

tio

n (

kcal

ori

es/p

erso

n/d

ay)

Food eaten/lost (million tons)

Fresh fruits andvegetables

Fluid milk

Processed fruits and veg

Meat, poultry and �sh

Grain products

Caloric sweeteners

Fats and oils

Other foods (includingeggs and other dairy products)

Food eaten Food lost

0 10 15 20 255

Source: Kantor et al., 1999; Food and Agriculture Organisation of the

United Nations, 2009

50

Statistics from the late 1990’s show that farmers globally were producing on average 4,600 kcal/capita/day at the ‘farm gate’ prior to conversion into food or use as animal feed.136 After removing all losses at the various stages of the food economy, approximately 2,800 kcal/capita/day of a combination of animal and vegetable based foods are available for supply. This figure is further reduced to approximately 2,000 kcal/capita/day at the consumption level due to further losses in the supply chain prior to food actually arriving on the plate of the consumer. This equates to only 43% of the potential edible crop harvest available at the beginning of the supply chain.137

These figures are global averages. Generally, the more developed the society, the more extreme the losses. Wastage and losses begin at the bottom of the supply chain and follow through all the way to the top in more developed nations. In the US, losses at the farm level are roughly 15-35% depending on the industry, while losses in the retail sector are roughly 26%. In addition to the losses that occur lower down the supply chain, the more opulent and urbanised the society becomes, the greater the wastage at the higher end of the supply chain closer to the consumer. In the United States for example, 30% of all food, worth US$48.3 billion, is thrown away annually by the consumer. Overall annual losses in the US are therefore estimated at US$90 billion to US$100 billion.

Figure 6.22: Gross estimated global losses through conversion and wastage at different stages of the food supply chain

Edible crop harvest 4600 kcal

Harvest losses

After harvest 4000 kcal

Animal feed

Meat and Dairy 2800 kcal

Distribution losses and waste

Available for household consumption 2000 kcal

0

1000

Field Household

2000

3000

4000

Source: Lundqvist et al., 2008; Food and Agriculture Organisation of

the United Nations, 2009

These figures are global averages. Generally, the more developed the society, the more extreme the losses. Wastage and losses begin at the bottom of the supply chain and follow through all the way to the top in more developed nations. In the US, losses at the farm level are roughly 15-35% depending on the industry, while losses in the retail sector are roughly 26%. In addition to the losses that occur lower down the supply chain, the more opulent and urbanised the society becomes, the greater the wastage at the higher end of the supply chain closer to the consumer. In the United States for example, 30% of all food, worth US$48.3 billion, is thrown away annually by the consumer. Overall annual losses in the US are therefore estimated at US$90 billion to US$100 billion.138

This characteristic has been observed in other affluent societies. In the United Kingdom the figures are roughly the same as those for the US with households wasting an estimated 6.7 million tonnes of food every year, around one third of the 21.7 million tonnes of food purchased annually. This consumer level food wastage figure of 32% compares closely with the 30% statistic in the US.139, 140 Another study conducted in Australia surveyed over 1,600 households and found that on a country-wide basis, $10.5 billion was spent on items that were never used or thrown away, equivalent to more than $5,000/capita/year.141

In terms of food wastage from animal products, this of course has an amplifying effect, given the feed-crops involved in the production of the produce in the first place. A number of organisations internationally are pushing for increased efficiency and lobbying governments, industry and the public to reduce wastage at the various levels of the value chain. Many of these organisations recognise the huge implications for climate change both in terms of the carbon cost of producing wasted food and the production of the particularly potent greenhouse gas, methane (23 times more potent than CO2 in terms of its warming effect142) from rotting food in landfill sites.

43% Proportion of edible crop produce available for consumption after supply-chain losses, wastage and non-food uses

26% Proportion of food wasted by

US retailers

30% Proportion of food wasted by

US consumers

51

For example a UK based group, WRAP (Waste and Resource Action Program), estimates that if food were not discarded in the way it is in the UK, the level of greenhouse gas abatement would be equivalent to removing 1 in 5 cars from the road.143 Whilst these types of campaign messages are well intentioned, one has to question their effectiveness in changing behaviour in UK kitchens and at the dinner table, let alone in the developing world where the new urban masses are less aware of the plight of polar bears and far more concerned with upping their intake of hamburgers and fried chicken.

Unsurprisingly, this type of activism is most prevalent in the more wasteful affluent societies where food wastage has remained fairly constant at the higher levels for years and the effect of this wastage is already factored into the global food economy. Given the increasing trends towards urbanisation and affluence in the developing world and the resultant changes in eating habits and behaviour, food wastage has the potential to play a significant role in future food demand. Indeed, trends in developing countries suggest precisely that.

Increased Market Volatility and Low Food Stocks and the Implications for Commodity Prices

In spite of a strong recovery in grain production in 2008, prevailing low stock levels suggest continued market tightness, especially when demand prospects for food, feed and fuels show no sign of abating. As long as stocks remain tight, this will apply upward pressure on prices. As the OECD-FAO Agricultural Outlook 2008-2017 puts it:

“Cereal markets are expected to remain closely balanced [over the period 2008-2017] as stock to use ratios are expected to remain low in the years to come despite growth in cereal production. This implies high grain prices throughout most of the [period 2008-2017] as global stocks have declined to record-low levels over the last decade, such that any variations in quantities produced and demanded cannot be buffered and hence have a proportionally much greater effect on market prices.” 144

The supply volatility shown in Figure 6.23 is caused by wide variations in yield in primary producing regions which are increasing along with the rise in extreme weather events. Annual fluctuations in world cereal production between 1960 and 2007 varied between 9.8% and –3.9% of the previous year’s production. This implies that supplies to the world market (the sum of the surplus in the supply of each region) can reduce by one-third or increase two-fold.145

The increased yield volatility due to climate change related extreme weather events (note the yield drops in Australia due to the droughts of 2002 and 2006 shown in Figure 6.24) in combination with low grain stocks, are creating the conditions for a future of higher agricultural commodity prices which may persist for some time to come. As a 2009 United Nations report on the food crisis of 2008 put it:

Figure 6.23: Volatility of production around trend be-tween 1960 and 2007 for various food commodities

3% 5% 7% 9% 11% 13% 15%

Bananas

Sugar

Tea

Rice

Wheat

Palm oil

Maize

Soybeans

Cocoa

Coffee

Source: World Bank, 2009

“Stocks of cereals and vegetable oil have fallen to low levels relative to use, reducing the buffer against shocks in supply and demand. Stocks are not expected to be fully replenished over the coming 10 years, implying that tight markets may be a permanent factor in the next decade. Climate change could increase the variability in annual production, leading also to greater future price volatility.”

30% Proportion of food wasted by British

consumers

52

The Effects of Rising Demand on Policy Decisions and the Implications for Agricultural Commodity Prices

The sudden rise in global food prices during 2008 triggered a wide variety of policy responses from governments. These included easing of import taxes on food, imposing export restrictions to maintain domestic food availability, applying price controls and subsidies to keep food affordable and drawing down of domestic grain stocks to stabilize prices.

Figure 6.24: Deviations from trend in wheat and coarse grain yields between 1995 and 2007

Source: OECD Secretariat, 2009; Food and Agriculture Organisation of the United Nations, 2009Note: Yield trends are estimated over these years to be 0.7% for the EU (27), 1.0% for Canada, and 2.6% for the US, and assumed to be 0% for Australia.

Australia Canada EU27 United States

-1.0

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

-0.8

-0.6

-0.4

-0.2

0

0.2

0.4

0.6

0.8

Tonnes per hectares

Figure 6.25: Policy actions to address high food prices, by region

Source: World Bank, 2008; Food and Agriculture Organisation of the United Nations, 2008

100

80

60

40

20

0

Apply price controls / provide consumer subsidies

Africa East Asia Europe and central Asia

Near East and North Africa

South AsiaLatin America andthe Caribbean

Increase supply using foodgrain stocksReduce taxes on foodgrains Impose export restrictions

Countries carrying out policy action (%)

None

Figure 6.25 shows a survey of policy responses conducted by the World Bank and the United Nations from 77 countries between 2007 and early 2008. About half of the countries reduced cereal import taxes and more than half applied price controls or consumer subsidies in an attempt to keep domestic food prices below world average prices, whilst one-quarter of the governments reviewed actually imposed some form of export restriction. Only 16% of the countries surveyed did not employ any policy response to mitigate soaring food prices.

53

Such policy responses from government disrupt the free market mechanisms required to produce the very incentives necessary to alleviate supply shortages. This can have the unintended consequence of exacerbating the issues which create the environment for high prices in the first place. In the words of a recent United Nations report, The State of Food Insecurity in the World 2008:

“Firstly, by maintaining farmgate prices at artificially low levels, policies may be discouraging the much-needed supply response and potential productivity increases. Second, export restrictions lower food supplies in international markets, pushing prices higher and aggravating the global situation. Third, higher subsidies and/or lower taxes and tariffs increase the pressure on national budgets and reduce the fiscal resources available for much-needed public investment [in agriculture] and other development expenditure.

In summary, some of the policy measures employed tend to hurt producers and trade partners and actually contribute to volatility of world prices. Experience has shown that price controls rarely succeed in controlling prices for long. Moreover, they place a heavy fiscal burden on governments and create disincentives for supply responses by farmers.”146

CHAPTER 7

Constraints to Current Supply and Limitations to Further Increases in Agricultural Productivity

55

“If there is climate change taking place, the best way to participate is through

agriculture.” Jim Rogers, 2009

“Feeding the majority of the poor and vulnerable populations in Africa,

while preserving the natural resource base and the environment, is one of

the most pressing development challenges of the twenty-first century.”

Dr. Akin Adesina, Vice President of the Alliance for a Green Revolution in Africa and Associate Director of

the Rockefeller Foundation, 2009

Figure 7.1: Trends in global average surface temperatures between 1880 and 2008

1880 1900 1920 1940 1960 1980 2000

0.0

0.2

- 0.2

0.4

0.6

- 0.4

- 0.6

14.0

14.2

13.8

14.4

14.6

13.6

13.4

Differences in temperaturefrom 1961-199 0Mean value, °C

Estimated actualglobal mean

temperature, °C

Source: US National Oceanic and Atmospheric Administration, 2008

Impacts of Climate Change

A comprehensive review of climate change is beyond the scope of this document. However, prior to discussing the scientific community’s consensus view of the implications of climate change to agriculture, it is worth providing the reader with important background information.

There is a growing body of historical data from actual observations of changes in weather conditions, in particular with respect to severe weather events, which highlight the most immediate climate related threats to global agricultural productivity.

Statistical data shows the undeniable trend towards a greater frequency of weather and temperature related anomalies. Figure 7.1 illustrates the increase in global average surface temperatures, which has been particularly pronounced since the 80’s. This has had the effect of distorting normal rainfall patterns and creating a greater frequency of extreme weather events.

56

As Figure 7.2 shows, the trend in rainfall variability has created a greater frequency of dryer years, roughly doubling the number of dry areas in the world, as illustrated in Figure 7.3.

Despite this, as seen in Figure 7.4, the number of floods has roughly quadrupled since 1980, due to factors such as heavier rainfall and damage to ecosystems which normally regulate the release of ground water.

Source: Intergovernmental Panel on Climate Change, 2007 Source: Intergovernmental Panel on Climate Change, 2007

Index

100

75

50

25

01950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000

Figure 7.2: Trends in rainfall variability in the Sahel region of Sub-Saharan Africa

Source: World Meteorological Association Commission for Agricultural Meteorology, 2006

Figure 7.3: Increase in dry areas globally between 1950 and 2005

Figure 7.4: Trends in climate disasters since 1980 versus earthquakes

Dry areas in % of total area

1950

30%

20%

15%

10%

35%

40%

1960 1970 1980 1990 2000 2005

25%

Spatial coverage: 75N-60S

200

150

100

50

0

1980 1985 1990 1995 2000 2005 2010

250

CyclonesFloods Earthquakes

57

Figure 7.5: A comparison of all natural disasters against earthquakes between 1900 and 2006

All disasters include:drought, earthquake,extreme temperatures, famine, �ood, insect infestation, slides, volcanic eruption, wave and surge, wild �res,wind storm.

Number of disasters per year

EarthquakesAll disasters

1900 1920 1940 1960 1980 2000 2010

450

400

350

300

250

200

150

100

50

0

Source: CRED Annual Disaster Statistical Review, 2006, 2007;

Intergovernmental Panel on Climate Change, 2007

Figure 7.6: Causes of food emergencies between 1981 and 2007

1981 1985 1989 1993 1997 2001 2005

70

60

50

40

30

20

10

0

Human-induced disasters

Number of emergencies

Natural disasters Total

Source: Food and Agriculture Organisation of the United Nations, 2008

As Figure 7.5 shows, the total number of natural disasters (excluding earthquakes) has increased approximately 10 times between 1960 and the present time, with the number of food emergencies roughly doubling since 1980 (see Figure 7.6). These effects are also becoming more sudden and unpredictable, making mitigation and management ever more challenging and amplifying the negative effects on agricultural productivity (see Figure 7.7).

Figure 7.7: Changing nature of natural and human-induced disasters

Natural

1980’s

1990’s

2000’s

Human-induced

86% 98%

80% 89%

73%

Sudden onset Socio-economic

War and con�ictSlow onset

27%

20%11%

14%2%

73%

Source: Food and Agriculture Organisation of the United Nations, 2008

26 Number of food emergencies in 1981

58

This interaction between climate change induced severe weather events and the socio-economic fabric of societies thus exerts further indirect pressure on food production by stimulating conflicts related to food insecurity. A society’s food producing capabilities are reduced during times of conflict. The level of socio-economic induced disasters has increased significantly as a proportion of total human-induced disasters in recent years, as shown in Figure 7.7.

There is a strong link between the state of the environment and food production. The natural environment is the platform upon which all life, and most importantly from a human perspective, food production, is based. Yields are affected by the complex between numerous environmental factors from the length of the growing season (as dictated by weather and water availability) to the availability of insects for pollination, and the natural control of weeds, diseases and insect pests.

All of these factors in combination, known as ecosystem services, help to sustain agricultural productivity. Figure 7.8 summarises the interactions between climate driven phenomena and their capacity to either increase or decrease agricultural yields. The negative impacts of climate change on productivity have already been observed in many regions of the world and are particularly severe in Africa where drought and disease have had devastating effects on yields.147

According to one World Bank forecast extreme whether events caused by climate change and water scarcity could

have significant impacts on yield. Agricultural productiv-ity could actually decrease during the next 30 years, rather than increase as more optimistic forecasts are predicting.148 Against a background of rising demand this could have significant implications for commodity prices in the coming years. In their words:

“Global temperatures are expected to rise by 0.4 degrees Celsius between now and 2030. This could lead to an overall decline in agricultural productivity of between 1 and 10 percent by 2030 (compared with a counterfactual where average global temperatures remained stable), with India, Sub-Saharan Africa, and parts of Latin America being most affected.”149

It should be noted that a 0.4 degree Celsius temperature rise actually lies at the conservative end of the scale in terms of the spectrum of forecasts from climate models. It stems from the 2001 report by the Intergovernmental Panel on Climate Change (IPCC) which predicted that temperatures would increase by 1.4°C to 5.8°C between 2000 and 2100.

10% Potential overall decline in global agricultural productivity by 2030 due to further temperature increase of 0.4 oC

Figure 7.8: Impacts of climate driven phenomena on agricultural productivity

Climate driven phenomena Agriculture, forestry and ecosystems

TEMPERATURE CHANGE Over most land areas, warmer and fewer cold days and nights, warmer and more frequent hot days and nights

Increased yields in colder environments•Decreased yields in warmer environments•Increased insect outbreaks•

HEAT WAVES/ WARM SPELLS Frequency increases over most land areas

Reduced yields in warmer regions due to heat stress•Wildfire danger increases•

HEAVY PRECIPITATION EVENTS Frequency increases over most land areas

Damage to crops•Soil erosion•Inability to cultivate land due to waterlogging of soils•

DROUGHT Affected areas increase

Land degradation•Crop damage and failure•Increased livestock deaths•Increased risk of wildfire•

CYCLONES AND STORM SURGES Frequency increases

Damage to crops•Windthrow (uprooting) of trees•Damage to coral reefs•

SEA LEVEL RISE Increased incidence of extreme high sea-level (excluding tsunamis)

Salinisation of irrigation water, estuaries and•freshwater systems•

Source: Intergovernmental Panel on Climate Change, 2008

59

There are a number of credible studies which view these estimates as being on the low side as they do not take full account of ‘tipping points’ caused by feedback loops in various earth systems. For example, a study published by Oxford University in 2005, based on the average results of 2,578 computer simulations, forecast a temperature rise of between 1.9°C and 11.5°C, with the majority of model results ranging from 2°C to 8°C.150

However, as Figure 7.9 shows, even at the lower end of the scale the consequences for global agricultural productivity would still be severe. It is no surprise therefore that an enormous amount of research is being conducted into the likely effects of climate change on food production. Whilst there are a number of models from credible sources predicting differing effects, especially in the mid-term (2030–2050), the general consensus is that on a global scale, the effects will be negative, with an increasing number of models agreeing on rising negative impacts over the longer term. In other words, the effects of climate change on agriculture and yields will become increasingly more noticeable as time goes on. 151, 152

Figure 7.9: Projected impacts of climate change

Global temperature increase (relative to pre-industrial)

0°C +1°C +2°C +3°C +4°C +5°C +6°C

0°C +1°C +2°C +3°C +4°C +5°C +6°C

Food

Water

Ecosystems

Extreme weather events

Risk of abrupt and major irreversible changes

Falling crop yields in many areas, particulary developing regions

Possible rising yields in some high latitude regions

Small mountain glaciers disappear,

Extensive damage to coral reefs

Falling yields in many developed regions

Sea level rise threatens major cities

Rising number of species face extinction

Rising intensity of storms, forest �res, droughts, �ooding and heat waves

Increasing risk of dangerous feedbacks and abrupt, large-scale shifts in the climate system

impacts on water suppliesSigni�cant decreases in water availability in many areas, including Mediterranean and Southern Africa

Source: Stern Review, 2008

15% Decline in production of wheat in Southern Africa by 2030

27% Decline in production of maize in Southern Africa by 2030

60

For example, by 2050 climate change may cause large portions of the Himalayan glaciers to melt, disturb monsoon patterns and result in increased floods and seasonal drought on irrigated croplands in Asia which account for 25% of the world cereal production. On average, yields of the dominant regional crops may fall by 15–35% in Africa and Western Asia once temperatures rise by 3 or 4 OC.153 Even without including the effects of extreme weather events in forecasting models, a study for Southern Africa forecasts declines in production of 15% for wheat and 27% for maize by 2030 at a time when the more extreme effects of climate change would only just be emerging.154

As Figure 7.10 indicates, there are some regions of the world whose agricultural productivity may increase over time, mainly in the far North and South of the planet.155 It is bitterly ironic that many of the countries whose agricultural productivity is destined to benefit from rising temperatures, such as the northern part of the US, Canada and much of Northern Europe, are the very countries who are most responsible for generating many of the greenhouse gasses which are the root cause of climate change in the first place.

The forecasts in Figure 7.10 take account of the direct fertilization effect of rising carbon dioxide concentration (CO2). Some studies have argued that this may offset losses caused by increased temperature and decreased soil

moisture which would otherwise act to reduce global crop yields by 2050.156 The forecasts presented in Figure 7.10 do not however take account of the effects of extreme whether events such as flooding, droughts and storms. These will likely combine to depress yields and increase production risks in many world regions regardless of the positive effects of increased CO2 concentrations.157 Indeed, the Intergovernmental Panel on Climate Change projects that changes in the frequency and severity of extreme climate events will have more serious consequences for food production and food security than changes in projected mean temperatures and precipitation.158

This uncertainty regarding the future effects of climate change severely increases uncertainty in forecasting global food production. For example one scenario predicted by the World Bank’s ENVISAGE forecasting model predicts annual productivity gains of 1.2% per year on average by 2030 and an annual rise in commodity prices of only 0.3%.159 However, the Food and Agriculture Organisation of the United Nations states:

“The current scenarios of losses and constraints due to climate change and environmental degradation – with no policy change - suggest that production increases could fall to 0.87% towards 2030 and only 0.5% between 2030–2050.”160

Figure 7.10: Projected losses in food production due to climate change by 2080

Projected changes in agricultural productivity to 2080 due to climate change,incorporating the effects of carbon fertilization

-50% -15% 0% +15% +35% No data

Source: Cline et al., 2007; Food and Agriculture Organisation of the United Nations, 2009

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The World Bank further acknowledges that: “A more-rapid-than-expected warming of the planet could reduce agricultural productivity sharply, leading to rising food prices”.161

The data from Figure 7.10 is based on a consensus estimate of 6 climate models and two crop modelling methods, so it can be viewed as an average of various forecasts. By 2080, assuming a 4.4°C increase in temperature and a 2.9% increase in precipitation, even without taking account of extreme whether variables, global agricultural output potential is forecast to decrease by about 6 to 16%.

It should be noted that these effects are additional to other effects reducing productivity such as soil degradation from erosion, salinization and nutrient depletion. The effects beyond 2080 are even more extreme with agricultural output being reduced by more than 60% for several African countries or an average 16–27%, depending on the effect of carbon fertilization.162

Impacts of Water Scarcity

Water is essential to humanity, not simply in its raw form as drinking water, but also by virtue of being one of the most important limiting factors in food production.163 The agricultural sector is responsible for between 70% and 85% of all human water consumption.164, 165 Irrigated land currently produces roughly 40% of the world’s food on 17% of its land, being on average 2 to 3 times more productive than rainfed lands.166

As Figure 7.11 indicates current projections are for a doubling in demand for water required for food production by 2050 with an increase in demand of 22–32% by 2025.167, 168 The World Health Organisation estimates that water scarcity will affect over 1.8 billion people by 2025.169 Unsurprisingly irrigation water costs are rising globally. Since 1990 in the Indo-Gangetic Basin of India for example, recent studies have shown the cost of water has increased by 400–500%.170

Irrigation water supply is threatened by a number of climate related trends, intensive agricultural practices and unsustainable development. This includes depletion of groundwater, particularly in poorer developing countries with rapid population growth and the destruction of watersheds and natural water reservoirs, such as forests and wetlands which also serve as flood buffers.171 In areas affected by these problems, water-deficit has obvious knock on effects on food security.172, 173

Figure 7.11: Historical and projected changes in water consumption for food production between 1960 and 2050

2000

4000

6000

8000

1960

1970

1980

1990

2002

2015

2030

2050

Increase, over 2002 water requirements, needed to meet the 2015 hunger target

Increases, over 2002 water requirements, needed to eradicate poverty by 2030 and 2050 respectively

Water requirements

for food production

(km³/year)

Source: De Fraiture et al., 2003; Shen et al., 2008; United Nations

Environment Program, 2005

70-80% Proportion of human water

consumption used in Agriculture

22-32% Increase in water demand for food

production by 2025

27% Proportion of world’s food produced on irrigated land

62

From a climate change perspective, perhaps one of the most crucial issues affecting future productivity is the fact that much of the world’s irrigated land is downstream of areas where snow and glacial mass are the primary sources of irrigation water.174 The rapid thawing of terrestrial ice has been one of the more publicised effects of global warming, particularly in northern hemisphere see ice, the rate of decline of which is shown in Figure 7.12. Of greater importance for global food production is the data in Figure 7.13 which shows the increasing rate of global glacier loss since 1960. The rate of loss has reached particularly high levels in recent years.

The regions of highest loss include Central Asia, parts of the Himalayan Hindu Kush, China, India, Pakistan and parts of the Andes. Throughout these regions the trend which is emerging indicates that glaciers and ice everywhere are melting above the rates forecast in most climate models. Whilst this may increase irrigation resources in the short-term, it will eventually lead to dramatic declines in water availability for irrigation with serious adverse consequences for food production.175

In areas heavily dependent on snow and glacial melt water, such as Afghanistan, Bangladesh, Bhutan, China, India, Myanmar, Nepal and Pakistan, collectively an area with an approximate combined population of 2.5 billion people, nearly 35% of crop production is based on irrigation. Given that a large proportion of future population increase is forecast to take place in these regions, water demand is projected to increase by at least 70–90% by 2050. Many of these areas, in particular Central Asia, China and Pakistan are already under direct water stress even at current population levels.176 As Figure 7.14 shows, these are far from the only areas of the planet already suffering from ‘very high’ levels of water stress.

Figure 7.12: Reduction in minimum sea ice extent in the northern hemisphere between 1978 and 2008

Northern hemisphere ice cover anomalies

Million square kilometres

200819781980 1985 1990 1995 2000 2005

1.5

1.0

0.5

0.0

-0.5

-1.0

-1.5

-2.0

-2.5

-3.0

All time record low in September 2007

1966 to 1990 mean

Source: US National Oceanic and Atmospheric Administration, 2008

Figure 7.13: Reduction in global glacial mass between 1960 and 2003

Annual deviation

Hundred thousand

million tonnes

1992

Loss

0

1960

- 1

- 3

1970 1980 1990 2000 2003

Cumulative loss

Hundred thousand

million tonnes

1

- 2

- 4

- 5

0

-20

-60

-40

-80

Increase

Source: Intergovernmental Panel on Climate Change, 2007

1.8 billion Number of people affected by water scarcity by 2025

63

Figure 7.14: Global water stress levels in 2000

Water stress: ratio between withdrawl and availability (in 2000)

no stress

0 0.1 0.2 0.4 0.8

low moderate high very highGlobal regions whereclimate change is projectedto decrease annual runoffand water availability

Source: Intergovernmental Panel on Climate Change, 2007

Two key questions are important in assessing the future affect on food production. Firstly, how much of the world’s food production is dependent on glacial melt water, and secondly, and secondly, how quickly might this resource diminish? According to the United Nations, melt water from the Himalayas supports the production of over 514 million tonnes of cereals annually, equivalent to 55.5% of Asia’s cereal production and 25% of the world’s current production. An estimated 857,830,000 ha of cropland in these areas is dependent upon the mountains’ water flow for irrigation.177, 178

Given that irrigated land is on average far more productive than rainfed land, particularly in many of the areas in question where monsoon seasons may result in sporadic rains, any reduction in the proportion of irrigated land will have a negative effect on yields. For instance, statistics show that yield for rice grown on irrigated land is in the range of 2–10 tonnes/ha, compared to 2–3 tonnes/ha for non-irrigated land.179, 180 A reduction of 10-30% in the yields on lands irrigated by the mountains of the Himalayas and Central Asia would translate into a 1.7–5.0% reduction in world cereal production.181

On a global scale a 10–30% irrigated yield loss would equate to a 4–12% reduction in cereal production. Greater losses than this have already been observed in a number of regions due to over-extraction from aquifers and rivers. On

a global scale almost half of all irrigation water comes from non-renewable and non-local sources such as glacial melt water.182

The importance of glacial melt water to world food production is beyond doubt. What is less certain is the rate of depletion in glaciers due to global warming. The United Nations in a recent document discussing the issue puts it thus:

“The assumption that the melting glaciers would cause reduced production by 2050, as indicated, and that a similar estimate for the remaining irrigated lands is considered an upper estimate, then the range of reduced yields due to water scarcity is in the region of 1.7–12% of the projected yield by 2050. Given the high dependence on many of the world’s rivers for irrigation, this estimate could be quite optimistic.”

25% Proportion of world cereal production dependent on Himalayan

glacial melt water

64

The document goes on to say, “The combined effects of melting of glaciers, seasonal floods and overuse of ground and surface water for industry, settlements and irrigation, combined with poor water-use efficiency are difficult to estimate. However, given that 40% of the world’s crop yields are based on irrigation, and almost half of this from the basins of rivers originating in the Himalayas alone, the effect of water scarcity can be substantial.”

According to climate models, rising temperatures combined with changes in the monsoon could result in the loss of up to 80% of the glaciated area by the end of the century.184,

185 A disturbing trend is for glacial melt to exceed the rates forecast by current climate models. The reasons for this are the subject of ongoing debate and research. What is not under dispute are the factual observations of the phenomenon. For example, actual measurements taken in Nepal indicate that warming at high altitudes is occurring at up to 0.03 OC per year, much faster than the global average. Warming has been observed to occur at faster rates the higher the altitude, reaching 0.06 OC per year in some cases.186, 187 If current trends continue, annual river flows dependent on glaciers will inevitably decline.188

Figure 7.15: River basins and their hydrological significance

Source: United Nation Environment Program, 2007; Viviroli, D., Weingartner, R. et al., 2003

1.7-12% Possible decline in global cereal production by 2050 due to reduction in glacial melt water

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Impacts of Drought

In the case of rainfed crops a key inhibitor of productivity is drought. Having risen steeply in recent years, droughts are forecast to increase in many regions of the world as a result of climate change. Apart from their effect on arable crops, droughts have also been particularly devastating on livestock production. In Africa for example, data from nine major droughts in the study countries between 1981 and 2000 resulted in an average livestock loss of 40% with the lowest recorded loss being 22% of animals and the highest loss being 90%, as seen in Figure 7.16.189

Impacts of Species Infestations

Worldwide, there are estimated to be 67,000 species which attack crops, including 9,000 insects and mites, 50,000 pathogens and 8,000 weeds. It is further estimated that up to 70% of these pests are introduced.190 Of a total crop value of US$267 billion covered in a number of studies, losses in yield due to alien invasive weeds and pathogens are estimated to be responsible for 8.5% and 7.5% in yield reduction, equivalent to US$24 billion and US$21 billion of crop value of respectively. 191, 192, 193 Other estimates for annual losses range from US$1.1 to US$55 billion, equivalent to 17% crop loss at the upper end. 194,

195, 196 These figures only take account of crop loss and do not include the additional costs associated with control of species infestations.

A large number of studies have concluded that increased climate extremes could worsen the impact of weeds, diseases and pests and enhance the spread of invasive species. 197, 198, 199, 200, 201 This clearly has the potential for devastating impacts on global food production. Indeed a number of studies have demonstrated that IAS are now the second gravest threat to global biodiversity and ecosystems, after habitat destruction and degradation.202,

203, 204 Whilst these studies were conducted primarily with reference to natural ecosystems, the implications for agriculture are clear and the number of IAS is predicted to continue to rise. 205, 206, 207

Figure 7.16: Impacts of drought on livestock numbers in selected African countries

Greater Horn of Africa1995-199720% of cattle20% of sheep and goats

Botswana1981-198420% of national herd

Namibia199322% of cattle, 41% of goats and sheep

Niger1982-198462% of national cattle herd

Northern Kenya199128% of cattle, 18% of sheep and goats

Southern Ethiopia1983-198445-90% of cattle18% of sheep and goats1991-199342% of cattle1995-199746% of cattle41% of sheep and goats1998-199962% of cattle

Source: Intergovernmental Panel on Climate Change, 2007

40% Average loss of livestock recorded over 9 severe droughts in Africa between 1981 and 2000

US$1.1-55 billion Annual cost of crop losses due to alien invasive species

66

Loss of Cropland and Reductions in Agricultural Productivity Due to Land Degradation

To date, due to deforestation and inappropriate agricultural practices, roughly 2 billion ha of the world’s agricultural land has become degraded.208 This includes an absolute decline, measured by satellite imagery between 1981 and 2003, of 12% of the global productive land area. This is an area inhabited by 1.5 billion people, some 15–20% of the global population.209 Some estimates suggest that at current rates up to 30% of all agricultural land will be unusable by 2020.210

Annually, the global rate of land degradation, which is due chiefly to soil erosion, is estimated to be between 20,000 and 50,000 km2. To put this in perspective, taking an average annual loss rate of 35,000 km2 equates to 95 km2 per day or 1,109 m2 per second. This means an area roughly the size of Tokyo, Singapore or New York City is lost every week or one International Football Association standard size football pitch every 7 seconds.211, 212

Losses are greatest in the developing world in Africa, Latin America and Asia where population increases are highest and land management and husbandry practices are less well established. Losses in North America and Europe are

Figure 7.17: Map of global soil degradation in the year 2000

Source: United Nations Environment Program, 2000; International Soil Reference Centre, 2000; World Atlas of Desertification, 1997

2 to 6 times lower.213 It is estimated that 950,000 km2 of land in Sub-Saharan Africa is threatened with irreversible degradation if nutrient depletion continues at current rates.214 Due to overgrazing, compaction and erosion from livestock, some 70% of all grazing land in dry areas is considered degraded.215

As a February 2009 report by the United Nations on the worsening global food crisis puts it: “Environmental degradation and loss of ecosystem services will directly affect pests (weeds, insects and pathogens), soil erosion and

NEW YORK CITY Equivalent area lost to land degradation every week

1 FOOTBALL PITCH Area lost to land degradation every 7 seconds

67

nutrient depletion, growing conditions through climate and weather, as well as available water for irrigation through impacts on rainfall and ground and surface water. These are factors that individually could account for over 50% in loss of the yield in a given ‘bad’ year.”216

Much of the negative impact on yield due to bad land management arises from unsustainable irrigation practices leading to increased salinization of soil (the process by which the level of salt in soils is increased to levels where agricultural productivity is reduced or eliminated), nutrient depletion and erosion. On a global scale, roughly 20% of irrigated land (450,000 km2) is salt-affected, with the potential for lost production as a result of salinity. It is estimated that there are already 950 million ha of salt-affected lands. These regions account for roughly 33% of the potential arable land area of the world.217

Nutrient depletion is particularly severe in regions of the world such as Sub-Saharan Africa where poor land management practices are the norm.218

In Zimbabwe alone, loss of Nitrogen and Potassium through soil erosion costs an estimated US$1.5 billion annually and in South Asia the annual economic cost from a combination of nutrient loss by erosion and soil fertility depletion totals US$1.8 billion.219, 220

Besides the loss of nutrients which occurs with soil erosion there is also a devastating effect due to the actual loss of soil, a resource built up over hundreds of thousands of years. The annual loss globally is 75 billion tonnes of soil which is estimated to cost the world about US$400 billion/year (at US$5/tonne of soil and nutrients). The cost of erosion of agricultural land in the US alone is about US$44 billion/year.221

Many of these negative effects are most severe in areas of the developing world where population growth, and hence growth in food demand, is highest. This is caused by a combination of poor arable land management practices and overgrazing of vegetation by livestock as rapidly growing populations place an ever greater strain on limited land resources.

Agricultural productivity has declined in over 40% of the cropland area over the last two decades some regions of Sub-Saharan Africa. During this time population in some of these regions has doubled. Estimates for total resultant yield reduction in Africa range between 2–40% depending on the region with a mean loss across the continent as a whole of 8.2%. This is in contrast with a global average yield loss due to lands affected by soil erosion of 1–8%.222, 223

In the words of a recent United Nations report, The Environmental Food Crisis: “With increasing pressures of climate change, water scarcity, population growth and increasing livestock densities, these ranges will be probably conservative by 2050.”224

Loss of Cropland Area Due to Urban Development

As already highlighted in this document urban development is increasing rapidly along with accompanying transport, industrial and other infrastructure. In 2007 the planet reached an urbanisation milestone with more than 50% of the global population living in urban as opposed to rural areas. Exacerbating matters further is the fact that settlements primarily occur at the cost of cropland as they tend to develop around the most agriculturally productive locations.226, 227, 228, 229

In the year 2000 the global extent of built-up areas was estimated to be in the range of 0.2% – 2.7% of the total land area.230 The United Nations’ medium population growth variant forecasts an increase of the global urban population from 2.9 billion people in 2000 to 5 billion in 2030 and 6.4 billion in 2050. Based on these figures, the HYDE methodology, one of the most respected land use forecasting models, predicts that the size of built-up areas is likely to increase by roughly 80% between 2000 and 2030, and 134% by 2050.231, 232

This corresponds to roughly 500,000 km2, 900,000 km2 and 1.17 million km2 respectively, a ratio of built-up area/cropland of 3.5% in 2000, 5.1% in 2030 and 7% in 2050. In other words, if all of the forecast expansion in built-up

US$400 billion Global annual cost of nutrient and topsoil loss due to erosion

US$44 Annual cost of erosion in the US

68

area were to be at the expense of cropland, a total of 40 million hectares of cropland would be lost by 2030, and another 27 million by 2050.233 This is a total of 670,000 km2, an area of land 849 times the size of New York City, 424 times the size of Greater London, 1.2 times the size of France and just under 3 times the size of the United Kingdom.234, 235 China alone lost more than 14.5 million ha of arable land to urbanisation between 1979 and 1995.236

Limitations to Future Cropland Expansion and the Implications for Future Increases in Production Capacity

It is commonly assumed that much of the hoped for expansion in cropland area will be achieved in the less developed regions of the world such as South America and Sub-Saharan Africa. These regions are generally less saturated in terms of their agricultural development potential. According to some of the more optimistic assessments of land availability, the 228 million ha of arable land currently under cultivation in Sub-Saharan Africa has the potential to be increased to over 1 billion ha of primarily rainfed crops by 2030 (much of the irrigated land has already been developed as discussed earlier). Similar estimates have been touted for the other areas such as South America, where expansion potential has been claimed to be 1 billion ha from the present figure of 208 million ha, although the majority of this would be on land currently occupied by forest.237

The fundamental problem with these assessments is that they do not take account of the environmental and climate change effects of land use change and the conservation and water supply issues that such an expansion might come up against.238 Besides the obvious constraints of political instability in the case of Sub-Saharan Africa and the ecological cost in the case of South America (both of which are discussed separately below), these figures have also been disputed on a purely practical and technical basis.

In a paper on the subject entitled Is there really spare land? A critique of estimates of available cultivable land in developing countries, the author states:

“The supposed existence of this spare land is widely quoted in forecasts of capacity to meet the food requirements for future population increase. It is argued here that these estimates greatly exaggerate the land available, by over-estimating cultivable land, under-estimating present cultivation, and failing to take sufficient account of other essential uses for land. Personal observation suggests

that the true remaining balance of cultivable land is very much smaller, in some regions virtually zero. An order-of-magnitude estimate reaches the conclusion that in a representative area with an estimated ‘land balance’ of 50%, the realistic area is some 3–25% of the cultivable land. The impression given by current estimates, that a reserve of spare land exists, is misleading to world leaders and policy-makers.”

Thus, as the United Nations stated in a 2009 report: “There is a general consensus that agriculture has the capability to meet the food needs of 8–10 billion people while substantially decreasing the proportion of the population who go hungry239,240,241 but there is little consensus on how this can be achieved by sustainable means.”

One of the world’s foremost scenario modelling systems, called IMAGE (Integrated Model to Assess the Global Environment), incorporates critical data on population growth, earth systems, climate change, economics and social factors. Run by a team of scientists, mathematicians, economists and other academics on a computer array at the Netherlands Environmental Assessment Agency (MNP) in Bilthoven in the Netherlands IMAGE has been operational since the late 80’s.The mathematical models and assumptions which lie at its core are constantly updated with the latest theoretical research and observational data from around the world.

Accounting for the effects of climate change and the need to increase agricultural output, the system is viewed by many as the pre-eminent forecasting tool for agricultural land use trends. Its results will play a major role for policy planning purposes at the at the next United Nations Framework Convention on Climate Change to be held in Copenhagen in December 2009, where world leaders from 192 countries will meet to discuss and agree upon climate change mitigation policy. In Europe, IMAGE has already been used in the Euralis study on future prospects for agriculture in the rural areas of the EU-25 countries and in the IPCC Agricultural Assessment (IAASTD).

The IMAGE model includes data dating back hundreds of years and has been tested retrospectively. . Figure 7.18 shows a map of global land use at the beginning of the 18th century. The red and yellow component indicates the relatively minor use of the world’s land resources for agricultural at that time.

Jumping forward to the present, Figure 7.19 shows that the 21st century planet is a very different place with

80% Increase in urban area by 2030

3 United Kingdoms Potential equivalent area of cropland lost to urbanisation by 2050

69

Landuse and agriculture

Agricultural land Extensive grasslands (inc pasture) Regrowth after use Forests Grasslands Non-productive land

1700 2000

Source: Integrated Model to Assess the Global Environment, 2009

7.18: Estimated global agricultural land use in 1700 Figure 7.19: Actual global agricultural land use in 2000 based on satellite imagery

hugely increased agricultural land coverage. It is glaringly apparent that there is little room for expansion into areas outside of the forest regions of the planet, areas which play a significant role in climate change by providing carbon capture and other ecosystem services.

Ecological Constraints to Cropland Expansion

The United Nations acknowledged in early 2009 that any major expansion of croplands in Sub-Saharan Africa and South America in particular would take place: “at the expense of natural ecosystems”, and that “these expansions will have huge costs to biodiversity”.242

What does sustainable agriculture mean with respect to agricultural land? It: “implies both high yields that can be maintained, even in the face of major shocks, and agricultural practices that have acceptable environmental impacts”.243

However, over the past three decades there has been a 50% decline in farmland birds and over 80% of the birds

and mammals on the endangered species list are further threatened by unsustainable land use and agricultural expansion.244 While it could be argued that human survival may be possible without many of the species with which we currently share the planet,, a more inconvenient outcome resulting from bad land management, which will affect humans directly, is the issue of climate change.

According to official figures, roughly 70% of land in the Amazon regions used as pasture is previously forested land.245 Destroying one of the world’s most important carbon sinks in order to feed the masses would be self defeating. If the act of meeting increased food demand to ensure human survival becomes the very thing that exacerbates and accelerates climate change, then that act of expansion will itself reduce the planet’s agricultural capacity. As Figure 7.20 shows, the combined effects of agriculture and land use change (deforestation) account for over a quarter of the world’s greenhouse gasses.

As the United Nations so aptly put it in a recent report, The Environmental Food Crisis:

70

“Efforts to boost food production, for example, through direct expansion of cropland and pastures, will negatively affect the capacity of ecosystems to support food production and to provide other essential services. The natural environment comprises the entire basis for food production through water, nutrients, soils, climate, weather and insects for pollination and controlling infestations.

Ecosystems have been described as the life support system of the Earth – for humans as well as all life on this planet.246 Ecosystem services, the benefits that humans derive from ecosystems, are considered ‘free’, often invisible, and are therefore not usually factored into decision-making.”247

As human induced desertification has so clearly demonstrated, vegetation, in particular forests, is crucial for the provision of a dependable water supply to crop areas through its influence on the precipitation cycle, flow regulation and the buffering of droughts and floods.248, 249 Additionally, 75% of the world’s usable freshwater supplies come from forested catchments.250 Forests are thus critically linked not just with provision of optimum conditions for agricultural productivity but also directly with human survival at a very basic level. Finally, forest ecosystems also play a crucial role in buffering global climate change.251

Those expecting to expand croplands into the remaining forestlands may find these to be inconvenient truths but the fact is, without the essential services these forests provide, even current production rates may not be sustainable.252 In other words, evidence and theory overwhelmingly support the view that increasing croplands substantially in forested areas will reduce our ability to survive on this planet in large numbers in the future. It is this reality which will be driving policy at the United Nations Framework Convention on

Climate Change to be held in Copenhagen on December 2009 (COP15).

Prior to IMAGE 2.4, one of the more commonly used global agricultural forecasting tools was the Global Trade Analysis Project (GTAP) model. Being primarily an economical modelling tool, GTAP did not take into account regional differences in land quality and changes in land quality due to land degradation, water stress and climate change. These shortcomings were rectified by IMAGE 2.4.253

The inclusion of environmental considerations into the model unsurprisingly results in some rather different conclusions on land availability for cropland expansion. As the IMAGE 2.4 overview document states, the system can be used to assess both the economic and environmental consequences of different scenarios:

“The model coupling of the economic model GTAP with the IMAGE model for the global environment allows analysis of the consequences of specific trade policies both on the economic and the environmental side. We use the strengths of both models: the economic model determines the amount of goods traded between regions and the total change in food supply and demand; the environmental model allocates the desired land using detailed information on soil quality and atmospheric conditions, resulting in spatially explicit environmental consequences which are communicated to the economic model on an aggregated level.”254

This approach envisages a cropland expansion strategy which has at its heart the explicit assumption that remaining forestland must be preserved to ensure that any production gains from cropland expansion are not a Pyrrhic victory.

Figure 7.20: The greenhouse gas effects of agriculture and deforestation compared to other sectors in 2008

40

60

20

0

Energy

63%

Agriculture (excluding land

use change)

15%

Industrialprocesses

7%

Deforestation

11%

Waste

4%

Developed countries Developing countries

Source: United Nations Framework Convention on Climate Change, 2008

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Figure 7.21 shows how future cropland expansion leading up to 2050 will need to take place primarily in regions not currently occupied by forests, in order for global temperatures not to rise 2oC above pre-industrial levels.

Two degrees above pre-industrial levels is seen by many scientists as the threshold beyond which climate change would become far more dangerous, with the risk of irreversible and potentially catastrophic environmental changes.255 For the cropland expansion scenario in Figure 7.21, the IMAGE system forecasts a 1.8oC rise in global temperatures by 2050 (from pre-industrial levels).256

These data sets will be amongst the most influential in guiding policy for the 192 participating countries at COP15 in December 2009. Indeed, the wheels are already in motion in terms of the enactment of binding international laws on the protection of forest ecosystems. The EU has stated in its position paper submitted on 28 January 2009 which establishes the official European negotiating position in advance of COP15:

“Appropriate actions should include a rapid decrease in emissions from tropical deforestation. By 2020, gross tropical deforestation should be reduced by at least 50% compared to current levels and by 2030 global forest cover loss should be halted.”257

Politicians and the public are now being forced to recognise that climate change, which is taking place at a time of increasing demand for food, feed, fibre and fuel, has the potential to irreversibly damage the natural resource base on which agriculture depends. The relationship between climate change and agriculture is a two-way street: agriculture contributes to climate change in several major ways and climate change in general adversely affects agriculture.

The importance of protecting forestland is also being recognised in proposed incentive based legislation due to be discussed at the Copenhagen conference. Since the proportion of greenhouse gas emissions due to deforestation has been rising and the protection of forests is so crucial as a carbon sink, the new treaty which is due to come into force in 2012, is likely to include incentives for “Reducing Emissions from Deforestation and Degradation” (REDD).

As reported by the Economist: “The basic outlines of REDD are clear. Rich countries will pay poor ones to keep their forests intact. In return, the rich will get credits that they can put towards their emissions-reduction targets under the new climate treaty.”258

Aside from the policy constraints to cropland expansion into forested areas which are likely to result from Copenhagen, REDD would introduce a serious financial incentive for countries controlling forest resources. A Deutsche Bank economist recently reported that the world was losing

‘natural capital’ worth between US$2 trillion and US$5 trillion every year as a result of deforestation. 259

If even a small proportion of this were monetized as a result of initiatives such as REDD, this would result in a serious incentive for stakeholders to preserve the integrity of forest ecosystems. As Murray-Philipson of Canopy Capital, an investment company specialising in the emerging market for ecosystem services, puts it:

“Why pay BP $100 a tonne to take carbon dioxide out of the atmosphere and bury it when you can do the same with a rainforest for a fraction of a dollar? The science of forest carbon sequestration is ‘definitive’ and that standing forests are responding to higher carbon dioxide levels by ‘bulking up’, and are sequestering between one and four tonnes of the gas per hectare per year. Even taking the lower figure, with one billion hectares of forest in the world, if the rights to the sequestration of carbon dioxide are sold for just $10 a tonne would generate $10 billion a year.”260

It is worth noting that one of the areas earmarked for substantial expansion under the IMAGE forecasting model is Sub-Saharan Africa. Quite aside from the socio-political hurdles (discussed separately in this chapter), cropland expansion in this region may be constrained by the fact that over the longer term the impacts of climate change could be much more serious in Sub-Saharan Africa than many other regions, with agricultural productivity declining much more quickly than the global average.261

Figure 7.21: Sustainable global agricultural land use in 2050

2005

Landuse and agriculture

Agricultural land Extensive grasslands (inc pasture)

Regrowth after use

Forests Grasslands Non-productive land

Source: Integrated Model to Assess the Global Environment, 2009

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Global Carrying Capacity and the Implications for Cropland Expansion

How many people can our planet support? This is a fundamental question of relevance not just to all of mankind but particularly to the farmland investor. The answer will guide global policy on cropland expansion and its study has, in recent years, been formalized through the use of a measure known as the ‘ecological footprint’.

The ecological footprint is a measure of human demand on the Earth’s ecosystems. It compares human demand on nature with the biosphere’s ability to regenerate resources and provide services. It does this by assessing the biologically productive land and marine area required to produce the resources a population consumes using prevailing technology. It also measures the earth’s capacity to absorb and render harmless the waste products of human consumption such as CO2. By assessing how much land resource is required to support a given population it is possible to estimate how much of the Earth (or how many planet Earths) it would take to support humanity if everybody lived a given lifestyle characterised by a given level of consumption.

The units of measurement of ecological footprint are global hectares per person (gha/p). In other words, gha/p quantifies the number of hectares of land needed to support all types of consumption of an individual including the land required for waste mitigation. The organisation at the forefront of assessing global ecological footprint is the Global Footprint Network, which is a multinational private and public sector funded body employing the skills of hundreds of individuals, including business leaders, scientists and academics, in over 200 cities and 23 nations.

Their findings paint a bleak picture and provide a clear insight into the constraints on further conversion of undeveloped land to cropland. In their words:

“Just like any company, nature has a budget -- it can only produce so many resources and absorb so much waste every year. The problem is, our demand for nature’s services is exceeding what it can provide. In 2008, humanity used about 40% more in one year than nature can regenerate that same year. That means it takes over a year and three months for the Earth to regenerate what humanity is using in one year. This problem -- using resources faster than they can regenerate and creating waste faster than it can be absorbed -- is called ecological overshoot.

We currently maintain this overshoot by liquidating the planet’s natural resources. For example we can cut trees faster than they re-grow, and catch fish at a rate faster than they repopulate. While this can be done for a short while, overshoot ultimately leads to the depletion of resources on which our economy depends. In fact, overshoot is at the root of the most pressing environmental problems we face today: climate change, declining biodiversity, shrinking forests, fisheries collapse and several of the factors contributing to soaring world food prices.”

As Figure 7.22 indicates, the planet exceeded its ‘carrying capacity’ in 1986. From that date onwards the planet entered a state of ecological overshoot. The result is a growing ‘ecological debt’ manifested in various ways, for example in the fact that CO2 is being produced at a faster rate than the planet’s ability to absorb it.

30% Decline in global biodiversity in the last 35 years

50% Rise in global resource use if one third of population of low and middle income countries increase consumption to the level of high income countries

Figure 7.22: Humanity’s ecological footprint between 1961 and 2005

1960 1970 1980 1990 2000 2005

0.8

0.6

1.4

1.6

0

0.2

0.4

1.2

1.8

1.0

Number of planet Earths

World biocapacity Human ecological footprint

Source: Global Footprint Network, 2009

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As a result of this reality mankind now requires the equivalent of 1.4 planets to support its current lifestyle. Regardless of one’s opinion with respect to future effects of climate change, this is already having undeniable and highly noticeable effects on many earth systems. The Living Planet Index measures global biodiversity by recording the populations of a sample set of 1,686 vertebrate species across the world. As indicated in Figure 7.23, global biodiversity has declined by nearly 30% over just the past 35 years. This observational data is historical and factual. Unlike theoretical forecasts which are open to debate, this type of real observational data places strong pressure on policy makers to legislate against further large scale expansion of croplands.

The importance of protecting remaining carbon sinks, such as forestland, is dramatically evident when considered in the context of the growing demands on the world’s resources from lower income countries. Lower income countries account for the bulk of the world’s population and many are experiencing rapid economic growth.

As Figure 7.24 indicates, much of the world’s resource use is dominated by the high-income countries which represent a minority of the world’s population. The majority live in low-income countries and currently use a far lower per capita share of resources. Even a small rise in consumption in lower and middle-income regions would have a huge impact given their total population numbers.

High-income countries, which total 972 million people or 15% of the world’s population, are currently responsible for 40% of world resource use. The remaining low and middle-income countries account for 85% of the world population but only 60% of resource use. If one third of the low and middle income population were to live lifestyles characterised by the consumption patterns of the high-income population, global resource use would rise by 50%.

Figure 7.23: Global biodiversity (“Living Planet Index”) between 1970 and 2005

1960 1970 1980 1990 2000 2005

0.8

0.6

1.4

1.6

0

0.2

0.4

1.2

1.8

1.0

Index (1970=1.0)

Source: Global Footprint Network, 2009

Figure 7.24: Ecological footprint and population by region 1970 and 2005

0

6

4

2

207

392

202

220 140

1 ,623

287

Population (millions)

Ecological Footprint (gha per person)

Middle East and Central Asia

Asia-Paci�c

AfricaNorth America

Europe EU

Europe Non-EU

Latin America and the Caribbean

Source: Global Footprint Network, 2009

15% proportion of world population in high income bracket

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The contribution of agriculture, even at current production rates, further reinforces pressure on policy makers. As Figure 7.25 indicates cropland and grazing land already accounts for 33% of the world ecological footprint. They comprise the second largest component after land required for carbon sequestration (see ‘Carbon Footprint’ in Figure 7.25), which has a 52% share.

This conflict between the need to maintain the carbon sequestration capacity of the earth whilst responding to rising global food demand is fundamental to appreciating the constraints on cropland expansion. With a limited supply of land for cropland expansion and rising food demand a future of higher agricultural commodity prices, and in turn farmland values, is easy to visualise.

Socio-political Constraints to Cropland Expansion

With respect to constraints on expansion of croplands due to political risk, the United Nations put it as follows in a 2009 report on the food crisis: “The potential for increases is more questionable in large parts of Sub-Saharan Africa due to political, socio-economic and environmental constraints.”262

Figure 7.26, which shows major international land leases, illustrates this point well. In November 2008 the South Korean firm Daewoo unveiled plans to lease 1.3 million hectares of farmland in Madagascar with the aim of cutting Korea’s reliance on US imports. Daewoo reached the agreement with the then government on a 99 year lease over the huge tract of land half the size of Belgium. It intended to produce 5 million tonnes of corn a year by

Figure 7.25: Ecological footprint by component be-tween 1961 and 2005

1960 1970 1980 1990 2000 2005

0.8

0.6

1.4

0

0.2

0.4

1.2

1.0

Number of planet Earths

World biocapacity

Built-up land

Fishing ground

Grazing land

Cropland

Carbon footprint

Forest

Source: Global Footprint Network, 2009

Figure 7.26: Major land leases by foreign countries and/or companies

Agricultural international land leases

thousand hectares

Each square represents 50 000 hectares.Values under this value are represented withone square

South Korea

China

UAE

Saudia Arabia

Japan

Libya

Malaysia

India

2000

1500

710

620

320

250

40

10

Source: Grain, 2008; Mongabay, 2008

2023 on over 400,000 hectares, in addition to palm oil from a 300,000 ha oil palm plantation.263

Despite the fact that Daewoo planned to commit to $2bn worth of infrastructure investment and create 45,000 jobs for Madagascans, the population reacted with months of often violent protest. In March 2009, five months after the agreement was signed, new president Andy Rajoelina

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who was sworn into office after a military coup, formerly cancelled the agreement as one of his first acts in office. This has halted the South Korean company’s plans to transform Madagascar into Korea’s breadbasket. The deal had become a source of popular resentment and was instrumental in the fall of Marc Ravalomanana, the former president who had agreed it.264

Korea’s other major land deals, primarily in war- torn Sudan, are barely fairing any better given the conflicts and security environment in the region. The Korean example clearly demonstrates the barriers to large scale farmland expansion in Africa. Despite this, national and global food security problems have prompted a surge in neo-colonial land grabs by many governments and multinationals.

The Daewoo deal highlights the political risks associated with such endeavours and suggests that for governments

or companies to take these risks on a meaningful scale, large economic incentives will be required (such as higher agricultural commodity prices). Figure 7.27, shows major conflict zones around the globe since 1990. These zones coincide with many of the regions in which cropland expansion is expected to take place and it is clear that political instability will be a serious impediment to agricultural development in many of them.

The Limitations of Neo-colonialism and the Implications for Future Increases in Production Capacity

It is assumed that much of the forecast future increase in food production will result from increasing yields in the developing world. It is maintained that this will be made possible by the introduction of modern farming practices which produce higher yields in the developed world.

Figure 7.27: Major global conflicts between 1990 and 2004

Source: International Peace Research Institute, 2004

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There is a legitimate argument for foreign investment in agriculture in the developing world as long as it happens according to reasonable ethical standards. The reality is that there is no internationally accepted code of conduct for foreign investment in agriculture. Many of the larger proposed projects show more of the characteristics of neo-colonialism than they do of sustainable and equitable development. Therefore, a key question, quite aside from the ethical debate, is whether neo-colonialism actually has the ability to deliver the hoped for gains in production.

Figure 7.28 shows the difference in agricultural yields between developed and developing regions. It is this margin of difference which future production optimists are banking on. However, when you scratch beneath the surface, there are limitations to these assumptions of growth potential.

Sub-Saharan Africa is one of the regions from which much of the hoped for future production increase will come. As Figure 7.29 shows, Sub-Saharan Africa has the lowest use of fertilisers, irrigation and improved cereal varieties. This is consistent with the fact that the region has shown almost no improvement whatsoever in crop yields since the 60’s (see Figure 7.28).

Figure 7.28: Differences in cereal yield growth for dif-ferent regions of the world between 1960 and 2005

0

5

4

3

2

1

20051960 1965 1970 1975 1980 1985 1990 1995 2000

Yields, tons per hectare

East Asia & Paci�c

Latin America & Caribbean

South Asia

Europe & Central Asia

Middle East & North Africa

Sub-Saharan Africa

Source: Food and Agriculture Organisation of the United Nations, 2006

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This leads academics and policy makers to believe that there is great potential to easily increase yields. The problem is that there are reasons for circumstances being as they are and they may not be as easy to overcome as some commentators hope. In Sub-Saharan Africa and many other poorer nations of the world the agricultural economy is highly fragmented, much more so than in the developed world. This presents fundamental barriers to agribusinesses enterprises (be they government or private) hoping to develop large scale commercial farming operations to exploit ‘yield gaps’.

In the developing world, rural economies are typified by large numbers of very small farms occupied by subsistence farmers. The average size of farms is generally smaller in

Middle East & North Africa

10 030 0402

1962 2002

2002

1982

East Asia & Paci�c

South Asia

Sub-Saharan Africa

Europe & Central Asia

Latin America & Caribbean

Arable and permanent cropland, %

Irrigation

Middle East & North Africa

20 060 0804

1980 2000

East Asia & Paci�c

South Asia

Sub-Saharan Africa

Latin America & Caribbean

Cereal area, %

Improved varieties of cereals

Middle East & North Africa

20 40 80 100 120 140 160 180 200060

1962 1982

East Asia & Paci�c

South Asia

Sub-Saharan Africa 13

59

48

85

77

24

11

11

33

29

4

39

190

98

73

81

Europe & Central Asia

Latin America & Caribbean

Kg of nutrients per hectare of arable and permanent cropland

Fertilizer use

34

Figure 7.29: Modern agricultural inputs in different regions of the world

Source: Food and Agriculture Organisation of the United Nations, 2006; Evenson et al., 2003

more densely populated regions of the world. As Figure 7.30 shows, Sub-Saharan Africa has low availability of cropland on a per capita basis compared to other regions. As land gets divided through inheritance in a growing population, farm sizes become smaller.

72.8 hectares Average farm size in Brazil

78

Figure 7.30: Arable and permanent cropland per capita in different regions of the world

432

Cropland per capita of agricultural population in 2003, hectares

10

Sub-Saharan Africa

South Asia

East Asia & Paci�c

Middle East &North Africa

Europe &

Central Asia

Latin America &Caribbean

0.48

0.27

0.23

0.74

3.53

1.55

Source: Food and Agriculture Organisation of the United Nations, 2006

79

As Figure 7.31 shows, the average farm sizes in Africa are all below 10 hectares, ranging from 8.3 hectares in Algeria to less than a hectare in Malawi. The notion that there are large swathes of unoccupied and potentially productive farmland in densely populated developing countries idly awaiting large scale development is not supported by the facts. As Figure 7.31 shows, this holds true for most developing countries. In countries like Brazil where bigger farms are available for purchase, large scale commercial farming is more practical, although as discussed earlier, there are other constraints to further expansion in Brazil.

Fulfilling the dream of large scale agricultural development therefore involves fulfilling the nightmare of the native rural populations who currently inhabit cropland. Large scale displacements of local populations from their land would be required in order to unify large numbers of individual properties under one secure ownership structure. Any enterprise contemplating such a move would need to cover the costs of providing housing and infrastructure for all displaced peoples on top of the substantial investment associated with Greenfield agricultural development. Many of the proposed projects seem to completely ignore the fact

that the great majority of these rural farmers live on, and are completely sustained by, their land.

As Daewoo discovered with its Madagascar escapade the risks of project failure due to large scale resistance by local inhabitants are great. In the case of the Daewoo project, the 1.3 million hectares of land they hoped to lease represents half of the arable land area of Madagascar. With a population of over 20 million people, the majority of whom live rurally, the number of Malagasy residing on this land must be huge.265 Certainly, the number is significantly larger than the 45,000 or so jobs Daewoo proposed to create.266

Figure 7.31: Changes in farm size and land distribution in a range of developing countries

Country Period Average farm size(hectares)

Change in total number of farms %

Change in total area %

Farm sizedefinition useda

Start End

Smaller farm size, more inequality

Bangladesh 1977–96 1.4 0.6 103 -13 Total

Pakistan 1990–2000 3.8 3.1 31 6 Total

Thailand 1978–93 3.8 3.4 42 27 Total

Ecuador 1974–2000 15.4 14.7 63 56 Total

Smaller farm size, less inequality

India 1990–95 1.6 1.4 8 -5 Total

Egypt 1990–2000 1.0 0.8 31 5 Total

Malawi 1981–93 1.2 0.8 37 -8 Cultivated

Tanzania 1971–96 1.3 1.0 64 26 Cultivated

Chile 1975–97 10.7 7.0 6 -31 Agricultural

Panama 1990–2001 13.8 11.7 11 -6 Total

Larger farm size, more inequality

Botswana 1982–93 3.3 4.8 -1 43 Cultivated

Brazil 1985–96 64.6 72.8 -16 -6 Total

Larger farm size, less inequality

Togo 1983–96 1.6 2.0 64 105 Cultivated

Algeria 1973–2001 5.8 8.3 14 63 Agricultural

a. Total land area, agricultural (arable) land area, or cultivated (planted) crop area.

Source: Anriquez et al., 2007; Food and Agriculture Organisation of the United Nations, 2006

45,000 Number of jobs Daewoo agreed to create in return for half of Madagascar’s arable land, currently supporting millions of native inhabitants

80

A similar pattern is being observed in many other neo-colonial projects. In Pakistan, farmers’ movements are already raising the alarm about 25,000 villagers that are bound to be displaced if the Qataris’ proposal to outsource part of their food production to the Punjab province is accepted.267 Another Qatari project in Kenya involves 40,000 hectares of land in the Tana River delta, home to 150,000 pastoralist families who regard the land as communal and utilise it to graze some 60,000 cattle.268

In Egypt, small farmers in the Qena district have been fighting tooth and nail to get back 1,600 ha that were recently granted to Kobebussan, a Japanese agribusiness conglomerate, to produce food for export to Japan.269 In Indonesia, activists are protesting against the planned 1.6m ha Saudi rice estate in Merauke. The estate will be handed over to a consortium of 15 firms to produce rice for export to Riyadh bypassing local Papuans’ right to veto the project.270

Quite aside from the ethical implications, it is clear, given the enormous costs and risks associated with such an endeavour, that the financial incentive would need to be highly attractive for it to be contemplated on any large scale.

Given these constraints and adding the legal and ethical issues to the list of other socio-economic and environmental constraints, it becomes obvious that agricultural commodity prices would need to remain at significantly high levels for a sustained period of time before the necessary investment becomes a reality.

Forecasts of Future Expansion of Total Global Agricultural Land

In the case of the EU, the US and much of Asia the expansion of croplands is constrained due to overdevelopment and expanding urban areas whilst the conversion of any remaining non-agricultural land to agriculture is further restricted by wildlife conservation policy. Assuming forested lands are also excluded from cropland expansion, then it is clear that much of the expansion will need to happen in fallow or marginal land or in areas currently utilised as grazing land.271

150,000 Number of native inhabitants requiring eviction when 40,000 ha of Kenyan grazing land are converted to commercial agriculture

Figure 7.32: Grassland area in a business- as- usual scenario up to 2030

2000

0

2

4

6

2000 2010 2010 2020 2020 2030

South & East Asia

million km²

North America & Oceania

Sub-Saharan Africa

Former USSR

Latin America & Caribbean

Europe

North Africa & West Asia

Source: Integrated Model to Assess the Global Environment, 2008

81

Figures 7.32 and 7.33, based on the IMAGE 2.4 model, take into account climate change constraints to expansion into forested areas and as a result, predict only modest increases in cropland area. When considering the need to support a doubling of global grain demand by 2050, it is clear that only a small portion of the required production increase could result from this level of cropland expansion. Despite the fact that this expansion takes place primarily at the expense of grassland and grazing lands, the model accepts

that there will still be a trade off between the environment and economic growth.272

The potential for these expansion rates is further inhibited, by the fact that a substantial proportion of the forecast growth in cropland area is supposed to take place in Sub-Saharan Africa, where political instability and conflicts, lack of transport and other infrastructure and ethical constraints will all conspire to hamper growth.273

Figure 7.33: Arable land area in a business as usual scenario up to 2030

2000

0

2

6

4

10

8

2000 2010 2010 2020 2020 2030

South & East Asia

million km²

North America & Oceania

Sub-Saharan Africa

Former USSR

Latin America & Caribbean

Europe

North Africa & West Asia

Source: Integrated Model to Assess the Global Environment, 2008

CHAPTER 8

Price Elasticity of Demand for Food and the Implications for Future Agricultural Commodity Prices and Farmland Values

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“You are going to have to get used to the fact that you are going to have

to spend a greater proportion of your income on food in the future - after

decades of spending less. The price of most commodities has jumped

significantly this year, as the global economy slowly stutters towards

recovery. Gains in oil and metals prices may not have much further to go but

many believe that the situation with food is different. If you are expecting

the price of your weekly shopping basket to fall soon, it may be best not to

hold your breath.”

The Sunday Telegraph Newspaper, 2009

Standard economic theory suggests that high prices are their own worst enemy. A high price spurs producers to find new means of raising output. In other words, price increases lead to supply and demand responses which result in due course to lower prices. One such response is the propensity of consumers to choose alternative products as prices rise.

Predicting actual prices for agricultural commodities and farmland at any point in the future would only ever be guesswork; however, predicting the direction of such changes is somewhat more achievable. This is especially true when we bear in mind the persuasive nature of the fundamentals of supply and demand discussed in earlier sections of this document.

As indicated in Figure 8.1, according to the theory of supply and demand, the price of a product is determined by a balance between production at each price (supply) and the desires of those with purchasing power at each price (demand), along with a consequent increase in price and quantity sold of the product. In other words, it predicts that in a competitive market, price will function to equalize the quantity demanded by consumers, and the quantity supplied by producers, resulting in an economic equilibrium of price and quantity.274

It is not only the need for food and the supply available to meet that need, but just as importantly, the price those demanding that food are prepared to pay. The preparedness of consumers to pay for food at a given price is described by the price elasticity of demand (PED), defined as the measure of responsiveness in the quantity demanded of a commodity as a result of change in price of that commodity.275 In other words, the price elasticity of demand is a measure of the sensitivity of demand to changes in price.

Inelastic demand means a producer can raise prices without affecting demand for its product, whereas elastic demand

PSD1 D2

Q1 Q2

P1

P2

Q

Figure 8.1: The relationship between price (P), produc-tion quantity (Q), supply (S) and demand (D)

Source: Wikipedia, 2009

84

means that consumers are sensitive to the price at which a product is sold and will not buy it if the price rises too much. An understanding of the price elasticity of demand for a commodity is therefore crucial to assessing the extent to which price levels may rise.

In general, the more crucial a product, the less likely it is that demand for it will be affected by a change in price. Common sense tells us food is one such product. This was formalised in the theory of the hierarchy of needs as proposed by Abraham Maslow in his 1943 paper A Theory of Human Motivation.

According to Maslow’s hierarchy of needs, often depicted as a pyramid consisting of five levels, the lowest level is associated with physiological needs, while the uppermost level is associated with self-actualization needs, particularly those related to identity and purpose. Deficiency needs must be met first. The higher needs in this hierarchy only come into focus when the lower needs in the pyramid are met. If a lower set of needs is no longer being met, the individual will temporarily re-prioritize those needs.276

morality,creativity,

spontaneity, problem solving, lack of prejudice,

acceptance of facts

self-esteem, con�dence,achievement, respect of others,

respect by others

friendship, family, sexual intimacy

security of body, of employment, of resources, of morality, of the family, of health, of property

breathing, food, water, sex, sleep, homeostasis, excretion

Self-actualization

Esteem

Love/Belonging

Safety

Physiological

Figure 8.2: Interpretation of Maslow’s hierarchy of needs, represented as a pyramid with the more basic needs at the bottom

Source: Wikipedia, 2009

Food, being absolutely fundamental to survival, is likely to be prioritised over all other expenditure. For example, modern western consumers might be more likely to delay the purchase of a replacement mobile phone, or purchase a mobile with fewer features, than reduce the number of meals they eat. In other words there is more room for demand destruction in other products and services which compete for consumer spending than there is in basic foodstuffs.

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It is for this reason that the food sector of the economy has always been seen as a defensive investment strategy, being more resistant to downturns in consumer spending during times of recession. Indeed, the recent rises in agricultural commodity prices are in themselves evidence of the capacity for consumers to absorb higher prices (even in times of recession). In the words of the OECD-FAO Agricultural Outlook 2008-2017:

“Despite a doubling of some grain prices and broad increases overall, global food and feed use per capita were sustained, implying that the generally strong economic performance of the last two years has been manifested in outward shifts of demand that – in combination with relatively inelastic demand in the short-term – has offset the impact of higher prices on quantities demanded. The sensitivity of demand to price changes appears to be falling for various reasons. Thus, a shock to supply of a given size will require a greater price change to bring about the demand adjustment required to balance the market.277

Or as the World Bank puts it in their 2009 Global Economic Prospects Report:

“Crude oil price increases reduce the disposable incomes of consumers, which, in turn, may slow industrial production. In principle, lower disposable income should have a negative impact on the consumption of food commodities. However, because the income elasticity for most food commodities is small, this effect is limited.”278

Real GDP, percentage change Asian crisis Dot-com crisis Forecast

High-income countries

Developing countries, excluding China and IndiaDeveloping countries

8

6

4

2

0

-21980 1984 1988 1992 1996 2000 2004 2008

500% This rise in agricultural commodity prices would only result in a doubling of US food expenditures because the commodity component of the final food bill is so low

50% Rise in the price of rice in Bangladesh between 2007 and 2008

16% Rise in global food expenditures between 2004 and 2006

In recent years, agricultural commodity prices have experienced marked increases, so it is self evident that consumers have absorbed those higher prices. Between 2004 and 2006 total global food spending grew by 16% from US$5.5 trillion to US$6.4 trillion.279 As Figure 8.3 indicates, this exceeded the growth in global gross domestic product during the same period. This was the case for both high-income OECD countries and developing countries. Indeed, the agricultural commodity price boom from 2007 to 2008 (when grain commodities more than doubled in price) was preceded by a comparatively modest increase in GDP in OECD countries of 2.9% GDP in 2006 and 2.4% in 2007 and in the case of developing countries 7.7% in 2006 and 7.9% in 2007.280

In other words, on average, consumers globally were spending a larger share of their income on food as prices rose. As Figure 8.4 indicates, the rate of price

Figure 8.3: Actual and forecasted global GDP growth from 1980

Source: World Bank, 2009

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inflation for food far exceeded the background rate of inflation during the period. Of course, the extent to which consumers are able to absorb increases in the price of food is affected by per capita income levels and the extent to which changes in agricultural commodity prices feed through into retail prices.

Food expenditure as a share of total expenditure is lower in more developed countries with a higher per capita income. This is described by Engel’s Law, which displays an inverse relationship between the per-centage share of food expenditure and income (see Figure 8.5).281

Bangla

desh

Botswan

aChile

China

Egyp

tHai

ti

India

Indones

ia

Kenya

Paki

stan

Peru

Seneg

al

25

Change from February 2007 to February 2008 (%)

Total consumer price index Food consumer price index

20

15

10

5

0

USANORIRL

CHE

AUT

HKGJPN

ESP

GBR

ITA

DEU

NGA LKA

SEN

THA

IDNUGA

KEN

TZA

PAKJOR

GHA

BFAECU

KOR

0

0

10

20

30

40

50

60

70

Percentage share of food expenditure in CPI

GDP per capita in constant PPP international dollars

5000 10 000 15 000 20 000 25 000 30 000 35 000 40 000

Figure 8.4: A comparison of rising food prices and overall inflation in different countries between 2007 and 2008

Figure 8.5: Relationship between percentage share of food expenditure and per capita income in 2008

Source: Food and Agriculture Organisation of the United Nations, 2008

Source : Food and Agriculture Organisation of the United Nations, 2009

This relationship has strong implications for agricultural commodity prices when considered in the light of changing dietary habits in countries like China and India where per capita GDP is rising. In the words of the OECD-FAO Agricultural Outlook 2008-2017:

“Economics of demand indicate that consumers tend to care less about prices of goods that represent a small share of their budget. As incomes expand and the share of budgets spent on a necessity like food fall, consumers are expected to be somewhat less sensitive to price changes, and a shock to supply of a given size will require a greater price signal to compel consumers to adjust their purchases. Higher incomes that tend to reduce demand elasticity may lead to greater variability in world prices.”

In the United States for example, only 10% of average consumer spending is on food. This means a 100% increase in food prices would only result in an 11% decrease in the amount of money available to the US consumer for non-food expenditures. A similar

87

situation applies to the majority of OECD countries where food expenditure shares range between 13% and 20%.282

The price inelasticity of food demand is most clearly demonstrated by recent data from developing countries where incomes are much lower and the share of food expenditure is much higher. For instance, it is 28% in China, 33% in India, and absorbs more than half of total household expenditures in countries such as Kenya at 51%, Haiti at 52%, Malawi at 58% and Bangladesh at 62%.283

Despite this, consumers in poorer countries continue to absorb steep increases in food prices, although in many cases unwillingly, as evidenced by the recent food riots in a number of the aforementioned countries. As Figure 8.6 indicates, Bangladeshis paid just under 50% more for rice as a result of the 2007-2008 commodity price spikes whilst Thais paid more than double.

250

200

150

100

50

0

-50World Bangladesh

Cumulative change (%)

April 2003 - April 2007

April/May 2007 - April/May 2008

India Philippines Thailand Viet nam

0.0Bangladesh Guatemala Malawi Nepal Peru Tajikistan Viet Nam

Change in average calorie intake (%)

-0.5

-1.0

-1.5

-2.0

-2.5

-3.0

-3.5Poorest 20%

Household income quintiles:

2 3 4 Richest 20%

Furthermore, as Figure 8.7 shows, the price spikes of 2007-2008 only had a minor impact on the level of dietary energy intake in even the poorest countries of the world, with only a marginal difference between the richest and poorest sectors of the population in terms of the extent to which food purchases dropped as a result of higher prices. This lends further support to the notion that even in lower income sectors of the market price elasticity of demand for food remains low.

The effects of price inelasticity of demand for food are further amplified in more developed countries because the commodity component forms a smaller proportion of the final food bill. This is due to the fact that developed economies have more complex, costly and wasteful food distribution, processing, packaging and marketing systems. This means that the extent to which changes in agricultural commodity prices feed through to food prices is lower than in developing countries.

In the United States for example, the commodity cost component of the total food bill has fallen from one-third in the 60’s to one-fifth since the mid-90’s.284 The lower the commodity component in food bills falls, the less consumers will notice a rise in the price of those commodities. Thus, as income increases and market chains extend (due to rising urbanisation), the responsiveness of demand to farm-level prices will decrease further.

A doubling of US farm-level prices would only result in food prices increasing by 20% for the average US consumer (because the commodity component of food bills in the US is only 20%).285 Recalling the statistic noted earlier that food only represents 10% of US consumer spending, a back-of-an-envelope calculation suggests that agricultural commodity prices could increase by a factor of 5 (500%) and only result in a doubling of food expenditures (to 20% of total consumer spending).

Figure 8.6: Trends in consumer spending on rice

Figure 8.7: Change in dietary energy intake by income group between 2007 and 2008

Source: Food and Agriculture Organisation of the United Nations, 2008

Source: Food and Agriculture Organisation of the United Nations, 2008

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Farm-level prices of agricultural commodities in other developed countries account for 25% to 35% of the final retail price, although staple commodities generally form a smaller percentage of the food bill.286 For example, despite cereal prices more than doubling between 2007 and 2008, the increase in the price of bakery products was only 5.7% in the US, 6.9% in the UK and 3% in France and Korea. Even in China and India the rise was only about 6%.287

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These figures illustrate the potential for consumers to continue to absorb further rises in agricultural commodity prices for the foreseeable future. Furthermore, in real terms, current prices are actually quite low. This has been partly due to the liberalisation of global trade which has been accompanied by a steep rise in world food imports of over 400% since 1990 (see Figure 8.8).

Figure 8.8: Global food import expenditures between 1990 and 2008

Source: Food and Agriculture Organisation of the United Nations, 2008

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Historical data actually imply significant latitude for the market to absorb higher prices in the future. The world as a whole now spends less than a quarter (measured as a proportion of total merchandise trade) of the money on food that it did in the early 60’s, as Figure 8.9 shows.

In addition, despite recent price spikes, the actual price of agricultural commodities in real terms actually remains low by historical standards. As Figure 8.10 shows, many key commodities were over twice as expensive in the early 70’s as they were in 2007.

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Figure 8.9: Trade in commodities as a share of total global merchandise trade

Figure 8.10: Trends in real and nominal prices for selected agricultural commodities between 1971 and 2007

Source: OECD, 2008; Food and Agriculture Organisation of the United Nations, 2008

Source: World Bank, 2009

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Commodity prices relative to incomes illustrate this point even more convincingly. As Figure 8.11 shows, consumers are now spending a significantly lower proportion of their income on food than they have in the past.

The complex and dynamic interrelationships between supply and demand, the state of the broader economy, environment, geopolitics, energy prices and other factors make predicting actual future prices difficult. What is certainly clear is that there is a lot of room for the price of agricultural commodities and the farmland upon which they are produced to rise in the future.

Figure 8.11: Trends in commodity prices relative to income between 1971 and 2007

Source: OECD, 2008; Food and Agriculture Organisation of the United Nations, 2008;

International Monetary Fund, 2008

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CHAPTER 9

Fossil Fuel Shortages and the Potential Consequences for the Agricultural Economy

92

“The threat to the world’s energy security, especially on oil and natural gas,

will reach serious dimensions in the next ten years.”

International Energy Agency, 2009

“Combined with the difficulties of OPEC producers in controlling output - and

it was as recent as 2004 that any excess oil capacity disappeared globally - this

could force prices above the 2008 records of around US$140 a barrel and well

towards US$200 within five to 10 years but more likely nearer five”

Professor Paul Stevens, Senior Research Fellow for Energy, Chatham House (The Royal Institute of

International Affairs), 2009

Trends in Biofuel Consumption and the Increasing Correlation between Energy and Food

Outside of climate change factors, the issue of oil production deficiencies relative to demand and the resultant rise in oil prices has the potential to be the most significant source of uncertainty for agricultural commodity prices.

Agriculture both supplies and demands energy; hence, markets in both sectors have historically shown themselves to be linked. The nature and strength of these linkages have changed over the years, but agricultural and energy markets have always adjusted to each other, with output and consumption rising or falling in response to changing relative prices. Rapidly increasing demand for liquid biofuels is now tying agriculture and energy more closely than ever.

The reasons for this are twofold. Firstly, higher oil prices could change the composition of demand for food crops as a result of new markets are created in the production of biofuels. Secondly, oil and other fossil fuels (in particular natural gas used in fertiliser production) are crucial components in modern agriculture and as such, fluctuations in price and availability of fossil fuels could have a major impact on agricultural economics and productivity.

The expansion in the production and use of biofuels is expected to have significant effects on feedstock prices (such as grains like wheat and corn used to produce biofuels) and consequently, the value of the land on which they are produced.288 According to a 2009 report from the United Nations: “Biofuels could have a significant impact on food prices if oil prices remain high or the cost of biofuels production declines.289

As the 2009 joint OECD United Nations report, Agricultural Outlook 2008-2017, puts it:

40% Forecasted proportion of US corn crop used in ethanol production by 2017

25% Forecasted use of biofeuls as a proportion of total global transport fuels by 2050

“The nature and composition of demand, on the other hand, are factors that may increase the future variability in world prices. As discussed, industrial demand for grains and oilseeds – such as for the production of biofuels – constitutes a growing share of total use. This demand is generally considered less responsive to prices than traditional food and feed demand.

Biofuel policies are also a source of uncertainty [such as] an array of new US mandates and the potential consequences of an EU Directive promoting larger quantities of biofuel use. These or other policies to promote biofuel production and use, whether through mandate or subsidy, will lead to greater purchases of feedstocks for biofuel production.

The prolific demand for maize arising from the rapidly expanding ethanol sector in the United States has profoundly affected the coarse-grain market. By 2017, approximately 40% of the country’s maize crop could be destined for energy production. However, overall there will be constraints in expanding new arable areas in many countries and competition for land and resources among grain and oilseed crops is set to intensify with those crops offering the highest returns gaining the most ground.

93

The main forces driving further growth in biofuel production are high crude oil prices and continued public support, in particular in OECD countries. The second scenario [of the OECD-FAO commodity price forecast] shows that wheat, coarse grains and vegetable oil price projections are all shown to be highly sensitive to petroleum-price assumptions.”290

As Figure 9.1 shows, biofuel production (including bioethanol and biodiesel) is expanding rapidly as a number of countries attempt to deal with energy security concerns in an era of high oil prices and diminishing reserves of crude oil. One of the reasons for this is that the production of fuels from edible feedstocks is very resource hungry. The corn equivalent of the energy used to feed a person for a day would power a car for mere minutes whilst a full tank of ethanol in a large, 4-wheel drive, suburban utility vehicle could feed one person for just under a year.291

The US is the largest producer and consumer of bioethanol, followed by Brazil which now uses 2.7 million ha of land for biofuels production, equivalent to 4.5% of its cropland area, mainly planted to sugar cane. Globally, biofuels including bioethanol (mainly from sugarcane and corn) and biodiesel (mainly from soybean, palm oil and other oil seed crops), accounted for roughly 1% of total fuel consumption for road transport in 2005 and it may reach 25% by 2050.The EU has set targets as high as 10% by 2020.292, 293, 294 To put this into perspective, a 2006 report from the UN’s Food and Agriculture Organisation of the United Nations suggested that for the EU to meet its 10 per cent target from home-grown biofuels would require a staggering 70% of arable land to be taken out of food production, necessitating a huge increase in EU food imports.295

In the early days of the biofuels boom, it was thought that biofuels would help to reduce CO2 emissions. However, as oil prices increase, fuel security is displacing the environment as the key policy driver. Despite recent research which highlights the potential for negative environmental impacts (e.g. Searchinger et al’s 2008 research suggesting the use of US croplands for biofuels increases greenhouse gases through emissions from land-use change296), the world continues to increase production and consumption of biofuels.

70% Proportion of EU arable land required to replace 10% of transport fuels with biofuels

242% Forecast increase in area of cropland dedicated to biofuels by 2030

Figure 9.1: Global production of biodiesel and ethanol between 1975 and 2005

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Figure 9.2: Production of biodiesel and ethanol by country in 2005

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Source: Earth Policy Institute, 2006

94

Figure 9.3: Voluntary and mandatory bioenergy targets for transport fuels in G8+5 countries

Country/Country Grouping Targets1

BrazilMandatory blend of 20–25 percent anhydrous ethanol with petrol; minimum blending of 3 percent biodiesel to diesel by July 2008 and 5 percent (B5) by end of 2010

Canada5 percent renewable content in petrol by 2010 and 2 percent renewable content in diesel fuel by 2012

China 15 percent of transport energy needs through use of biofuels by 2020

France5.75 percent by 2008, 7 percent by 2010, 10 percent by 2015 (V), 10 percent by 2020 (M = EU target)

Germany6.75 percent by 2010, set to rise to 8 percent by 2015, 10 percent by 2020 (M = EU target)

India Proposed blending mandates of 5–10 percent for ethanol and 20 percent for biodiesel

Italy 5.75 percent by 2010 (M), 10 percent by 2020 (M = EU target)

Japan 500 000 kilolitres, as converted to crude oil, by 2010 (V)

Mexico Targets under consideration

Russian Federation No targets

South Africa Up to 8 percent by 2006 (V) (10 percent target under consideration)

United Kingdom 5 percent biofuels by 2010 (M), 10 percent by 2020 (M = EU target)

United States of America9 billion gallons by 2008, rising to 36 billion by 2022 (M). Of the 36 billion gallons,21 billion to be from advanced biofuels (of which 16 billion from cellulosic biofuels)

European Union 10 percent by 2020 (M proposed by EU Commission in January 2008)

1 M = mandatory; V = voluntary.

Source: GBEP, 2007, updated with information from the United States Department of Agriculture, USDA, 2008a; Renewable Fuels Association, RFA, 2008;

written communication from the EU Commission and Professor Ricardo Abramovay, University of São Paulo, Brazil, 2008

95

Whilst the environment debate rages on, government support worldwide continues to back biofuels. Many developing countries such as Indonesia and Malaysia see biofuels as an opportunity to improve rural livelihoods and produce export revenues.297, 298 Figure 9.3 shows legislative support through ‘mandatory blending targets’ already passed by many of the world’s governments. In addition, as Figure 9.4 shows, governments continue to provide growing financial support to the sector with $5.8 billion of support in the US alone in 2006 and pump subsidies in a growing number of countries.

Further exacerbating the situation is the fact that the production of other non-food crops, waste components of which can be used in biofuels production, is also projected to increase, thus competing further with food crops. For example cotton, the seeds of which can be used for biodiesel production, is expected to increase by an additional 2% of cropland area by 2030 and 3% by 2050 as the crop’s profitability is increased in line with rising fuel prices.299

According to the United Nations these figures suggest an increase in cropland area designated for the production of biofuels and cotton alone to be in the range of 5–13% by 2050,300 although compared to estimates from other credible sources these figures are conservative. According to a recent OECD report, under current policies, areas for biofuel crops are projected to increase by 242% between 2005 and 2030.301

The OECD has forecast scenarios for future increases in the allocation of land to growing biofuel feedcrops. Their model predicts that the proportion of cropland dedicated to biofuels will increase from 0.5% in 2008 to 2% by 2030 (range 1–3%) and 5% by 2050 (range 2–8%).302

Peak Oil and the Implications for Agricultural Commodity Prices and Farmland Values

The extent to which oil prices will affect demand for biofuels is dictated by future price levels of crude oil because the economic incentive to produce biofuels increases in proportion with oil prices. This affects food commodity prices in two ways. Firstly new market demand for feedstock crops is created for ‘first generation biofuels’ (biofuels made from edible plants containing sugar, starch or oil or from animal fats). Secondly, competition for arable land for ‘second generation biofuel’ feedstocks (e.g. the use of non-edible plant matter such as wood and cellulose as feedstocks) will reduce the availability of arable land for food production.

Figure 9.4: Total support estimates for biofuels in selected OECD economies in 2006

OECD economyEthanol Biodiesel Total Liquid Biofuels

TSE Variable share1 TSE Variable share1 TSE Variable share1

(Billion US$) (Percentage) (Billion US$) (Percentage) (Billion US$) (Percentage)

United States of America2 5.8 93 0.53 89 6.33 93

European Union3 1.6 98 3.1 90 4.7 93

Canada4 0.15 70 0.013 55 0.0163 69

Australia5 0.043 60 0.032 75 0.075 66

Switzerland 0.001 94 0.009 94 0.01 94

Total 7.6 93 3.7 90 11.3 92

1 The percentage of support that varies with increasing production or consumption, and includes market-price support,production payments or tax

credits, fuel-excise tax credits and subsidies to variable inputs.2 Lower bound of the reported range.3 Total for the 25 Member States of the European Union in 2006.4 Provisional estimates.5 Data refer to the fiscal year beginning 1 July 2006.

Source: Steenblik, 2007; Koplow, 2007; Quirke, Steenblik and Warner, 2008.

96

Figure 9.5: Breakeven prices, expressed as the crude oil price, for selected feedstocks based on 2005 production costs

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Source: Food and Agriculture Organisation of the United Nations, 2006

As Figure 9.5 shows, the higher the oil price, the more economically viable biofuel production becomes (even without subsidies or climate change mitigation incentives) and the greater will be the competition for cropland. At oil prices above the $50 mark, biofuel production becomes capable of producing significant profits thus creating stiff competition and forcing up the price of maize, wheat and other feedstock crops.

Estimates from OECD-FAO forecasting models project global ethanol production increasing rapidly over the next 10 years and reaching some 125 billion litres in 2017, twice the quantity produced in 2007. These estimates are based on the assumption that: “long run oil prices are expected to stabilize (in real terms) at around $75”.303

This seems conservative for two reasons. Firstly, fuel ethanol production tripled between 2000 and 2007 alone.304 Secondly, the long run oil price forecast of $75 per barrel is well below the forecasts of many leading industry experts. They forecast much higher oil prices on the basis that once global demand returns to pre- recession levels, given that significant production expansion is unlikely in the near future, a return to 2008 prices of well above $100 per barrel is likely.

Even so, the same OECD-FAO report forecasts that food prices will rise by between 20% and 50% by 2016, partly as a result of biofuels.305 Figure 9.6, showing the correlation between feedstock and oil prices, demonstrates that agricultural commodity prices rise with the price of oil.

97

Figure 9.6: Correlation between oil and food prices

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It is now the view of most commentators both in the production and investment areas of the oil industry, that due to the exhaustion of easily accessible oil resources, prices well in excess of $50 per barrel are not merely a possibility, but rather the new reality. If oil moves beyond the $50 per barrel mark for a sustained period of time, thus providing the economic conditions to incentivise the further expansion of worldwide biofuel processing capacity, competition for feedstocks will reach new heights.

98

Figure 9.7 lists some notable statements from recent years suggesting that the era of cheap oil is coming to an end. Even British Petroleum (BP), who have famously always refused to comment on questions from journalists regarding likely future oil prices “for commercial reasons” have also recently made statements to the effect that cheap oil may be a thing of the past.

In June 2009 at the launch of its annual Statistical Review of World Energy, BP’s chief executive, Tony Hayward, stated that “there is a rational argument to say that somewhere between $60 to $90 a barrel is the right sort of level”. He argued that Opec members require something in the region of $60 per barrel to pay for the cost of extraction and to cover the running costs of their economies which depend so much on oil revenues. He also pointed out that demand data from 2007 and 2008 suggest that consumers only cut back once the oil price hits $100 per barrel.306

Figure 9.8 provides an example of the breakeven levels in the US for one feedcrop, maize used for ethanol production, at various oil prices. Even without subsidies and further increases in production efficiency, oil prices of above $70 per barrel support corn prices above the pre- 2008 20 year average of $111 per tonne. With subsidies, this holds true at just over $40 per barrel. A return to 2008 price peaks of over $140 per barrel of oil would result in corn prices of $300 per tonne, 153% higher than the 20 year historical average of $118 per tonne.307

A growing number of industry experts now believe that sustained prices above $100 per barrel are actually likely to be at the lower end of the scale between now and 2030.

Figure 9.7: Notable recent statements relating to the end of the era of cheap oil

Commentator Statement Reference

David O’Reilly,Chairman, Chevron

“The time when we could count on cheap oil... is clearly ending.”

CERA Energy Conference. February 2005.

Samuel Bodman, U.S.Secretary of Energy

“The era of cheap and abundant petroleum may now be over.”

Christian Science Monitor. July 8, 2006

Jeroen van der Veer,Shell Chief Executive.

“Peak oil does exist for easy-to-drill oil…” Cummins, C., Williams, M.Shell’s Chief Pursues Simple Goals. WALLSTREET JOURNAL. January 17, 2006.

Alpha Oumar Konare,African Union Commission Chair.

“The era of cheap oil is over.” Era of cheap oil is over. Reuters. 02/04/2006

Viktor Khristenko,Russian Energy Minister

“... the era of cheap hydrocarbons is over”. Hope, C. RUSSIA: ‘ERA OF CHEAP FUEL ISOVER’. The Telegraph. 06/06/2006.

Guy Caruso,Administrator. U.S.EIA

“The era of low cost oil is probably over.” Holmes, J. Four Corners Broadband Edition.Australian Television Program. 10 July 2006.

Source: See table

Figure 9.8: Breakeven prices, in terms of the crude oil price, for maize (corn) with and without subsidies

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Source: Tyner and Taheripour, 2007; Food and Agriculture

Organisation of the United Nations, 2008

62 Number of oil producing countries past peak production

3% Number of barrels of oil consumed for every barrel discovered

99

Underlying such forecasts is the growing body of evidence that suggests the world may be entering a crucial stage in the exploitation of its crude oil resources known as ‘peak oil’.

Peak oil is the point in time when the maximum rate of global petroleum extraction is reached, after which the rate of production enters terminal decline, otherwise known as the ‘geological limit’ of production. The concept of peak oil is based on the historically observed production rates of individual oil wells and the combined production rate of a field or region of related oil wells. The aggregate production rate from an oil field over time grows until the rate peaks, after which it declines, sometimes rapidly, until the field is depleted. This concept has been shown to be applicable to the sum of a nation’s domestic production rate. Peak oil theory maintains that the same sort of behaviour can similarly be applied to the global rate of petroleum production.308

A detailed discussion of this wide ranging topic is beyond the scope of this document, however, a short examination of some of the key points and recent evidence is warranted given the profound implications peak oil could have for agricultural commodity prices. If peak oil were to occur in the next couple of decades (or if it is occurring now), it could potentially outweigh all other factors, including climate change and food demand growth, exerting upward pressure on agricultural commodity prices.

Peak oil theory was first proposed by M. King Hubbert, a geoscientist who worked at the Shell research lab in Houston, Texas, and later became a senior research geophysicist for the United States Geological Survey. Hubbert’s ‘logistics model’ was first used in 1956 to accurately predict that United States oil production would peak between 1965 and 1970. As Figure 9.9 indicates, US oil production peaked in 1970 as the ‘Hubbert peak theory’ predicted and by 2005 oil imports to the US were twice US production.

This distinct curve, known as ‘Hubbert’s curve’, is characteristic of oil production profiles throughout history and can be applied to individual oil fields, specific domains or oil producing region (e.g. individual states of the US) and to the sum of such regions (e.g. the US as a whole). Peak theory mathematically models the pattern by which peak oil production (or exploitation of reserves) for a given region follows the peak of discovery (of those reserves).

Underlying this pattern is the fact that larger oil fields are more likely to be discovered and exploited first. These are also the cheapest fields to exploit as exploration and production costs per unit of oil are higher the smaller the field. The more mature an oil producing region, the smaller the discovered fields and the higher the cost of production becomes.

Figure 9.9: US Oil Production and Imports

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The pattern of peak production following peak discovery has been observed in many oil producing regions of the world. Indeed, peak oil has already been reached and surpassed in the 62 oil producing countries listed in Figure 9.10.

9.10: Oil producing countries at or past peak production as of 2008

1 United States 17 Poland 33 Peru 49 Serbia

2 United Kingdom 18 Myanmar 34 Morocco 50 Papua New Guinea

3 Russia 19 Tajikistan 35 France 51 Japan

4 Libya 20 Trinidad & Tobago 36 Senegal 52 Pakistan

5 Kuwait 21 Indonesia 37 Congo (Kinshasa) 53 Turkey

6 Iran 22 Romania 38 China Taiwan 54 Italy

7 Egypt 23 Belarus 39 Netherlands 55 Denmark

8 Ukraine 24 Turkmenistan 40 Benin 56 Mexico

9 Norway 25 Israel 41 Cameroon 57 South Africa

10 Australia 26 Spain 42 Barbados 58 Cuba

11 Venezuela 27 Tunisia 43 Greece 59 Yemen

12 Germany 28 Albania 44 Argentina 60 Bahrain

13 Bulgaria 29 Georgia 45 Uzbekistan 61 Oman

14 Kyrgyzstan 30 Hungary 46 Gabon 62 Colombia

15 Austria 31 Chile 47 Slovakia

16 Czech Republic 32 Croatia 48 Syria

Source: Energy Files, 2008

101

Figure 9.11 shows the discovery and production peaks for a number of these countries. These curves clearly demonstrate that the peak of production characteristically occurs somewhere between 20 and 40 years after discovery. Figure 9.12 shows the discovery and production curves for the regions of Asia-Pacific, Europe and the United Sates, all of which have peaked in a similar pattern, thus demonstrating that peak theory holds not only for countries or sub-regions but also for collections of those countries or sub-regions.

Figure 9.11: Oil discovery and actual and forecast production curves for various countries

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Figure 9.12: Oil discovery and actual and forecast production curves for regions of the world

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Figure 9.13 shows global oil discoveries and production since1910. Global discoveries peaked in 1962 with the trend since then being generally downwards. Onshore oil is generally exploited first in any region given that it is cheaper to extract (and therefore more profitable) than offshore oil. This suggests, based on the timescale between peak discovery and peak production, that global oil production could peak at some point in the near future.

Figure 9.13: Global oil discoveries and onshore and offshore production

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As Figure 9.14 indicates, the world currently consumes over 80 million barrels of oil per day, or about 30 billion barrels a year. Annual discoveries since the year 2000 have, however, been roughly 10 billion barrels or lower. This means that the world currently consumes three times more oil than it discovers. In other words, more than two out of every three barrels consumed are supplied to the market by depleting reserves from oil fields discovered prior to the year 2000.

Whilst the concept of peak oil is not questioned by the majority of petroleum industry participants, the point in time that peak is forecast to occur remains hotly debated. In 2005, the US Department of Energy commissioned a report titled Peaking of World Oil Production: Impacts, Mitigation, & Risk Management (the Hirsch Report). The report’s objective was to provide policy makers with an overview of the various peak oil forecasts and the consequences of such a peak, particularly with reference to mitigation actions.309 Figure 9.15 from the Hirsch Report lists a number of credible sources and their views on the subject of oil.

Figure 9.14: World petroleum consumption

Mill

ion

Bar

rels

per

Day

Non-OECD

World

OECD

58% of WorldTotal in 2006

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

90

60

30

0

Source: US Energy Information Administration, 2007

Figure 9.15: Recent statements regarding peak oil

Commentator Statement Reference

Royal SwedishAcademy ofSciences

“Already 54 of the 65 most important oil producing countries have declining production and the rate of discoveries of new reserves is less than a third of the present rate of consumption.”

Statements on Oil by the Energy Committee at the Royal Swedish Academy of Sciences.October 14, 2005.

International Energy Agency

“By 2011 … global growth will marginally exceed supply-side expansions.”

International Energy Agency - Medium-term Oil Market Report. July 2006.

Raymond James(Brokerage / Financial)

“The peak in global oil production, which we believe is approaching, will occur no matter what the economic circumstance.”

The Politics of Oil: Is History Repeating Itself? Raymond James Insight. June 26, 2006.

Schlesinger, J. R.(Former Secretary ofEnergy, Secretary ofDefense, CIA Director, andAEC Chairman)

“In the decades ahead, we do not know precisely when, we shall reach a point, a plateau or peak, beyond which we shall be unable further to increase production of conventional oil worldwide. We need tounderstand that problem now and to begin to prepare for that transition.”

Statement of James Schlesinger Before the Committee on Foreign Relations United States Senate. 16 November 2005

Greene, D. (Oak Ridge NationalLaboratory energy analyst)

“Peaking of conventional oil production is almost certain to occur soon enough to deserve immediate and serious attention.”

Greene, D, et al. Have we run out of oil yet? Oil peaking analysis from an optimist’s perspective. Energy Policy 34 (2006).

Source: Hirsch, 2007

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An updated supplement to the Hirsch Report published in 2007, entitled Peaking of World Oil Production: Recent Forecasts, provides a list of peak forecasts tabulated according to forecast date.310 These are shown in Figure 9.16.

Figure 9.16: Various peak oil forecasts by commentator and source

Commentator Statement Reference

Pickens, T. Boone (Oil & gas investor) 2005 Boone Pickens Warns of Petroleum Production Peak. EV World. May 4, 2005.

Deffeyes, K. (Retired Princeton professor & retired Shell geologist)

Dec-05 http://www.defenseandsociety.org/fcs/crisis_unfolding.htm .February 11, 2006

Westervelt, E.T. et al. (US Army Corps of Engineers)

At hand Energy Trends and Implications for US Army Installations.ERDC/CERL TN051 Sept 2005.

Bakhtiari, S. (Iranian National Oil Co. planner)

Now King, B.W. No more business as usual. Energy Bulletin. August 11, 2006.

Herrera, R. (Retired BP geologist) Close or past Bailey, A. HAS OIL PRODUCTION PEAKED? Petroleum News. May 4, 2006.

Groppe, H. (Oil / gas expert & businessman)

Very soon Henry Groppe. PEAK OIL: MYTH VS. REALITY. DENVER WORLD OIL CONFERENCE. November 10, 2005.

Wrobel, S. (Investment fund manager)

By 2010 Hotter, A. Global Oil Output to Peak in 2010 – Diapason. Schlumberger. May 16, 2006.

Bentley, R. (University energy analyst)

Around 2010 Bentley, R. The Case for Peak Oil. DOE/EPA Modeling the Oil Transition. April 21, 2006.

Campbell, C. (Retired oil company geologist; Texaco & Amoco)

2010 An Updated Depletion Model. THE ASSOCIATION FOR THE STUDY OF PEAK OIL AND GAS “ASPO”NEWSLETTER No. 64 – APRIL 2006.

Skrebowski, C. (Editor of Petroleum Review)

2010 +/- a year Skrebowski, C. Peak Oil The emerging reality. ASPO5 Conference. Pisa Italy. July 18, 2006.

Meling, L.M. (Statoil oil company geologist)

A challenge around 2011

Leif Magne Meling, Statoil ASA.. Oil Supply, Is the Peak Near? Centre for Global Energy Studies.September 2930, 2005.

Pang, X., et al. (China University of Petroleum)

Around 2012 Pang, X, Meng, Q., Zhang, J., Natori, M. The Challenges Brought By The Shortage of Oil And Gas In China And Their Countermeasures. ASPO IV International Workshop on Oil and Gas Depletion. 1920 May, 2005.

Koppelaar, R.H.E.M. (Dutch oil analyst)

Around 2012 Koppelaar, R. World oil Production & Peaking Outlook. Stichting PeakoilNederland. 2005.

Volvo Trucks (Swedish automotive company)

Within a decade Volvo web site. 2007.

de Margerie, C. (Oil company executive)

Within a decade ASPO NEWSLETTER No. 65 – MAY 2006

al Husseini, S. (Retired Exec. VP of Saudi Aramco)

2015 Motavalli, J. End of an Era. Cosmos. April 2006.

Merrill Lynch (Brokerage / Financial) Around 2015 Mario Traviati, et al. Oil Supply Analysis: From “Upstream” Incapacity to Spare Capacity: It’s Now a Better Story “Downstream.” Merrill Lynch. 12 October 2005.

West, J.R., PFC Energy (Consultants) 2015 - 2020 West, R. Energy Insecurity. Testimony before the Senate Committee on Commerce, Science & Transportation. September 21, 2005.

Maxwell, C.T., Weeden & Co. (Brokerage / Financial)

Around 2020 or earlier Maxwell, C.T. The Gathering Storm. Barron’s. November 14, 2004.

Wood Mackenzie (Energy consulting)

Tight balance by 2020 MacroEnergy Long-term Outlook – March 2006. Wood Mackenzie.

Total (French oil company) Around 2020 Bergin, T. Total Sees 2020 Oil Output Peak, Urges Less Demand. Reuters. June 7, 2006.

Source: Hirsch, 2007

106

A number of the more credible peak forecasts are plotted on the graph in Figure 9.17 providing a clear impression of a consensus position in the 2000 to 2020 date range. Aside from these forecasts, more recent historical data suggest that oil production might have already peaked and may never return to the production level seen in 2008.

Figure 9.17: Various peak oil forecasts

1940 1950 1960 1970 1980 1990 2000 2010 2020 2030 2040

100

90

80

70

60

50

mbpd

40

30

20

10

0

BP (2006)

EIA (NGPL)

EIA (CO)

EIA (Other Liquids)

Loglets (CO+NGL)

Const. Barr./Cap. (CO+NGL)

Deffeyes (CO)

Logistic Med (CO+NGL)

Laherrere (All)

Logistic Low

Shock Model (CO+NGL)

Logistic High

GBM (CO+NGL)

ASPO-71 (CO+NGL)

ASPO-58 (CO+NGL)

Skrebowski (CO+NGL)

Bakhtiari (CO+NGL)

Koppelaar (All)

EIA (All)

CERA (All)

CERA (CO)

Source: Various (see key)

107

One of the primary uncertainties in the debate over the point in time at which oil production will peak centres around OPEC reserves. During the 80’s OPEC introduced a quota system such that members with the highest reserves would be granted a higher production quota by the cartel. This had the effect of incentivising OPEC member nations to exaggerate their reserves in order to increase their annual oil revenues.

As Figure 9.18 demonstrates, all OPEC members increased their stated reserves substantially between 1984 and 1990, without any associated discovery or exploration activity, in what has come to be known in the oil industry as the ‘scramble for quotas’. These reserve figures, if they are exaggerated, will result in faster depletion and therefore an earlier peak than official OPEC figures imply. The credibility of the figures is further called into question by virtue of the fact that the stated reserve figures of most OPEC members have not reduced over the years as oil has been supplied to the world markets. Again, this is despite a general lack of exploration and discovery activity since the scramble for quotas occurred.

The fact that OPEC members keep their true reserve confidential on the basis of ‘national security’ creates further uncertainty. Saudi Arabia for example has not allowed a comprehensive survey of its reserves by

independent observers since pre-1980 when the Saudi Government took full control of Saudi Aramco, the state owned oil company. In the words of Sadad I. Al Husseini, former Vice President of Saudi Aramco: “World reserves are confused and in fact inflated. Many of the so-called reserves are in fact resources. They’re not delineated, they’re not accessible, they’re not available for production.”311

The January 2006 issue of Petroleum Intelligence Weekly reported on a leaked document purported to be from the Kuwaiti Oil Company which stated the reserves of Kuwait to be 48 billion barrels (less than half the official stated reserves which now stand at 100 billion barrels) with only 24 billion barrels being “fully proven” (less than a quarter of stated reserves).312 This report has been the subject of numerous debates in the Kuwaiti parliament in which MPs have questioned the reliability of official Kuwaiti reserve figures.

These potential inaccuracies could prove to be crucial in the years to come. As shown in Figure 9.19, non-OPEC conventional oil production actually peaked in 2004 at 46.8 million barrels/day. As non-OPEC production has been in decline since then, it appears that it will fall entirely on OPEC to make up for the loss in non-OPEC production and provide for any overall expansion in oil production.

Figure 9.18: Reserve revisions under the OPEC quota system

YEAR Abu Dhabi Dubai Iran Iraq Kuwait Saudi Arabia Venezuela

1982 31 1 57 30 65 165 20

1983 31 1 55 41 64 162 21

1984 30 1 51 43 64 166 25

1985 31 1 48 44 90 169 26

1986 30 1 48 44 90 169 25

1987 31 1 49 47 92 167 56

1988 92 4 93 100 92 167 58

1989 92 4 93 100 92 170 59

1990 92 4 93 100 92 257 59

1991 92 4 93 100 94 257 63

1992 92 4 93 100 94 258 64

1993 92 4 93 100 94 258 64

1994 92 4 89 100 94 259 65

1995 92 4 88 100 94 259 65

1996 92 4 93 112 94 259 72

1997 92 4 93 112 94 259 72

Source: Energy Files, 2006

108

It is also the case that global oil production has actually been in decline since January 2008 when production peaked at 81.73 million barrels/day, since which time it has dropped to approximately 80 million barrels/day.313 Whilst this is a fact, those arguing that peak oil will not occur in this decade maintain that these production figures are a reflection of reduced demand during the global downturn rather than reduced production capacity. These commentators assert that when global demand resumes to 2008 levels, OPEC will respond accordingly by increasing production from the ‘spare capacity’ it claims to have.

Assuming this outcome, it might be reasonable to expect that OPEC would need to increase production levels such that global production exceeded 81.73 million barrels/day in order to avoid a return to price levels upwards of $140 per barrel. However, OPEC has failed to materially increase its capacity in the past few years, despite an unprecedented seven years of rising oil prices. Given that extreme price volatility is disruptive to the oil industry (upstream investment in the oil industry has slumped by $100 billion, or 21%, since the $147 price peak), it has been argued that if OPEC countries were able to increase production they already would have done so.314

Figure 9.19: Peaking of non-OPEC oil production including unconventional sources

1997

30

32

34

36

38

40

42

44

46

48

50

MBD

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Natural Gas Plant Liquids Canada Oil Sands Crude Oil and Lease Condensate

Non OPEC-12 Peak2004: 42.1 MBD

Non OPEC-12 Peak2004: 46.8 MBD

Forecast

Source: International Energy Agency, 2008; The Oil Drum, 2009

109

Analysis of historical supply changes provides further support for the view that the capacity of the oil industry to increase production is becoming increasingly stretched. As Figure 9.20 shows, average annual global oil production increased by an average of 6.48% between 1945 and 1980, whereas the average over the following 25 years (1980 to 2005) was only 1.74%.

GDP growth is a strong indicator of growth in demand for oil. Figure 9.21 shows World Bank figures for historical global GDP growth and forecast future GDP growth. Global GDP growth averaged 2.7% during the 90’s, 3.1% in the 2000’s (prior to the recent economic downturn) and is forecast to average 2.5% from 2015 to 2030. Asia’s GDP increased by 9%annually between 2004 and 2006, with growth especially high in China and India, whilst Sub-Saharan Africa experienced 6% annual growth in the same period.315

These figures contrast starkly with the average oil production increase of 1.74%. Assuming a direct link between GDP growth and demand growth for oil, a back-of-the-envelope calculation shows that supply the increase needed to be roughly 55% higher to keep up with 1990’s demand increase and 78% higher to keep up with demand increase in the 2000’s. In the context of this fundamental discrepancy between supply and demand, the increase in the price of oil price during this period (from $20+ to $140+) makes perfect sense.

Figure 9.20: Global historical petroleum supply changes

% s

up

ply

ch

ang

e ea

ch y

ear

6.48%

1.74%

19501945 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

14

12

10

8

6

4

2

0

-2

-4

-6

Source: Energy Files, 2008

110

As Figure 9.22 shows, there is a strong correlation between economic activity and oil consumption. The higher the per capita income of a country, the greater the per capita oil consumption will be. On average, oil producing and exporting countries consume more oil per unit of GDP than oil importing countries as oil is generally cheaper for local consumers. This can be clearly seen in Figure 9.22 which shows many oil producing countries lie below the trend line. This characteristic of oil producing countries to consume larger amounts of oil further exacerbates global supply by applying pressure on exports.

Figure 9.22: Relationship between per capita income and oil consumption

0

5000

10000

15000

20000

25000

30000

Ave. yearly oil consumption per person (bbls)

Ave

. ye

arly

in

com

e p

er p

erso

n (

$)

USUK

Saudi Arabia

China

Russia

India

0 5 10 15 20 25 30

Source: EnergyFiles, 2006

Figure 9.21: Actual and forecast average annual GDP growth

PeriodAverage annual growth rate

Per capita income Population GDP

1990s

World 1.2% 1.5% 2.7%

High income 1.8% 0.7% 2.5%

Low and middle income 2.0% 1.6% 3.6%

Low income 2.3% 2.2% 4.5%

Middle income 2.2% 1.2% 3.5%

2000s

World 1.8% 1.2% 3.1%

High income 1.7% 0.7% 2.5%

Low and middle income 4.2% 1.3% 5.6%

Low income 4.1% 1.9% 6.1%

Middle income 4.6% 0.9% 5.5%

2015-30

World 1.7% 0.8% 2.5%

High income 1.2% 0.1% 1.3%

Low and middle income 3.9% 0.9% 4.9%

Low income 3.8% 1.5% 5.4%

Middle income 4.1% 0.7% 4.8%

Change (2015-30 vs. 2000s)

World -0.2% -0.4% -0.6%

High income -0.5% -0.7% -1.2%

Low and middle income -0.3% -0.4% -0.7%

Low income -0.3% -0.4% -0.7%

Middle income -0.5% -0.2% -0.7%

Source: World Bank, 2009

111

A February 2009 report from Merrill Lynch supported the view that production decline rates in OPEC and non-OPEC countries could lead to higher oil prices as soon as 2010 or 2011. The report forecasts that cumulative decline in global oil production from today’s production levels could amount to 30 million barrels per day by 2015. According to Francisco Blanch, head of global commodities research at Merrill Lynch: “As a result of these steep decline rates, the world now needs to replace an amount of oil production equivalent to Saudi Arabia’s production every two years”.316

The Merrill Lynch report blamed forecast production declines of 30 million barrels (37.5% of current production) by 2015 on a general lack of investment in developing new production capacity and on producers’ emphasis in recent years on developing small oil fields.317 As larger fields are generally cheaper to exploit and produce revenue flows for longer, this is a clear sign of the fact that the world is running out of larger fields. Smaller fields deplete and reach peak production more rapidly than larger fields. According to the report: “Interestingly the decline rates are inversely proportional to the size of the field, with super giants experiencing a 3.4 per cent yearly decline, giant fields posing 6.5 per cent and large fields averaging 10.4 per cent.”318

The fact is that cheap, easily accessible oil is simply getting harder to find. According to the International Energy Agency, the world’s preeminent authority on oil supplies, the average depth of production from offshore wells has tripled in the last ten years.319 In a recent interview with UK newspaper, The Independent, Dr Fatih Birol, the chief economist at the IEA, admitted that previous estimates of decline rates in existing fields had been incorrect. As the articles states:

“The first detailed assessment of more than 800 oil fields in the world, covering three quarters of global reserves, has found that most of the biggest fields have already peaked and that the rate of decline in oil production is now running at nearly twice the pace as calculated just two years ago. The IEA estimates that the decline in oil production in existing fields is now running at 6.7 per cent a year compared to the 3.7 per cent decline it had estimated in 2007, which it now acknowledges to be wrong.”320

As Figure 9.23 demonstrates, despite record oil price increases investment in exploration has actually decreased by over 50% since 1980’s levels, indicating that viable exploration opportunities are becoming increasingly difficult to identify. Interestingly an increase of over 100% in production investment between the late 1990’s and mid 2000’s has done little to increase supply. This further supports the hypothesis of diminishing returns blighting an increasingly resource stretched oil industry. In 2005 the world’s six largest oil companies invested US$54 billion in new projects but gave back US$71 billion to shareholders in the form of dividends, despite rising oil prices.321

Regardless of historical data and forecasts, it will only be possible to state officially the point at which peak oil occurs a number of years after it actually takes place. Until then the issue will remain in debate. What is certainly true is that for oil prices to remain at or near lower long-term historical averages, production increases will need to continue at the same rate as the demand increases dictated by economic growth.

Figure 9.24 demonstrates the huge potential for demand to increase in coming years. China and India’s combined consumption remains lower than the United States, yet their combined population is over five times greater and their demand for oil will continue to grow with the rapid growth of their economies.

Figure 9.23: Real spending by major American multina-tional oil companies since 1980

0

20

40

60

80

100

0

10

20

30

40

50

60

70

US$ 2006, billions Real price per bbl, US$ 2000

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

Crude oil prices (right axis)

Exploration (left axis) Development (left axis)

Source: Energy Information Agency, 2008; World Bank, 2009

112

There is no doubt that once global oil production moves into a state of terminal decline there will be severe consequences for the price of oil. This in turn will substantially increase the financial incentive for biofuels manufacturers which will pass through into feedstock prices. In the words of the World Bank, Global Economic Prospects 2009 report:

“Biofuels could expand crop demand very rapidly. The potential role of biofuel demand for food crops greatly complicates the picture. Given today’s technology, maize can be profitably transformed into ethanol at oil prices in excess of $50 a barrel. Above that price, every percentage point increase in the barrel price of oil causes the maize price to rise by 0.9 percent, which means the maize market is effectively tied to the oil market (this relationship is not statistically significant when oil is below $50 a barrel). Moreover, because farmers have responded to high maize prices by increasingly growing maize in fields where they once grew wheat and soybeans, prices of these (and other) commodities have also become increasingly sensitive to oil prices.

Given that the energy market is much larger than the market for maize (if all the world’s maize were used to produce biofuels, it would only meet 8 percent of energy demand), biofuel demand has the potential to change permanently the nature (and price) of agricultural commodities. The International Energy Agency (IEA), for example, suggests that biofuel demand for grains could increase by 7.8 percent a year over the next 20 years (compared with 1.2 percent annual increases for food demand). If this prognosis is borne out, 40 percent of global grain production could be going to biofuels by 2030.”322

Peak oil thus has the potential to increase global farmland prices enormously. This could occur reasonably quickly if the peak occurs soon or in 2008 as many commentators postulate (and historical production data suggest). This is particularly true in view of the fact that, like with food, the demand for transport fuel is little affected by increasing price and the large scale development of substitutes would be both time consuming and costly.

According to the Hirsch Report: “As noted in previous literature, peak oil presents the world with a risk management problem of tremendous complexity and enormity. Prudent risk minimization requires the implementation of mitigation measures roughly 20 years before peaking to avoid a very damaging world liquid fuels shortfall. Since it is uncertain when peaking will occur or whether it will be due to geological or investment limitations, the challenge is indeed vexing.”323

Being the only viable short-term mitigation strategy for global oil shortages, biofuels are likely to play a very important role in a post peak world. This view is already being expressed by major investors in the sector. In March,

Royal Dutch/Shell, which had sold most of its solar business two years ago, said it is freezing its research and investment in wind and solar power to focus on biofuels whilst BP continues to push forward with its investments in Jatropha (an oil seed plant used in biodiesel production).324 High demand for farmland and feedstocks from the biofuels sector is also likely to continue for a prolonged period after the peak according to the findings of the Hirsch Report:

“Mitigation will require an intense effort over decades. This inescapable conclusion is based on the time required to replace vast numbers of liquid fuel consuming vehicles and the time required to build a substantial number of substitute fuel production facilities.”325

Figure 9.24: Comparison of oil consumption in various economies

1960 1965 1970 1975 1980 1985 1990 1995 2000 20050

6

12

18

24

Million Barrels per Day

India

United States

Russia

Former U.S.S.R.

Japan

China

Source: US Energy Information Administration, 2007

7.8% Forecasted annual increase in demand for grain from biofuels sector over next 20 years

153% Forecasted rise in the price of corn due to biofuels demand if oil returns to $140

113

Current activity in the automotive sector provides some insight into the extent to which the world is unprepared for a sudden reduction in the availability of conventional transport fuels. In June 2009 The Financial Times reported on a study in which it was estimated that carmakers around the world would produce 100,000 electric cars in 2015. To put this in perspective, this represents 0.1% of total car production.326

Given that the automotive sector consumes 50% of the oil produced worldwide (a figure forecast to rise to nearer 60% by 2030), a substitute for liquid fuel cars of 0.1% in 2015 seems somewhat modest. Add to this the fact that car numbers continue to increase rapidly and it is clear that adding 100,000 electric cars a year is a bit like trying to put out the great fire of London with a pipette.

Between 1990 and 2005 the number of motorists in India tripled and in China the number rose tenfold. Compared to the west (or even their emerging market counterparts), they have barely started.327 The US, with the highest, has 940 cars for every thousand residents; the EU an average of 584 and Brazil has 122.328 China now has roughly twenty vehicles per thousand residents.329 As Chinese environmentalist Liang Congjie points out: “If each Chinese family has two cars like US families, then the cars needed by China, something like 600 million vehicles, will exceed all the cars in the world combined.”330

Supply Side Implications of Peak Oil and Gas

Increased biofuels demand is not the only effect, however, which higher oil prices would have on agriculture. Agriculture, especially in the era of the Green Revolution, is hugely dependent on oil and other fossil fuels. As Figure 9.25 shows, agriculture is responsible for 13.5% of all greenhouse gasses compared to transport’s 13.1%.

Ten percent of the energy used annually in the United States was consumed by the food industry.331 A 2002 study from the John Hopkins Bloomberg School of Public Health estimated that, using current agricultural systems, three calories of energy are needed to create one calorie of edible food, with grain-fed beef requiring thirty-five calories for every calorie of beef produced.332 If the energy used in processing and transporting food is included, it takes an average of seven to ten calories of input energy to produce one calorie of food.333

The single biggest culprit in the consumption of fossil fuels in industrial farming is the use of agrichemicals (pesticides, fertilisers, growth agents etc). These chemicals are absolutely critical to the supply side of the equation. Increased fertilizer application has in the past been responsible for at least 50% of yield increases.334, 335 From 1961 to 1999, the use of nitrogenous and phosphate fertilizers increased by 638% and 203%, respectively, whilst the production of pesticides increased by 854%.336

$5.8 billion

US subsidies for biofuels in 2006

Figure 9.25: Global greenhouse gas emissions by sector in 2004

Waste and wastewater 2.8%

Residential and commercial buildings 7.9%

Energy supply

25.9%

Transport 13.1%

Industry19.4%

Agriculture 13.5%

Forestry 17.4%

Source: Intergovernmental Panel on Climate Change, 2007

As much as forty percent of energy used in the food system goes towards the production of artificial fertilizers and pesticides.337 Nitrogenous fertilizers are synthesized from atmospheric nitrogen and natural gas, a process that takes a significant amount of energy. Producing and distributing them requires an average of 62 litres of fossil fuels per hectare.338

A discussion of the long-term implications of peak oil for global agricultural productivity and the human species as a whole is beyond the scope of this document. However, from the perspective of the farmland investor, there is precedent for assessing the possible short to mid-term effects in view of recent experience with the oil shock of 2008.

Current Food and Agriculture Organisation of the United Nations’ (FAO) projections for increases in food production for the period 2015 to 2030 actually assume an average oil price of US$21/barrel, while their 2030 to 2050 scenario assumes US$53.4/barrel. However, at the peak of the 2008

114

food crisis oil prices hit US$147/barrel and were still above $70 in July 2009 in the midst of the worst global economic recession since the Great Depression.339 This apparent disconnect between the realities of the recent history of oil prices and the FAO forecasts, provides some insight into the extent to which world policy makers, even at the very highest levels of the United Nations, may be completely unprepared for a future of higher average oil prices.

Despite sticking to their long-term forecast assumptions of oil price, the UN does acknowledge this. In the words of a recent FAO report: “If peak oil supply is reached within the period under consideration, this will have major consequences for the economics of virtually all aspects of food production.”340

As Figure 9.26 shows, during the 2008 price spikes fertiliser prices reached historic highs, due to a combination of rising global demand and high oil prices, and farming input costs increased dramatically. Farmers in low-income countries who could not afford fertilisers reduced their usage, relying on the residual nutrient content in the soil from natural stocks and previously applied fertilisers, a process known as ‘nutrient mining’.

An inevitable consequence of nutrient mining is the lowering of yields over time. This in turn resulted in a drop in worldwide grain production which fed through to higher agricultural commodity prices. The result was that at the same time as fertiliser prices were reaching historic highs, so were agricultural commodity prices. Farmers with suitable cash flow or access to credit thus benefited from higher fertiliser prices whilst farmers in poorer countries suffered. The higher regional differentiation in production and demand also lead to greater reliance on imports for many countries, further exacerbating the demand side of the equation.

As a recent UN report acknowledges: “The projected increases required to sustain demand assume a substantial increase in the use of fertilizers by small-scale farmers.”341 Most of the projected increases in production assume an increase in the use of fertilizers to exploit the ‘yield gap’ in key expansion regions such as Sub-Saharan Africa and South America In a world of more expensive oil, this could have profound implications as forecast supply increases could fall short of forecast demand increases.

This would place upward pressure on agricultural commodity prices, causing farmland profits in high-income countries more capable of absorbing rising fertiliser prices to rise. High income countries also generally have better access to international markets and strong demand from wealthier domestic consumers and are therefore more able to capitalise on upward fluctuations in commodity prices. Indeed, farm incomes in the developed world increased substantially during 2007 and 2008, despite higher input prices.342

Figure 9.26: Prices of fertiliser nutrients since 1975

1975 1978

Do

llar

s/p

ou

nd

of

nu

trie

nt

1981 1984 1987 1990 1993 1996 1999 2002 2005 2008

1.0

0.8

0.6

0.4

0.2

0

Nitrogen Phosphate Potash

Source: US Department of Agriculture, 2008

CHAPTER 10

Farmland as an Asset Class

116

“We think right now is an excellent point of entry for taking a long-term

position in agriculture. If you look at the macro picture today, we have an

extraordinary situation. If you take governments’ printing money as fast

as they are, borrowing as fast as they are, and bailing out white-elephant

corporations, we’re surely going to have an inflationary situation fairly soon. In

that kind of environment, owning a hard asset like land is a good hedge.”

Lord Jacob Rothschild, 2009

Investor Appetite for Farmland under Current Market Conditions

Under market conditions in the second half of 2008 and early 2009, many investors are seeking alternative asset classes to boost returns without dramatically altering their overall risk profile. The current markets are characterised by:

Price volatility in mainstream asset classes.1.

Unusually2. high levels of positive correlation between virtually all traditional asset classes and their subcomponents.

Unce3. rtainties over valuations due to low levels of visibility with respect to the global economy.

Con4. cerns over inflation in light of mass quantitative easing in many global markets.

The 5. disappearance of ‘risk free returns’ on cash due to unprecedented low central bank interest rates.

Many investors are now looking for alternatives with the following characteristics:

‘Real’ or ‘hard’ assets that are expected to provide 1. protection of value.

Greater retur2. n than traditional fixed income investments provide in the current market climate.

Low 3. correlation to mainstream investments such as stocks and bonds and traditional alternative investments such as commercial real estate and hedge funds.

Supe4. rior performance in an inflationary environment, to mitigate market risks due to global monetary policy (low interest rates, quantitative easing, commodity driven inflation etc).

Good5. long-term fundamentals to support future capital growth in an investment environment where short-term visibility is at historic lows.

Simp6. le, secure investments, preferably involving direct ownership of underlying assets.

-18.9% Fall in UK house prices in 2008

-30.9% Fall in FTSE 100 index in 2008

10% UK farmland returns in 2008

-27% Fall in UK commercial property in 2008

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As this section will demonstrate, direct investment in farmland has the potential to provide all of the above features. This has resulted in rapidly rising interest among professional investors in farmland as an asset class. If this trend continues, it will provide meaningful lsupport for farmland values in the coming years. The sector was previously dominated by agricultural buyers with a relatively small number of investment buyers having very little impact on demand.

The attempts of countries to ensure their domestic food security by acquiring large tracts of productive land in foreign states, further raises farmland prices.

Note that in the context of this document, when farmland investment is being discussed it is assumed that the investment is in direct freehold ownership of farmland (i.e. not through an equity position in a farm business, fund or some other form of securitised structure). It is also assumed that the farmland is located in a developed, free market economy with a robust legal system protecting property ownership rights and allowing direct freehold ownership of land. Under such conditions an investor might expect to earn a return in three possible ways:

Income from agricultural tenancies.1. Capital growth from rises in agricultural land values.2. The potential for windfall returns if land is developed 3. for alternative uses at some point in the future (e.g. infrastructure, industrial, commercial or residential development).

Throughout history, land has been the most basic repository of wealth and value through good times and bad. Future supply and demand fundamentals could make farmland even more attractive for the long-term investor. In the view of a growing number of professional investors, farmland offers particularly appealing portfolio planning characteristics under current market conditions.

A Note about the Perils of Assumptions Based on Historical Data

It is important to note that this chapter includes references to third party reports which discuss farmland as an asset class in a favourable light. These studies are specific to the circumstances they cover, such as: the time period covered by the study, geographical region and farmland type. For this reason, their conclusions, whilst providing an interesting insight into scenarios with similar conditions, should be used as a guide rather than a basis for any investment decision. Past performance is no guarantee of future performance and investors should of course be cautious in the use of historical data when making investment decisions.

As has been so clearly demonstrated by recent market events, the time period used to provide data for predicting future events, is crucial. Other than simply using the longest time period possible, as dictated by the availability of complete and accurate data, an alternative may be to focus on data for time periods most likely to be characteristic of future conditions.

For example, during the 1980’s, commodity prices fell due to depressed demand in many developing countries and the accumulation of large grain stocks. If you believe that these are likely to be representative of prevailing market conditions in the coming years, then data from this period would be relevant. As a result you might expect land prices to decline, leaving farmland returns low or negative in the mid to long-term.

Alternatively, during the 1970’s commodity prices were high, agriculture was more profitable, land prices rose and those who had bought land prior to the 1970’s made higher returns. The same conditions occurred again in recent years and, again, returns in terms of rising land prices and agricultural rents were generally higher. If the investor believes that higher agricultural commodity prices are likely in the mid to long-term then data from these periods may be more relevant for forecasting future trends.

This document does not seek to advise investors on the appropriateness of farmland for their particular investment circumstances. This would depend on a number of factors such as the investors’ personal strategic investment goals, views on future markets conditions and the likely performance of competing asset classes, risk tolerance etc

The following sections are meant to provide a summarised overview of farmland’s characteristics as an asset class. Bibliographic details for the farmland investment research and reports referred to in this document are available at the end of the chapter for those investors interested in a more detailed review.

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Farmland as a Portfolio Diversification Tool

A number of studies have shown that, historically, farmland returns have a low or negative correlation with traditional asset classes such as stocks and bonds and only a modest positive correlation with commercial real estate.343

A study in the US, using data over a period of 33 years up to the 1980’s, considered six asset classes including farm real estate, large and small capitalisation stocks, long-term corporate bonds and Treasury bills. The study concluded that inclusion of farmland in the portfolio had highly attractive characteristics, particularly in view of the low correlation with other assets in the portfolio (especially large capitalisation stocks).344

These characteristics make farmland an attractive diversification tool that can help reduce the impact of broader market volatility on a diversified portfolio. The farmland component can be further diversified by varying crop types, management styles and geographic distribution within the portfolio. In a direct ownership structure, investors can acquire farmland across a range of farms in different countries and/or climate zones and under different asset managers.

Farmland as an Inflation Hedge

Farmland returns have been shown historically to have a positive correlation with inflation, making farmland an effective inflation hedge and capital preservation vehicle. According to the Hancock Agricultural Investment Group (HAIG), part of the US investment management division of Manulife Financial, “during the period from 1941 to 2002, average farmland values increased by almost two percent more than the average rate of inflation over that time period”.345

This may be especially appealing to investors concerned about inflationary government policies such as low interest rates and quantitative easing prevalent under current market conditions in many of the world’s economies. Unlike other popular hedges against inflation, such precious metals, farmland also provides a regular income to the investor. This makes it a useful replacement for lost ‘risk free’ income on cash deposits.

High Level of Capital Security and Low Level of Risk

Many investors, whilst seeking higher returns when times are good, are now placing greater emphasis on capital preservation during periods of severe market turmoil. Historically, data show that farmland has exhibited strong capital protection characteristics over prolonged periods of time.

Assuming farmland is properly managed and is located in a jurisdiction where property rights are well protected, the investment is backed by a solid asset in finite supply which is unlikely to depreciate in value. The asset is completely secure and immune to theft or fraud (as long as due diligence and conveyancing are properly and professionally conducted at the point of acquisition).

Farmland’s historical risk/return profile compares favourably with more traditional assets such as stocks and bonds. Studies have shown that even taking into account the transaction costs associated with less liquid assets, farmland still constituted a substantial portion of the optimal portfolio across a wide range of scenarios.346

Farmland’s Superior Risk- Adjusted Returns

The most commonly used measure of risk- adjusted return is known as the Sharpe Ratio. It is a measure of the excess return, or ‘Risk Premium’, per unit of risk in an investment asset or trading strategy and is used to assess how well the return on an investment compensates the investor for the risk taken. The higher the Sharpe Ratio for a particular asset, the higher the return earned per unit of risk an investor is exposed to when owning that asset.

As Figure 10.1 from the US National Council of Real Estate Investment Fiduciaries (NCREIF) shows, the Sharpe Ratio for US Farmland was higher than large capitalisation US equities, T-bills and commercial real estate for the period 1991 to 2007. In terms of total returns, farmland was outperformed only by stocks (by 0.3% annually). Stocks however had more than double the risk (in terms of standard deviation) compared to farmland. These figures are particularly impressive considering that the study period ended in 2007, prior to the recent crash in equity and commercial real estate values.

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Figure 10.1: Sharpe Ratios for US assets classes between 1991 and 2007 (geometric mean % total returns)

Asset Class Average Total Annual Return Risk (Standard Deviation) Sharpe Ratio

Government bonds 7.2 5.9 0.53

S&P 500 11.4 17.0 0.41

Farmland 11.1 7.6 0.93

Urban Real Estate 9.2 7.1 0.72

Source: National Council of Real Estate Investment Fiduciaries, 2008

A General Look at Farmland’s Performance against Other Asset Classes

Some comparative studies on farmland have been criticised for taking numbers derived from agricultural equity type investments (i.e. data which include income from the commercial operation of a farm), thus making a direct comparison between straight farmland ownership and other asset classes difficult. However, in a much referenced and well respected study conducted in the US, where farmland was specifically analysed from the perspective of capital growth and income from rents, the findings were consistent with other studies in terms of its benefits compared to other asset classes.347

Figure 10.2: Efficient portfolios when asset classes are unrestricted

Annual Return Standard Deviation

Asset Allocation

Farmland S&P 500 Business Real Estate

Long term Corp. Bonds

% % % % % %

15.56 6.49 100.00 0 0 0

15.50 6.31 98.4 1.6 0 0

15.00 5.33 87.9 12.1 0 0

14.50 4.72 78.8 12.0 9.2 0

14.00 4.17 69.3 10.8 19.7 0.2

13.50 3.68 61.7 8.8 26.2 3.3

13.00 3.26 54.1 6.7 32.8 6.4

12.50 2.90 50.5 5.2 36.2 8.1

12.00 2.58 49.2 4.2 37.3 9.3

11.50 2.31 48.1 3.2 38.4 10.3

11.00 2.09 46.0 2.0 40.3 11.7

10.55 2.03 42.8 0 43.1 14.1

Source: Journal of the American Real Estate and Urban Economics Association, 1992

The study concludes as follows: “The study used cash rents after property taxes to derive the income part of the returns on farmland for the period 1967-88 and showed that diversification enhances portfolio performance for institutional investors. The results were robust across wide variations in variance and annual returns to farmland.

For the period 1967-88, farmland exhibited a higher return than that of stocks and bonds. Further, returns on farmland were negatively correlated with stocks and bonds and positively correlated with inflation. Thus investment in farmland not only was a good hedge against inflation but also provided diversification for those who included it in their portfolio. The implication is that, by including farmland in their portfolio, they may be able to reduce the possibility of shortfalls of their funds in times of higher inflation.”348

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Another more recent study, based on figures from the NCREIF Farmland Index, reported similar findings.349 As Figure 10.3 indicates farmland performed well during the study period (1991 – 2004) compared to other assets such as US investment grade bonds (as represented by the Lehman Aggregate Bond Index), a diversified portfolio of the top 1,000 US large capitalisation stocks and top 2,000 small capitalisation stocks (as represented by the Russell 3000 Index), as well as mainstream real estate (as represented by the NCREIF Property Index)..

Figure 10.3: US farmland returns against other asset classes over different time periods ending December 2004

1 Year 3 Yrs 5 Yrs 7 Yrs 10 Yrs 13 3/4 Yrs

NCREIF Farmland 20.50% 12.20% 9.04% 8.48% 8.76% 8.56%

NCREIF Property 14.52% 10.03% 9.91% 11.00% 10.87% 7.59%

Russell 3000 11.95% 4.80% -1.16% 5.09% 12.01% 11.29%

Lehman Aggregate 4.34% 6.20% 7.71% 6.59% 7.72% 7.54%

Source: NCREIF Farmland and Property Indexes, 2004; Lehman Aggregate Bond Index, 2004; Russell Investment Group, 2004

As Figure 10.4 shows, farmland also showed low or negative correlation with traditional asset classes and real estate, whilst showing a positive correlation with inflation as measured by the Consumer Price Index (CPI).

Figure 10.4: Correlation of US farmland to other asset classes and inflation over different time periods ending Decem-ber 2004

RETURN STD DEV CORRELATIONS

CPI Bonds Stocks RE Farmland

CPI 4.8% 3.2% 1.00

Bonds 8.9% 7.2% -0.34 1.00

Stocks 12.7% 17.2% -0.23 0.33 1.00

Real Estate 9.4% 5.6% 0.38 -0.20 0.06 1.00

Farmland 10.3% 7.8% 0.54 -0.52 -0.13 0.11 1.00

Source: UBS AgriVest, 2004; U.S. LT Government Bond Index, 1970-1977; Lehman Aggregate Bond Index, 1978-2004; S&P 500 Stock Index, 2004;

Evaluation Associates, 1970-1977; NCREIF Property Index, 1978-2004; Core Farmland Index, 1991-2004; Ibbotson Associates, 1970-1990

A further study conducted in Saskatchewan, a prairie province which produces just under half of Canada’s grain, compared farmland with a number of other asset classes found in a typical globally diversified investment portfolio held by a Canadian mutual fund investor. The study concluded that: “the addition of farmland ownership would have enhanced financial performance across the portfolio for average or medium levels of risk. The financial gains from farmland are a result of its negatively correlated returns with equity markets. When added to an equity portfolio, the risk level is reduced while maintaining the same rate of return on investment.”350

The study compared Saskatchewan farmland with Canadian T-Bills and long-term bonds, forming the lower risk end of the portfolio, and various equity markets (Canada, United States, Japan, United Kingdom, France, Germany, and Italy) at the higher risk end of the portfolio. As can be seen from Figure 10.5, Saskatchewan farmland out-performed the local equity market whilst exhibiting a lower level of risk (measured in terms of volatility).

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Long Bonds

0%

2%

4%

6%

8%

10%

12%

14%

Risk (Standard Deviation)

Ret

urn

o1n

In

vest

men

t

Canada Equities

T-Bills

0% 5% 10% 15% 20% 25% 30% 35% 40% 45%

Farmland

USA Equities UK Equities Japan Equities

Italy Equities

France Equities

Germany Equities

Figure 10.5: Comparison of average risk and return for Saskatchewan farmland and other asset classes between 1970 and 1998

Source: University of Saskatchewan, 2000

Source: Savills, 2009

Although returns in some equity markets were a little higher, farmland did show a lower level of risk than all the equity markets and was outperformed in risk terms only by long-term bonds and T-Bills. The average total return (income from leases and capital gains in the value of the land) for Saskatchewan farmland during the study period was 9.6%.

Investment Appeal in Times of Market Turmoil

Historically, land (and agriculture in general) has repeatedly benefited from ‘flight to quality’ investment behaviour. It performs comparatively well during times of market uncertainty, thus acting as an ideal recessionary hedge. As the title of an Economist article published in March 2009 puts it, “No matter how bad things get, people still need to eat”.351

According to estate agent Savills’ Agricultural Land Market Survey 2009: “UK farmland has once again proved resilient to recessionary pressures as in the previous three recessions (mid 1970’s, early 1980’s and early 1990’s) during the past thirty years. Farmland is also one, along with gold, of the world’s principal defensive hedges and is sought after in times of economic volatility. Although some limited pressure on values was recorded during previous recessions the general upward trend was not stifled. We believe this will again be the case in the current economic climate.”352

According to a recent Bloomberg article, returns from farmland in the United Kingdom averaged about 10% during 2008, whilst UK house prices fell 18.9% and commercial property 27%.353 In 2008 the FTSE 100 dropped by 30.9%. In North America, in the words of Gary Bader-

5,000

4,500

4,000

3,500

3,000

2,500

2,000

1,500

1,000

500

0

per

acr

e (£

)

1970

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1980

1985

1990

1995

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2005

1973oil crisis

Interest ratesat 15% +

‘Winter ofdiscontent’

High interest rates,ERM, Gulf War,

US savings& loan crisis

Credit crunch

Figure 10.6: Historical resilience of UK farmland to recessions between 1970 and 2008

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Chief Investment Officer of the Alaskan Retirement Fund (which in recent years increased its holdings of farmland from $200 million to $500 million -approximately 5% of assets under management):

“People are going to need to eat no matter what happens to the economy. The [farmland] portfolio returned 14.97% for the year [2007 – 2008] ending Sept. 30, at a time when virtually all other asset classes and strategies [in our portfolio] are posting negative numbers.”354

A further study on US farmland conducted in 2002 compared the effects on portfolio efficiency of including farmland in a mixed asset portfolio under market conditions of certainty and uncertainty. It concluded that, in both certain and uncertain world models, farmland can be shown to improve portfolio efficiency.355

Farmland as a Real Estate Investment

Whilst farmland falls under the general classification of real estate, it has a number of unique characteristics when compared with other forms of real estate. This has had the effect of sheltering farmland assets from the more extreme falls in commercial and residential property values which have scared many investors off during the recent global financial meltdown.

1. Fundamental Limits to Supply Unlike other forms of real estate where supply can be increased by building new units, the supply of farmland is fundamentally limited. This is especially true when considered in the context of the constraints to further expansion (and the potential for an aggregate reduction in global cropland area) discussed in this document.

2. Price / Earnings and Yield As a general rule, agricultural land values are supported by earnings (although some agricultural areas may experience upward price pressure from development speculators thus driving farmland values up beyond pure agricultural value). Farmland has therefore shown itself to be a reliable vehicle yielding, over a prolonged period of time, returns which include both the capital gains on principal as well as income. Indeed, farmland has been referred to by investors as ‘gold with a coupon’.

A note of caution. Purchasing farmland at above market

prices in regions where earnings from farm operations do not support current real estate values is essentially a bet on future real estate development and, as such, is inherently higher risk.

3. Farm Sector Debt Further reassurance of fundamental value comes from the fact that both the debt-to-equity and debt-to-asset ratios are low in the farming sector. This reflects the fact that farmland values have risen in step with, or more rapidly than, debt levels over the past few years.

As a general rule this is in stark contrast to residential and commercial real estate. The ratios in the farmland sector could also be taken as an indicator that the sector is less overbought (and therefore less likely to be overvalued) than other forms of real estate.

Fiscal Advantages of Farmland Investment

In many of parts of the world, including many developed economies, there are a range of tax related incentives associated with farm real estate. These may result in favourable treatment across one or all of the standard taxes (such as income taxes and capital gains taxes) which would normally have an adverse effect on returns in other asset classes. In some instances there are also special exemptions with respect to inheritance tax which may make farmland particularly attractive for estate planning purposes. Some countries have additional incentives for forestry related usage of farmland.

In the UK, for example, foreign buyers of farmland are not charged capital gains at source and there are no withholding taxes on the repatriation of funds in the event of sale or on income earned from tenancies (i.e. all profits from the sale of the asset and/or income from tenancies, including in the case of death, may be repatriated by the investor).

For UK resident farmers and Farmland Investors There are a number of tax incentives for farmland investors (and their farming tenants) that make farmland an attractive shelter for individuals with significant capital gains and inheritance tax liabilities. There are two different types of inheritance tax relief; Agricultural Property Relief and Business Property Relief. These reliefs operate by reducing the value of qualifying assets liable to inheritance tax as follows:

100% for the agricultural value of farmland, including 1. farmland under tenancies. To benefit the land must have been owned and farmed by the owner for at least 2 years, or 7 years if not farmed by the owner (e.g. when farm is rented to a tenant farmer).

100% for interests in business assets owned by a 2. farming enterprise entity (either sole trader, partnership or limited company).

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There are also a number of capital gains tax reliefs available:

Rollover relief on the replacement of land and farm 1. buildings with other qualifying business assets and vice-versa.

Holdover relief on gifts, even where the farmland is 2. tenanted (with the same 2 and 7 year time constraints as above).

‘Entrepreneurs’ Relief’ provides an effective tax rate of 3. 10% on certain qualifying business disposals.

The special income tax rules for farmers / tenants include:

The ability to average the individual’s farm results 1. between tax years, if this reduces the tax liability.

An election to treat a herd of breeding animals as a 2. capital asset rather than trading stock.

Rules to treat all farming as one trade, even if the farms 3. are in different areas.

The ability to claim capital allowances on farm 4. buildings and other permanent structures that would not otherwise qualify for capital allowances.

Additionally, no restrictions on foreign direct ownership and the very highest levels of protection of ownership rights under the British legal system add to the appeal of UK farmland for foreign and local investors alike.

CHAPTER 11

Investing In Agriculture – Guidance for Investors

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“The trick here is not just to harvest crops but to harvest money.”

Mikhail Orlov, founder of Black Earth Farming and former private equity manager with Carlyle and Invesco, 2008

A Comparison of Agricultural Investment Strategies

There are a number of different ways of investing in the agriculture sector. The choice of method will be determined by the investor’s objectives: short, medium or long investment term; liquidity and income requirements; risk appetite, etc. Listed below are the principle methods used by the investing community to gain exposure to the agriculture sector followed by a brief assessment of their relative merits and demerits.

1. Agricultural Commodities Investors can get direct exposure to individual crop prices through investing in agricultural derivatives such as futures or options, or buy into a mixed basket of agricultural commodities through exchange- traded funds which track commodity indexes.

2. Direct Investment in Agricultural Equities There are a number of agricultural equity plays available to investors. It is possible to invest in large- scale commercial farming enterprises involved directly in crop production; or in other industries which supply the agriculture sector, such as (fertiliser, pesticide and seed producers and agricultural machinery manufacturers.

3. Collective Investment Funds Investing in farmland through a securitised or unitised fund which invests over a portfolio of different farms or agricultural equities.

4. Direct Farmland Investment Direct investment in agricultural land with a fixed rent, possibly with an additional variable element linked to farm income, profitability or commodity prices.

Whilst a direct comparison is problematic given the different risk profile of each method, there are a number of benefits to direct farmland investment, both in terms of asset characteristics and mid to long-term supply and demand fundamentals. As covered in the previous chapter, farmland has performed well against the majority of other assets in a number of different markets over a wide range of different time frames.

There is also evidence to suggest that this holds true not just across different asset classes but also across different instruments in the agricultural sector. According to a 2009 study from UK estate agent, Savills: “Rural land based assets have significantly outperformed alternative assets in recent years recording total returns of well over 20%. Even over the long-term rural assets have recorded comparable performance to other assets.”356

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5%

0%

-5%

-10%

3yrs 10yrs 20yrs 30yrs

Let Land

Let Residential Commercial - All

Farming Top 25% Forestry

Equities

Gilts

Figure 11.1: Performance of rural land against other asset classes over different time periods ending 2008

Source: Savills, 2009

What is most interesting about this particular study is the comparison of leading agricultural equities with direct ownership of rural land. As Figure 11.1 indicates, direct farmland ownership has outperformed the top 25% of agricultural equities (“Farming top 25%” in the graph) over all time periods.

By owning farmland through agricultural companies, or by owning companies which depend on the sector for revenue, the investor obviously assumes additional risks such as enterprise risk and other risks generally associated with

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investing in companies. This additional level of risk has not shown itself to be sufficiently rewarded by proportionately higher historical returns.

Farmland is the foundation of all agriculture and the most basic repository of wealth and value within the sector. The fortunes of companies can wax and wane as management and market conditions change or one competitor outperforms another. Farmland on the other hand is fixed and will always gain in value over the mid to long-term as demand continues to rise. In the words of an agricultural fund manager with ABN AMRO:

“In any resource sector, if you want to get involved, you always want to be in the upstream. It doesn’t matter whether it’s mining, whether its oil and gas or agriculture; the highest return you get is always in the upstream. Over the next five years, you will have 2 billion more people eating bread, eating noodles, drinking coffee ... There is no way in this world that the supply side can catch up with the demand side.”357

Additionally, as the studies in the previous chapter demonstrate, there is less volatility in direct farmland investment compared with other asset classes (including agricultural equities and commodities). Farm enterprise profits are more vulnerable to fluctuations in commodity prices and input costs. It is this perceived volatility within the farming sector that has caused the non-agricultural investor to believe that farmland ownership is riskier than it actually is.

The reality is that the income of agricultural landowners is more insulated from changing market conditions, given that rents are a fixed cost which the agricultural enterprise must bear regardless of prevailing market conditions. Thus, in the case of tenancy arrangements with fixed rental rates, the asset class shows less volatility, producing a smoother and more reliable income stream. In addition, a variable ‘top-up’ component to leases can provide the investor with additional returns in good years. In essence, farmland earns equity-like returns (showing both capital growth and income) with a lower degree of volatility and capital risk.

Diversification is frequently cited as one of the advantages of investing in farmland through a collective investment fund structure. For investors with sufficient capital, similar diversification is possible through direct farmland investment by investing in a portfolio of farmland assets. Additionally, a number of research studies suggest that if assets are selected according to certain criteria, diversification is less of a concern than in the case of other asset classes.

This is due to the fact that many farms operate a mixed cropping system with rotation between crop types. This creates diversification at the l farm enterprise level and hedges against fluctuations in individual commodity prices. If such farms are specifically selected during pre-purchase

due diligence, diversification at the portfolio level becomes less of an issue.

One comprehensive study, conducted in 2002, which looked at the importance of diversification in farmland portfolios concluded that:

“With respect to farmland investment and geographic diversification, the results [of the study] question the ability of an optimised mean-variance portfolio to provide substantial improvement in comparison to a naive portfolio. The marginal improvement in portfolio efficiency of an optimised farmland portfolio is not statistically significant.”358

This is especially pertinent when considered in the context of historical data on asset managers’ failure to outperform investment benchmarks (achieve ‘alpha’). One of the more recent and comprehensive studies on this subject, which analysed monthly returns for over 2,000 actively-managed US, open-ended, domestic equity mutual funds between 1975 and 2006, concluded that359:

75.4% of funds are zero-alpha funds, with manager’s 1. excess returns over their benchmark being eliminated by fees and expenses 24.0% of funds are unskilled, displaying an alpha of less 2. than zero (i.e. nearly a quarter of mutual fund managers actually loose investors’ money when compared to passive index based returns) 0.6% of funds exhibited a true positive alpha (i.e. less 3. than 1% of managers were able to generate true alpha and outperform passive index benchmarks)

Aside from investment performance, there is also the matter of capital risk. It is hard to imagine an investment with better characteristics in this regard. In a worst- case scenario, even if a farmland tenant is unable to make a rent payment, the investor still owns the underlying asset. The bulk of their capital is always preserved. This cannot be said of agricultural equities where the worst- case scenario is the loss of 100% of capital; or agricultural commodities where the loss of capital has the potential, under certain circumstances, to exceed the amount invested.

Betting on short-term movements in commodity prices is not for the faint hearted. This is especially true under the current market conditions. Firstly, in these nervous times sentiment prevails in many cases over fundamentals. This exposes investors to additional risk from external random events (e.g. the collapse of another major financial institution) which can alter investment sentiment very suddenly. Secondly, predicting future events in the short to mid-terms is made all the more difficult by the fact that the markets are exposed to unprecedented levels of artificial intervention (e.g. mass fiscal stimulus and quantitative easing happening simultaneously across numerous financial markets).

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Because there is no precedent on which to base forecasts, the level of guesswork is at an all time high. Indeed, many of the politicians and economists orchestrating these interventions admit that they are unable to predict with any degree of certainty the outcome of their actions. This additional level of uncertainty brings with it levels of risk which of course can be rewarding. If, on the other hand, an investor’s long or short positions are unexpectedly caught on the wrong side of a sudden and extreme market fluctuation, then major risk to capital is a very real possibility.

Many investors in today’s market, characterized by low levels of short-term visibility and continuing uncertainty over asset values, are finding it difficult to make decisions based on short-term market fluctuations. Under such conditions, there is an argument for making investment decisions based on what is likely to happen over the next five to ten years rather than over the next five to ten months. With a direct investment in farmland and an appropriate time horizon in mind, short-term fluctuations in market prices become less important. Farmland investors are guided more by the long-term investment proposition, as dictated by fundamental trends in demand growth and the constraints to increasing supply discussed in the earlier part of this document.

Preservation of capital invested in individual assets within a portfolio is one of the most important contributing factors to long-term performance across the portfolio as a whole. In the words of renowned long-term value investor, Warren Buffett:

“There are three rules I try to follow when investing:

Don’t lose money.1. Don’t lose money.2. Don’t lose money.3. ”

Despite the obvious advantages of direct farmland investment which not only make sense in theory but also in fact (as proven by historical performance figures) the asset class has been all but neglected by the majority of investors. There are a number of reasons for this:

The perception of a lack of efficient market information 1. on price and value. The level of specialist expertise required to identify, 2. assess and acquire farmland. The perception of a lower level of liquidity within the 3. asset class. The lumpiness of asset size usually restricts the asset 4. class to high / ultra-high net worth or institutional investors.The perceived burden of managing the asset.5.

On the first point, a study conducted in the United States which assessed farmland values over a prolonged period from 1900 to 1994 demonstrated that values only show

inconsistencies in the short-term. It may not be possible for speculators with a short holding horizon to obtain systematic excess returns by trading in land markets (due to transaction costs), however, farmland markets are efficient and prices are consistent with standard farmland valuation models (even allowing for transaction costs) if a longer term investment horizon is accepted.360

As for points 2 to 4, in general, many investors fear that by adding farmland as a separate asset class into a portfolio, this may increase its complexity and maintenance costs. Simple inertia also plays a role to the extent that many investors (or their advisors / investment managers) have a greater degree of familiarity with more traditional asset classes and feel put off by a lack of experience in agricultural land investment.

The reality is that these issues can be dealt with by outsourcing the investment process to an advisor with the appropriate expertise. It’s just that this sort of advisor is more difficult to find than advisors who know all about the equity and bond markets. Because the asset class does require a higher level of expertise and specialist knowledge, identifying the right partners is, of course, absolutely critical to investment success. The risks in farmland investing are very real for a novice but very manageable for an expert.

A Discussion about Portfolio Weightings in Farmland Investment

As the previous chapter demonstrates, there is much historical evidence showing that farmland can enhance the overall performance of investment portfolios dominated by traditional asset classes such as stocks, cash, bonds and/or commercial and residential real estate. Farmland provides competitive returns anchored by a solid income component hedged against inflation (because rental income is linked to commodity prices which are positively correlated with inflation). Although a number of institutional investors and specialist funds have acknowledged through their asset allocations the positive investment characteristics

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of agricultural land, this does not (yet) seem to be widely accepted in the mainstream investment community, especially at the private investor level.

The Financial Times, Association of Private Client Investment Managers and Stockbrokers (FTSE APCIMS) index series published by the FT on a weekly basis: “provides investors with an objective benchmark against which they are able to measure their investment portfolios, based upon the assumption that they are domestic investors with sterling denominated accounts. The index series represents performance for growth-oriented, income and balanced portfolios, and incorporates returns from FTSE indices

Figure 11.2: Asset allocations for FTSE APCIMS private investor indices (effective as of January 19th 2009)

FTSE APCIMS Portfolio Index

Portfolio Objectives UK Equities

Foreign Equities

Bonds Cash Commercial Property

Hedge Funds

Stock Market Growth Portfolio Index

Aiming for growth/capital appreciation from predominantly equity investments

47.5% 30.0% 7.5% 5.0% 2.5% 7.5%

Stock Market Income Portfolio Index

Aiming for income from predominantly equity and fixed interest investments

45.0% 10.0% 37.5% 5.0% 2.5% 0.0%

Stock Market Balanced Portfolio Index

Aiming for a balance between growth and income

42.5% 22.5% 20.0% 5.0% 2.5% 7.5%

Source: FTSE APCIMS, 2009

representing UK equities, foreign equities, fixed income, and cash, according to variable percentage weightings set by committee and based upon average allocations across private client investment managers.”361

Given that these portfolios are “based upon average allocations across private client investment managers” it is assumed for the purpose of this document that these are considered model portfolios in terms of achieving the investment objectives they are intended to benchmark.362 The three model portfolios and their asset allocations363 are shown in Figure 11.2.

Farmland is not included, and even if it were included under the ‘Commercial Property’ component, is a 2.5% weighting appropriate? This question is legitimate both in terms of observations from actual past market data and the potential for future upside in farmland values from a supply and demand perspective.

In the US, according to US Department of Agriculture Economic Research, the total aggregate value of US

farmland in 2003 was approximately $1.2 trillion, yet according to the National Council of Real Estate Investment Fiduciaries, total investments of fund sponsors at the time were only around $900 million (as of 31/12/04). This represents less than 1% of the total U.S. farmland market.364 In other words, despite the fact that farmland represents roughly 5% of the market wealth in the United States, it remains a relatively insignificant component of institutional investors’ portfolios.365

A comprehensive study conducted in the late 80’s in the United States analysed model portfolios containing US farm assets, government and corporate bonds and Treasury

Bills. Efficient sets used in the study included farm assets ranging from 30% to 68%of the portfolios. They concluded that agricultural assets entered efficient portfolios at levels far greater than were historically observed in the capital markets.366 A further study conducted in the early 90’s found that farmland entered the optimal portfolio at a fairly high level of risk and remained a choice asset to the low end of the risk spectrum, reaching a portfolio proportion of 50% near the middle.367

Modern Portfolio Theory quantifies in mathematical and technical terms the old adage: “Don’t keep all your eggs in one basket”. The modern asset manager seeks to increase return, or maintain return at stable levels, whilst reducing overall volatility (risk) by combining assets with low or negative return correlations.

For these reasons, in order to achieve the intended portfolio objectives asset ratios are as important as asset types. The question of appropriate portfolio weightings for farmland needs to be considered not only in the context of the current rather unique and unpredictable market conditions,

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but also in terms of the investor’s future expectations of market activity.

Despite asset allocations remaining low compared to the value of the sector within the economy, interest in farmland has risen rapidly in recent years. According to a recent article in Fortune Magazine:

“Over the past few years hedge fund gurus like George Soros, investment powerhouses like BlackRock, and retirement plan giants like TIAA-CREF have begun to plough money into farmland. As of the first quarter of 2009, more than $2 billion of private equity money had been raised for farmland investments globally, and another $500 million was planned. Even after the correction, grain prices remain above their 20-year average, and food stocks around the world are still near 40-year lows. For many investors, last year’s shortages are a preview of what could lie ahead.”368

Even so the sector remains under bought. Increased interest from institutional investors should create a new layer of demand to support farmland values in the future. Indeed, interest in the sector has received impetus from current market conditions. In the words of Paul Spencer, agriculture manager at Lloyds TSB:

“Other factors influencing the agricultural land market have included institutional investors, such as pension funds and investment portfolio managers. Having seen returns from their more traditional investments reduce, managers will always be looking for more attractive returns. Farmland, in comparison to some of the “higher-risk” ventures, can provide a more stable and attractive longer-term return. Land will continue to be an asset capable of delivering a strong return on investment and the long-term fundamentals for the sector remain favourable.”369

Things to Consider When Choosing a Direct Farmland Investment

While farmland investing is expected to provide a diversification benefit, an inflation hedge and a greater return than fixed income, it entails challenges and risks. The farmland marketplace is characterized by relatively few investment managers (relative to the sector’s weight in the economy), an investing community with low levels of expertise (compared with other asset classes), and relatively sparse data regarding risk, income potential and valuations. This means identifying the right investment partner is not only challenging, but absolutely vital.

When choosing an investment advisor / manager, demonstrable expertise in all of the following fields will be required:

Identification of potential acquisitions according to 1. investment objectives (risk, potential for capital growth, income requirements, etc) Pre-purchase due diligence with respect to target 2. farmland assets Acquisition and negotiation with respect to the 3. purchase of farmland assets and rental incomes Post investment monitory and asset management 4. (including both portfolio oversight and the tenant farmer)

Much of value an advisor is able to add, in assisting an investor to enhance returns and reduce risk, will be performed prior to the acquisition actually being made. The investment partner will use her expertise to assess key elements which ensure the right assets are purchased at the right prices, and that future income streams from rents are as secure as possible.

As farms vary in the quality of both the land and its management, there will be considerable variability in profitability between farming enterprises. Direct farmland investment involves both capital and income components and assessing the asset itself is as important as assessing prospective tenants.

A good tenant / contract manager will maintain the property through sound land management practices. They will also be able to add value to the underlying asset (the land) by improving agricultural infrastructure in order to intensify or expand productive capacity. Indeed, as noted below, ensuring sound land management practices is a fundamental component of managing risk.

Therefore, comprehensive due diligence is required on the land itself, and on the proposed tenant or sitting farm enterprise. Assuming the right acquisition is identified and its characteristics well researched, the level of future income will be dictated to a large extent by the quality of the tenant farmer. Getting both the land and the tenant selection right

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will require specialist expertise in the advisor and in the third party experts he employs. By way of providing an insight into the complexity of the process and the need to partner with the right advisors, a list of some of the items due diligence might include (but not necessarily be limited to) is provided below:

LAND AND INTERNAL INFRASTRUCTURE

Exact hectarage; boundaries; boundary disputes; •distance from centres, markets, railheads/portsOwnership and title•Past use and existing tenure•

Current ownership and legal status•Legal or social encumbrances• Existing occupation of the land, arrangements for •vacation – purchase, assistance, compensation, eviction, commitments to evacuees

Existing Infrastructure on the farm – land •drainage, roads, road drainage and bridges, power, communications, water, boundary marking/fencing, irrigation equipment, farm buildings (offices, sheds, workshops, fuel points, silos, stores, security points), housing – senior, junior, amenities inc. electricity, potable waterRivers, dams and water rights •

EXTERNAL INFRASTRUCTURE

Physical – roads, power, communications, water, •housing, sewage

ENVIRONMENT

Biological environment – sensitivities, •government legislation Surrounding farms and plantations – competition / •opportunities for cooperation

AGRICULTURE

Climate – annual patterns for local rainfall, max and •min temperatures, humidity, wind speed, sunshine hours, soil temperatures; occurrence of extreme events e.g. hail, hurricane (information should be based on at least 10 year records from met stations at specified site or within reasonable proximity to it)Topography – contour maps and description•

Soils – soil maps and descriptions •Soil depth• Physical analysis, soil texture and ease of drainage •(e.g. light or heavy, well or poorly drained), organic matter content Chemical analysis – pH, major and minor nutrients, •short and long-term fertiliser requirement, toxicity Constraints – pollution from past use, acidity/•alkalinity and requirement for pH correction, compaction and requirement for amelioration, salinity

Past land use and surrounding agriculture – details of •crops previously planted inc. yields and constraints; details of crops, yields and constraints on surrounding land,

Agricultural constraints – details of pests and diseases •known to occur or which may occur in the area; problem weeds

Land condition and preparation– extent of existing •clearing; current vegetation cover; type of clearing work that would be required to prepare for planting if expansion of existing operations is planned

FINANCE AND VALUATION

Analyse historical and current financial position – cash •flow, P&L, balance sheet Assess potential to enhance profitability by increasing •production or diversifying into new crop enterprises Assess fair market valuation based on the above•Financing possibilities – equity, loans• Loan servicing, dividend or rental payments (currency •considerations in the case of foreign farmland)Assets acquired with acquisition of the land•Taxes and levies• Identification of local accountants, auditors, legal •advisors

MANAGEMENT

Company structure and corporate due diligence relating •to proposed corporate farming tenant, including financial and performance history with respect to past success rates to assess capability to maintain uninterrupted payment of rents for the period of the tenancy

Identifying an investment manager with good local connections in the rural community is also crucial to ensuring that farmland is acquired at the right price. In the words of a US agricultural fund manager:

“It’s really hard to buy property at the right price. Half of all farmland that trades in the United States never sees a broker. We believe you’ve got to have a lot of local knowledge of the marketplace. Farmers are smart and they talk. And if one Town Car full of Wall Street types rolls into town and makes a bid, suddenly all of the prices go up.”370

$2 billion Global private equity investment in farmland in the first quarter of 2009

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Risk Considerations in Direct Farmland Investment

Other than the obvious supply / demand risk to revenue from farmland tenancies and the link with agricultural commodity prices, there are a number of other risks to investing in farmland.

1. Land Management The greatest risk is that the farmer fails to employ best management practices such as those which ensure that soil nutrients are continuously replenished, and soil degradation, particularly topsoil erosion, is rigorously avoided. This risk can be mitigated by selecting on the basis of a track record of good management at the tenant selection stage of the investment.

2. Climate and Weather Climate and weather risk can be minimised by following strict and carefully considered selection criteria on factors such as geographical location, access to water supplies, etc. With respect to short-term weather risk, there is usually detailed information available in mature farming regions on everything from rainfall patterns (including likelihood of drought or flooding) to annual daylight hours and wind conditions. This information allows investors to effectively screen and select acquisitions according to risk appetite.

In terms of mid to long-term climate risk, there are numerous climate models which assign levels of probability to climate change induced severe weather events. Comparative analysis of a range of such forecasting models should be able to provide the longer term investor with a reasonable degree of comfort.

Tenant farmers are also able to obtain insurance to protect against natural disasters and certain extreme weather events.

3. Pests, Disease, Fire and Other One off Events To a large extent, the risks of pest and disease can be mitigated by good management practice such as regular crop inspections, rotation of crop types, use of mixed genetic stock or pest and disease resistant strains, and integrated pest management control measures. Perennial crops (which often yield higher returns) are more vulnerable to bad weather and disease because the trees or vines that produce the crops can take longer periods of time to fully recover, although again, risks can be minimised by sound management practices.

Fire insurance packages are also available in many farming regions.

4. Trade Tariffs In addition to global competition, worldwide trade tariffs and government subsidy programs provide additional risks to farmland investing. In recent years the overall

trend has been towards reducing trade tariffs (e.g. GATT, NAFTA) and increasing support for the scaling back of farm subsidies; however, the possibility always exists for a rise in protectionism and new trade barriers, such as export or price restrictions, in the name of food security.

These risks can be mitigated at the asset selection stage by investing in regions which do not have a history of imposing such restrictions. This would generally involve investing in regions with free market trading policies, higher levels of per capita GDP and lower levels of food insecurity.

Current Market Conditions and the Implications for Investment Timing

Current market conditions have created what might be described as a perfect storm in terms of buying opportunities. There are a number of different factors which, in combination, are producing a rise in the number of distressed sellers, whilst simultaneously restricting the number of buyers able to take advantage of those opportunities:

Short-term pressure on farm profits due to lower 1. commodity prices. This is exacerbated by the fact that input prices (such as fuel, fertilizers etc) have not fallen to the same extent as revenues from the sale of crops. Tightening credit policies of many agricultural lenders 2. due to the credit crunch, meaning that some farmers are struggling to obtain the cash flow finance their businesses need to operate. Down-valuations of plant and machinery owned 3. by agricultural enterprises, creating unfavourable adjustments in debt to equity ratios, resulting in loan capital repayment demands from lenders.

Despite the fact that the majority of agricultural businesses remain profitable on an EBITDA basis (even at lower commodity prices and higher input prices) when debt comes into the picture, the current conditions of tight credit and higher lending rates in the farmland sector can conspire to produce distressed sellers.

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So, whilst many farmers remain confident about the future and, in the case of cash- rich farmers, continue to acquire land in order to expand production, there are a limited number who do not have sufficient cash flow and capital to weather the current squeeze on profits whilst still servicing debt or making equity payments due to down-valuations.

This is particularly true in a post boom environment. A number of farmers who leveraged their businesses more than they would have done previously, buoyed by the commodity price hikes of early 2008, are now caught between a rock and a hard place as lenders tighten their terms. This opens a buying window for astute, cash- rich buyers who are able to step in with capital to assist distressed farmers during their time of need. Such farmers would rather sell to a buyer prepared to lease the land back to them, than to a competing farmer who would usually require vacant possession of the land for their own use.

Having said this, opportunist investors soon close the value gap. Many experts see the window of opportunity available in the first half of 2009 beginning to close in the second half of 2009, as agricultural commodity prices recover, general economic sentiment and credit availability improves and agriculture’s long-term fundamentals reassert themselves. The signs of this were already in the air as this document went to print with corn prices having risen 26% between December 2008 and June 2009 and wheat and soy by 20% and 10% respectively.371

In the words of leading UK rural land agent, Knight Frank: “For the far-sighted investor, an agricultural downturn could be the ideal time to buy farmland. Most commodity analysts believe the current situation is a dip in a longer upwards trend driven by factors such as an increasing world population and a slowdown in agricultural productivity gains.”372

Liquidity and Investment Horizons in Farmland Investment

Buying and selling farmland, like other types of real estate, carries higher transaction costs than many other assets. The sale of farmland will generally include items such as transfer taxes, legal fees and real estate commissions. Additionally, transactions generally take longer to execute than more heavily traded unitised assets.

As such, farmland has often been characterised as trading in a less active and efficient marketplace with a lower level of liquidity and marketability relative to financial assets that trade regularly in a secondary market. Any investor, attracted to the asset class due to its fundamentals, should enter the investment understanding its liquidity limitations.

Not only should farmland be considered a long-term investment due to the high initial costs, it should also be

understood that it usually takes 2 to 3 months to initiate an exit. However, for those investors with a longer investment horizon and for whom drop-of-a-hat liquidity is not a priority, direct farmland investment has the potential to be a very rewarding strategy in the coming years

Indeed, it has been argued that in the short-term, the fact that liquidity issues restrict the number of investors prepared to consider farmland may even be a benefit for those who do. A research study which looked at just this issue concluded that: “There are barriers to the flow of non-farm equity into farm real estate markets due to high transaction costs and illiquidity. These barriers create a segmented farm real estate market where compensation for risk on farmland investment is high relative to well-established secondary markets.”373

Choice of Geographic Location - Factors to Consider

Farmland prices and farming profits vary depending on local conditions in the area being considered. For example, rainfed arable land prices in Western Australia range from A$150 per acre to A$250 per acre in low rainfall areas and A$1,500 to A$2,000 per acre in high rainfall areas.374 Historical averages over the past 10 years show that farmland returns have been slightly higher (as a percentage of land value) in low rainfall areas than in high rainfall areas.375

The downside of investing in low rainfall areas, however, is that farm income is less reliable and more volatile than in high rainfall areas. This may adversely affect a low rainfall tenant’s ability to pay rents. Even though farms in low rainfall areas may produce higher returns relative to land value during an unusually high rainfall year, they will produce little or no revenue during drought years. In contrast land in high rainfall areas can often produce viable yields even during regional droughts.

As discussed in this document, trends in climate change mean an increasing number of severe weather events are affecting many regions of the planet. Droughts in Australia are a case in point. Higher priced land in areas less affected by drought fares better than lower priced land in more drought prone locations. Indeed, if drought trends continue in Australia, any case for lower priced land based on historical average returns may become less convincing.

Also, the very fundamentals which have been the subject of this document and which underlie the appeal of farmland as an investment, provide further support for the selection of farmland at the lower end of the risk spectrum. In 2008 commodity prices spiked due to unusually low global grain production relative to demand. This benefited those able to produce and sell grain at the time. However, higher commodity prices were of no use whatsoever to Australian farmers who had lost their entire crop due to drought.

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The trends in this document suggest that for the foreseeable future, global agriculture will be characterised by an increasingly tight relationship between supply and demand, low global stock levels, a higher frequency of human induced and natural disasters disrupting production, and increased commodity price volatility. In such a climate it is farmland upon which above average production levels can be maintained consistently which will benefit the most. Tenants of high quality farmland will be best positioned to capitalise on cyclical peaks and maintain rental payments during cyclical troughs. This will feed through into higher levels of income for investors.

Additionally, free access to international markets will be a prerequisite of benefiting from higher global commodity prices. This favours the selection of countries where export restrictions or price controls are less likely to be imposed (especially bearing in a future likely to be characterised by higher levels of food insecurity).

From a portfolio planning perspective it is also important to recognise that natural disasters and manmade disruptions, such as wars and social or political unrest, often have negative effects on equity holdings in an investment portfolio. These same conditions have the opposite effects on agricultural commodity prices because production disruptions effect supply. In this respect, allocation in investment portfolios to farmland at the higher end of the quality spectrum and lower end of the risk spectrum can actually provide investors with a hedge against such extreme events.

Other issues requiring careful consideration include security of tenure and/or restrictions on foreign ownership of farmland which apply in many jurisdictions. While a detailed discussion of the laws on a country by country basis is beyond the scope of this document, these issues should factor highly during the due-diligence process.

Generally, more developed countries allow direct freehold ownership of farmland by foreigners. Less developed countries tend to restrict foreign ownership in some way, either by granting foreigners the right to acquire control over land only through long-term leases, or by only allowing the acquisition of farmland through a locally incorporated company (often with the requirement for a local equity partner). This has obvious fiscal and commercial consequences which need to be weighed up against the potential for earning higher returns.

As a general rule, the lower the level of political stability and the higher the level of poverty and corruption, the less secure will be tenure and the less robust (i.e. enforceable) the legal contracts on which tenure is based. This of course needs to be weighed against land prices which are generally much lower in these regions. If the investment plays out well there is the potential for higher returns, whereas if things play out badly there is the potential for substantial loss of capital, or in a worst case scenario, the total loss of capital. As Figure 11.3 from Transparency International, a global anti corruption organisation, shows, bribery and corruption are particularly rife in the land sector, so risks to capital are very real in some regions.

It is worth noting that the longer the time period of the investment, the greater the opportunity for negative outcomes. Given that farmland investment is by its very nature a long-term investment, the level of risk accumulates along with potential returns. The fundamental question an investor needs to address with respect to their personal risk tolerance and their views on the outlook for a specific region, is whether returns will accrue at the same rate as risks.

In the words of Lord Jacob Rothschild who has invested heavily in farmland in recent years: “Land might be cheap and plentiful in Russia, but if the price of wheat goes up, is your deed going to be honoured?”376

% of respondents paying bribes to corruptof�cials in the previous 12 months

0 5 10 15 20 25

Police

Judiciary

Land Services

Registry &Permit Services

EductionServices

MedicalServices

Tax Revenue

Utilities

11.3: Percentage of people globally who reported paying bribes during 2008

Source: Transparency International, 2009

26% Rise in maize prices between December 2008 and June 2009

CHAPTER 12

Conclusion

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A recent Chatham House (Royal Institute of International Affairs) Report entitled, The Feeding of the Nine Billion, Global Food Security for the 21st Century377, notes mankind’s impressive achievements with respect to increasing food production in step with rising demand (recent developments notwithstanding):

“Even as the world’s population has more than doubled over the half-century since 1960, global aggregate food production has kept pace – an astonishing achievement.”

With reference to the current predicament, however, the report states:

“The underlying point is that a concatenation of trends on both the supply and demand side was involved creating a situation in which global consumption outstripped production for several years in succession. The phrase ‘perfect storm’ has become over-used in recent years; in this case, it was justified.”

Looking towards the future, the report quotes Northern Foods Chairman Chris Haskins as saying:

“The Malthusian predictions were wrong for 200 years, but might prove right in the next 50 if evasive action is not taken in time.”

What is more, the trends observed in this document, demonstrate that maintaining the balance between supply and demand is likely to become more difficult as time passes. Some key trends are:

Per capita food production has been in decline since the 1. mid 80’s The per capita availability of arable land has been in 2. decline since the 20’s Yield increases delivered by the green revolution are 3. decliningDemand from food, feed and fuel continues to rise4.

In other words, there is less availability of food and farmland per person with each passing year. Additionally, farmland is being lost to urbanisation, land degradation and desertification quicker than new farmland is being added. As Figures 12.1 and 12.2 show, for the last 3 years both the total arable land and the total agricultural land (includes pasture and permanent crops) globally have declined. Indeed, as Figure 12.3 shows, total agricultural land actually peaked in 2001.

Considered as a whole, some readers may find the trends discussed in this document rather alarming. Thoughts of mass starvation for may even spring to mind. Therefore, before drawing to a conclusion it may be worth analysing the reality of food supply in the foreseeable future.

1,413,000

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1990 20001970 1980

polynomial trendline

2007

Figure 12.1: Total global arable land between 2005 and 2007

Figure 12.2: Total global agricultural land between 2005 and 2007

12.3: Total global agricultural land between 1961 and 2007

Source: Food and Agriculture Organisation of the United Nations, 2009

Source: Food and Agriculture Organisation of the United Nations, 2009

Source: Food and Agriculture Organisation of the United Nations, 2009

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The truth is that, theoretically, we are producing more than enough food to feed humanity. The problem for those spending a large proportion of their income on food is not one of availability, but rather of price. The reason why prices become an issue is that there are three Fs in the demand picture: in addition to Food, there is also Feed and Fuel. A ‘W’ for wastage could also be added to the list.

Sudanese refugees would no doubt be overjoyed with a cup of rice a day. They pray for food security. For American consumers, on the other hand, food is not a worry. For them the priority is cheaper fuel. In China, the preoccupation is with emulating the western meat- rich diet. So, the food crisis, at least in the short to mid-term, has more to do with competition between the three Fs than with a general lack of food. If we all stopped eating meat, and biofuels were no longer part of the equation, everyone would have their cup of rice.

The United Nations answered the question “How many people can be fed with the cereals allocated to animal feed?” in a 2009 report on The Environmental Food Crisis as follows:

“By 2050, 1,573 million tonnes of cereals will be used annually for non-food, of which at least 1.45 million tonnes can be estimated to be used as animal feed. Each tonne of cereal can be modestly estimated to contain 3 million kcal. This means that the yearly use of cereals for non-food use represents 4,350 billion kcal. If we assume that the daily calorie need is 3,000 kcal, this will translate into

about 1 million kcal/year needed per person. From a calorie perspective, the non-food use of cereals is thus enough to cover the calorie need for about 4.35 billion people.

It would be more correct to adjust for the energy value of the animal products. If we assume that all non-food use is for foodproducing animals, and we assume that 3 kg of cereals are used per kilogram animal product and each kilogram of animal product contains half the calories as in one kg cereals (roughly 1,500 kcal per kg meat), this means that each kilogram of cereals used for feed will give 500 kcal for human consumption.

One tonne cereals used for feed will give 0.5 million kcal, and the total calorie production from feed grains will thus be 787 billion kcal. Subtracting this from the 4,350 billion calorie value of feed cereals gives 3,563 billion calories. Thus, taking the energy value of the meat produced into consideration, the loss of calories by feeding the cereals to animals instead of using the cereals directly as human food represents the annual calorie need for more than 3.5 billion people.”378

In other words, apart from the question of dietary protein, this simple calculation shows that we could feed the additional 2.5 billion people expected by 2050 with some grain to spare. On the other hand, the starving masses face the problems of oil scarcity and the rapidly growing consumption of meat. This means competition for the world’s limited (and potentially diminishing) land resources will continue to intensify for the foreseeable future. In the words of John Roach of National Geographic News:

“The land base is relatively fixed, and when you get these high prices what you have are the different commodities fighting for acres on the basis of profitability to the farmer.”379

Having said this, the purpose of this document is not to forecast trends in hunger. The intention of the last few paragraphs has been to reassure the reader. In theory, as long as humanity has the humanity, we should be able to survive the foreseeable future without the massive increase in starvation some observers predict. Although, as Gandhi once said: “There is enough for everyone’s need, but not for everyone’s greed.”380

It is certainly clear that mankind is at a point in its history when the challenge of resolving the increasing divergence between supply and demand is intensifying. The objective of this document has been to assess the fundamental trends driving this divergence and the implications for farmland values over the next 10 to 20 years.

As Figure 12.4 shows, commodity prices sit at the centre of an intensifying tug of war between rising demand and diminishing supply. The greater the tension on the rope, the higher commodity prices, and with them farmland values, will go.

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? ?

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Population GrainDemand

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degradationUrban

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SUPPLYTENSION

COMMODITYPRICES

DEMAND TENSION

Figure 12.4: The tug of war between supply and demand between now and 2050

Source: All figures on the supply side (except climate change) were compiled by the United Nations Environment Program (UNEP) in 2009(381). As the UNEP did not include the “effects of extreme weather”(382) nor “the cumulative loss of ecosystems services endangering the entire functioning of food production systems” in the climate change component of their figures, the World Bank (2009) figure of a decline in agricultural productivity of between 1 and 10 percent by 2030(383) has been used. The World Bank purports to take the effects of extreme weather into account in this figure. The demand side, the population forecast comes from the United Nations Population Division (2007)(384); the per-capita income forecast comes from the World Bank World Bank LINKAGES model (2009) estimate for 2015 to 2030 of 1.7% per annum compounded forward to 2050(385); the grain demand forecast from the Food and Agriculture Organisation of the United Nations (2009)(386); the meat demand forecast comes from the Food and Agriculture Organisation of the United Nations (2006)(387). No oil depletion or biofuels demand figures are provided as these are dependent upon the timing of peak oil which remains uncertain.

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With reference to the demand side of Figure 12.4, it should be noted that no figures have actually been given for biofuels demand because the effect will depend on oil scarcity. The extent to which this will become an issue, and how quickly, remains hotly debated. Having said this, and given the fact that demand from biofuels has the potential to far outweigh all other factors in the foreseeable future (the next 10 to 20 years), it is worth taking note of a number of recent comments on the subject.

In an internal World Bank document leaked to the Guardian Newspaper in 2008, its author, Don Mitchell, lead economist for the Development Prospects Group of the World Bank, concluded that

“70-75 percent increase in food commodities prices [between January 2002 and June 2008] was due to biofuels.”388

The International Monetary Fund’s World Economic Outlook Report 2008 observed that:

“Although biofuels still account for only 1.5% of the global liquid fuels supply, they accounted for almost half the increase in the consumption of major food crops in 2006–07, mostly because of corn-based ethanol produced in the United States.”389

A paper produced in December 2008 in consultation with the Food and Agriculture Organisation of the United Nations analysing the causes of the surge in global food prices and the likely outlook for the future, stated:

“If energy prices continued to be high and/or rising and probiofuel policies remained in place, the diversion of crops to biofuels could continue. This could prevent the current commodity cycle from unfolding in the “normal” way over the short- to medium-term and prices trending back towards their pre-surge levels.”390

Finally, investment bank Goldman Sachs, estimates that demand growth for food crops could increase from 2.0% annually to 2.6% annually within a decade, principally due to increased demand from biofuels.391 It is interesting to note that if these figures are correct, the estimate in Figure 12.4 of a 100% increase in cereal demand by 2050 could be highly conservative. A simple calculation of compound growth of 2% between 2007 and 2016, followed by compound growth of 2.6% between 2017 and 2050, gives a demand increase of 286% by 2050.

Another conclusion which can be drawn from an analysis of long-term trends is the fact that global agriculture is currently in a cyclical transition phase from rising supply to falling supply relative to demand. As this document has made clear, cropland expansion has been the primary driving force behind increased food production throughout most of history.

Between 1804 and 1927 the world’s population doubled from one to two billion people.392 This was accompanied by a doubling of cropland area. A further billion people were added by 1960. During this period cropland expansion slowed down somewhat but still accounted for much of the growth in production, with arable land rising from 1 billion hectares to 1.4 billion hectares.394, 395 After this, circumstances changed.

Leading up to the great depression there was a period of unprecedented (for the time) economic growth. In fact, the conditions were very much like those which preceded the recent bubble. Production gains from cropland expansion were beginning to lag behind growing demand from more affluent consumers so food prices began to trend upwards. The result was that the number of people suffering from malnutrition and hunger also trended upwards between the early 1920’s and the early 1950’s.

This motivated the Mexican government and the Rockefeller Foundation to commission the establishment of a crop breeding station in 1943 to develop higher yielding varieties of wheat that could be used to feed the country’s rapidly growing population. This was the first step in the transformation of agriculture now known as the Green Revolution. Starting on wheat in Mexico and then rice in Asia, the Green Revolution crop improvement miracle spread to the four corners of the world and made possible a staggering ballooning of the human population (which more than doubled again from 1960).396

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Since then, the Green Revolution has been responsible for producing a greater volume of food than was being produced across all the world’s farmland in the early 1950’s. In 1943 Mexico imported more than half of its wheat. By 1956 Mexico was self sufficient and became a wheat exporter. Net exports peaked in 1965 then began to fall because the population continued to increase while production was already approaching a peak. Domestically, the work of the Green Revolution had been done and the production gains banked. By 1977 Mexico was back in the hole. In 2007 Mexico imported 3.4 million tonnes, five times more than the 0.68 million tonnes it exported in its best year in 1965.397

Of course, for Mexico this state of affairs, whilst not ideal, has been bearable because over the years it has been able to import food from other countries where the Green Revolution continued to work its magic. Eventually, however, like Phileas Fogg, the Green Revolution will have completed its circumnavigation of the world. Indeed, the diminishing returns observed in this document suggest that Phileas Fogg is now writing his memoirs. Unfortunately, unlike Mexico, planet earth has no trading partners.

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Higher Estimate Lower Estimate

Parts of Sub-Saharan Africa are among the last major regions of the world which still remain untouched by the Green Revolution. Unfortunately, this is unlikely to solve the world’s supply problem. As the UN’s High Level Task Force on food prices recently noted:

“While there is scope in some developing countries for bringing new land into cultivation and ... intensifying land use through irrigation, these options are costly, have potentially adverse environmental consequences, and will not be feasible on the scale required to resolve the massive problem of accelerated soil productivity decline.”398

Figure 12.5 shows the relationship between population growth and arable land area. As the graph indicates, until 1920 global arable farmland expanded at a faster rate than the human population. In 1920 the per capita availability of arable land peaked at 0.48 hectares per person and began a long period of decline which continues to the present day. In 2007 per capita arable land availability stood at 0.21 hectares, less than half its peak level (see Figure 12.6).

Figure 12.5: Trends in per capita availability of arable land between 1700 and 2050

Source: Arable land figures between 1961 and 2007 - Food and Agriculture Organisation of the United Nations, 2009; Arable land figures between 1700

and 1960 - Integrated Model to Assess the Global Environment (IMAGE), Netherlands Environmental Assessment Agency, 2006; Population figures –

United Nations Population Division, 1999 & 2008

140

After the per capita availability of arable land peaked, the world entered a period during which food production rose at a slower rate than demand. Between the early 1900’s and the late 50’s to early 60’s, when the Green Revolution took over as the primary driver of production growth, per capita food production fell with obvious consequences for commodity prices and hunger rates. Indeed it was this state of affairs which set the scene and provided the impetus for the enormous increases in crop yield which the Green Revolution breeding programmes achieved.

These increases have allowed western consumers, throughout most of their living memory, to feed themselves with an ever diminishing fraction of their income (recent developments notwithstanding). For this trend to continue, supply will need to expand at a sufficient rate to meet the doubling (or more) of demand which is forecast by 2050.

As discussed in this document, it is highly unlikely that cropland expansion will play anything more than a minor role, at best, in increasing food production between now and 2050. At worst, it is possible that the area of land

suitable for agriculture actually diminishes. Figure 12.5 shows two different forecasts for per capita availability of arable land, one which assumes the same average rate of expansion as seen between 1961 and 2007 and the other which assumes contraction at the rate seen in the last few years (see Figure 12.1). Based on these forecasts (the lower of which may still be optimistic bearing in mind trends noted in this document), per capita availability of arable land in 2050 will be 0.15 ha per person or 0.17 ha per person respectively. This is approximately one third of the peak level in 1920.

Similarly, the ability of conventional crop breeding to produce a further doubling of production is in serious doubt. Recall, from Figure 5.1 in Chapter 5, that the average gain in cereals production between 1991 and the year 2000 was 0.61%. A simple calculation demonstrates that if food production increased by this rate between 2007 and 2050, the compound growth in production by 2050 would be 30%.

141

The fact is that supply is already falling short of rising demand, much as it did post 1920 when cropland expansion began to lag behind population growth. Between 2000 and 2008, consumption exceeded production in 7 out of 8 years.399 It is quite clear that agriculture is now at a point in its development when a revolution of equal proportions to the Green Revolution is required.

As Figure 12.6 shows this view is borne out by agricultural commodity prices which have risen again since their December 2008 lows despite supposedly depressed demand due to the global recession. Indeed, by June 2009 the International Monetary Fund’s food price index already sat at 41% above the 20 year average.

Over the last 100 years there have been good times and not such good times to be in agriculture. This document concludes that agriculture is now entering one of the most challenging, but also most profitable, periods in its history. Figure 12.6 highlights how this time of transition in the commodity super cycle (at least the next 10 to 20 years) has similar characteristics to past periods when agricultural commodity prices and farmland profits were at their highest.In the words of agricultural commodities bull and farmland investor Jim Rogers (co-founder of the Quantum Fund with George Soros which gained more than 4,000% in 10 years, while the S&P rose less than 50%):

“Eventually, of course, food prices will get high enough that the market probably will be flooded with supply through development of new land or technology or both, and the bull market will end. But that’s a long ways away yet.”400

200.00

166.25

132.50

98.75

65.00

Aug 1989

Aug 1991

Aug 1993

Aug 1995

Aug 1997

Foo

d P

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Ind

ex

Aug 1999

20 year average

Aug 2001

Aug 2003

Aug 2005

Aug 2007

Jul 2

009

Figure 12.6: Food prices over the last 20 years

Source: International Monetary Fund, 2009

142

?

1900

Population Cropland

Green Revolution

De�cit

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1750

1800

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2009

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RIS

ING

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ICES

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ISIN

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RE

1804: 1st billion people

1927: 2nd billion people (123 years later)

6.8 billion (2009)

9.2 billion

1999: 6th billion (12 years)

1987: 5th billion (13 years)

1974: 4th billion (14 years)

1960: 3rd billion (33 years)

1920: Per capita arable land availabilitypeaks at 0.48 hectares and enters a

long-term declining trend

1943: Beginning of Green Revolution

1960: Green Revolution supersedescropland expansion as

primary source of production growth

1985: Per capita grain productionpeaks and begins to decline

2050: Per capitaarable land at

0.15 to 0.17 ha?

2007: Per capita arableland now 0.21 ha (lessthan half 1920 peak)

2000: Consumption beginsto exceed production

?

2000

1950

Figure 12.7: Trends in world population and sources of agricultural production between 1700 and 2050

Source: Arable land figures between 1961 and 2007 - Food and Agriculture Organisation of the United Nations, 2009; Arable land figures between 1700 and 1960 - Integrated Model to Assess the Global Environment (IMAGE), Netherlands Environmental Assessment Agency, 2006; Population figures – United Nations Population Division, 1999 & 2008 (Note: The total area of arable land under cultivation globally is assumed to remain at 2007 levels.)

143

In summary, we can draw the following conclusions from the various trends observed in this document:

Much of the best agricultural land has already been 1. used Agricultural land is being lost at a faster rate than the 2. rate at which it is being added There are a number of fundamental constraints to 3. further cropland expansion It is probable that the aggregate area of land under 4. cultivation continues to decline Meeting expanding demand leading up to 2050 will be 5. extremely challenging, if not impossible Crop breeding for increased yield is unlikely, in its 6. current form and at its current stage of maturity, to meet this challenge The world sits now at the beginning of a transition 7. period when major new technological fixes are required to substantially impact the supply side of the equationThe demand side of the equation will inevitably increase8. There is the potential for extreme increases in demand if 9. oil prices return to, and remain at, higher levels It takes time for economic incentives to feed through 10. into action in the agricultural economy Based on historical prices and price inelasticity of 11. demand for food there is great scope for agricultural commodity prices to increase well beyond current levels In the foreseeable future (i.e. the next 10 to 20 years or 12. even up to 2050) farming is likely to become ever more profitable This, combined with a shrinking supply of quality 13. farmland (both in total and per capita terms) should lead to appreciation in farmland values Farmland is likely to yield increasingly attractive returns 14. both in terms of income and capital growth over at least the next 10 to 20 years Farmland investment provides an extremely effective 15. means of capitalising on (and hedging against) the mutually reinforcing impact of the three most significant trends of the modern era: population growth, resource scarcity and climate change Farmland is an investment safe haven during turbulent 16. times and an effective hedge against inflationary monetary policies

The best investment opportunities are those which are supported by fundamental long-term trends. It is extremely rare to find an investment that is supported simultaneously by a number of powerful trends all of which act together to support the proposition. It is even rarer to recognise such an opportunity at the right point in the business cycle before the growth story has already played out. From a timing perspective, we are in the early stages of a food and agricultural super cycle driven by a structural shift in demand and constrained supply. What is more, these drivers are, to a large extent, not contingent upon the fortunes of the wider global economy.

Direct farmland investment offers the best means by which to achieve exposure to these trends. Farmland is not only the source of the food, feed and fuel upon which mankind depends; it also represents a stake in a finite (and potentially diminishing) resource. When all else is stripped away, what does any organism, including mankind, really need to survive? Food and space.

In June 2009, Jim Rogers was asked in an interview by the Economic Times what advice he would give “a confused fund manager” during these tumultuous times. His response:

“Become a farmer. Ten years from now, it will be farmers who will drive the Lamborghinis and the stock brokers will drive tractors.”401

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67 Ibid.

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74 Ibid.

75 Ibid.

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94 Ibid.

95 Ibid.

96 International Herald Tribune (25 June 2009). ‘Decoupling’ rises again in OECD projections. The Global Edition of the New York Times.

97 The Economist (26 April 2009). Bamboo shoots of recovery, signs that a giant fiscal stimulus is starting to work in China. Available online at: http://www.economist.com/daily/news/displaystory.cfm?story_id=13496444&fsrc=nwl [Accessed on the 03 June 2009].

98 Fortune Magazine (16 June 2009). As world population expands, the demand for arable land should soar. At least that’s what George Soros, Lord Rothschild, and other investors believe. Available online at: http://money.cnn.com/2009/06/08/retirement/betting_the_farm.fortune/index.htm?section=money_latest [Accessed on 6 August 2009]

99 FAO Statistical Yearbook 2004, Issue 2 - Country Profiles. Food and Agriculture Organisation of the United Nations. Available online at http://www.fao.org/es/ess/yearbook/vol_1_2/site_en.asp?page=cp [Accessed on 08 April 2009]

100 FAO (2006b). Livestock’s long shadow, pp. 416. FAO, Rome. Available online at: ftp://ftp.fao.org/docrep/fao/010/a0701e/a0701e.pdf [Accessed on the 20 January 2009].

101 Ibid.

102 Ibid.

103 Fortune Magazine (16 June 2009). As world population expands, the demand for arable land should soar. At least that’s what George Soros, Lord Rothschild, and other investors believe. Available online at: http://money.cnn.com/2009/06/08/retirement/betting_the_farm.fortune/index.htm?section=money_latest [Accessed on 6 August 2009]

104 FAO (2006b). Livestock’s long shadow, pp. 416. FAO, Rome. Available online at: ftp://ftp.fao.org/docrep/fao/010/a0701e/a0701e.pdf [Accessed on the 20 January 2009].

148

105 Chapagain, A.K. and Hoekstra, A.Y. (2008). The global component of freshwater demand and supply: an assessment of virtual water flows between nations as a result of trade in agricultural and industrial products. Water International 33 (1): 19-32.

106 FAO (2006b). Livestock’s long shadow, pp. 416. FAO, Rome. Available online at: ftp://ftp.fao.org/docrep/fao/010/a0701e/a0701e.pdf [Accessed on the 20 January 2009].

107 Ibid.

108 Devine. R. 2003. La consommation des produits carnés. INRA Prod. Anim., 16(5): 325–327

109 FAO (2003). World agriculture: towards 2015/2030. FAO, Rome. Available online at: ftp://ftp.fao.org/docrep/fao/004/y3557e/y3557e.pdf [Accessed on the 20 January 2009].

110 FAOSTAT (2009). FAOSTAT. Available online at: http://faostat.fao.org/default.aspx [Accessed on the 20 January 2009].

111 FAO (2008): The state of food insecurity in the world 2008. FAO, Rome. Available online at: ftp://ftp.fao.org/docrep/fao/011/i0291e/i0291e00.pdf [Accessed on the 03 June 2009].

112 FAO (2006b). Livestock’s long shadow, pp. 416. FAO, Rome. Available online at: ftp://ftp.fao.org/docrep/fao/010/a0701e/a0701e.pdf [Accessed on the 20 January 2009].

113 Ibid.

114 Schmidhuber, J. & Shetty, P. 2005. The nutrition transition to 2030. Why developing countries are likely to bear the major burden. Acta Agriculturae Scandinavica, Section C Economy, 2(3–4): 150–166.

115 Rae, A. 1998. The effects of expenditure growth and urbanisation on food consumption in East Asia: a note on animal products, Agricultural Economics, 18(3): 291–299.

116 King, B.S., Tietyen, J.L. & Vickner, S.S. 2000. Consumer trends and opportunities. Lexington, USA, University of Kentucky.

117 Popkins, B., Horton, S. & Kim, S. 2001. The nutrition transition and prevention of diet-related chronic diseases in Asia and the Pacific. Food and Nutrition Bulletin, 22 (4: Suppl.). Tokyo, United Nations University Press.

118 WHO. 2003. Obesity and overweight. Fact sheet, Geneva, World Health Organization

119 Popkins, B., Horton, S. & Kim, S. 2001. The nutrition transition and prevention of diet-related chronic diseases in Asia and the Pacific. Food and Nutrition Bulletin, 22 (4: Suppl.). Tokyo, United Nations University Press.

120 Pingali, P. (2004). Westernization of Asian Diets and the transformation of food systems: Implications for research and policy. ESA Working Paper No. 04-17. FAO, Rome.

121 Keyzer et al. (2005). Diet shifts towards meat and the effects on cereal use: can we feed the animals in 2030? Ecological Economics 55 (2): 187-202.

122 United Nations Environment Programme Rapid Response Assessment (February 2009). The Environmental Food Crisis: The environment’s role in averting future food crises. Available online at http://www.grida.no/_res/site/file/publications/FoodCrisis_lores.pdf [Accessed on 20 April 2009]

123 FAO (2006b). Livestock’s long shadow, pp. 416. FAO, Rome. Available online at: ftp://ftp.fao.org/docrep/fao/010/a0701e/a0701e.pdf [Accessed on the 20 January 2009].

124 OECD-FAO (2008). Agricultural Outlook 2008-2017. OECD, Paris. http://www.agri-outlook.org/dataoecd/54/15/40715381.pdf [Accessed on 21 May 2009].

125 Delgado, C., Rosegrant, M., Steinfeld, H., Ehui, S. & Courbois, C. 1999. Livestock to 2020: The next food revolution. Food, Agriculture, and the Environment Discussion Paper 28. Washington, DC, IFPRI/FAO/ILRI (International Food Policy Research Institute/FAO/International Livestock Research Institute).

126 Schmidhuber, J. & Shetty, P. 2005. The nutrition transition to 2030. Why developing countries are likely to bear the major burden. Acta Agriculturae Scandinavica, Section C Economy, 2(3–4): 150–166.

127 Rae, A. 1998. The effects of expenditure growth and urbanisation on food consumption in East Asia: a note on animal products, Agricultural Economics, 18(3): 291–299.

128 King, B.S., Tietyen, J.L. & Vickner, S.S. 2000. Consumer trends and opportunities. Lexington, USA, University of Kentucky.

129 FAO (2006a). World agriculture: towards 2030/2050, Interim Report. Rome.

130 FAO (2006b). Livestock’s long shadow, pp. 416. FAO, Rome. Available online at: ftp://ftp.fao.org/docrep/fao/010/a0701e/a0701e.pdf [Accessed on the 20 January 2009].

131 FAO (2006a). World agriculture: towards 2030/2050, Interim Report. Rome.

132 FAO (2006b). Livestock’s long shadow, pp. 416. FAO, Rome. Available online at: ftp://ftp.fao.org/docrep/fao/010/a0701e/a0701e.pdf [Accessed on the 20 January 2009].

133 Rae, A. 1998. The effects of expenditure growth and urbanisation on food consumption in East Asia: a note on animal products, Agricultural Economics, 18(3): 291–299.

134 Zhou, Z.Y., Wu, Y.R. & Tian, W.M. 2003. Food consumption in rural China: preliminary results from household survey data. Proceedings of the 15th Annual Conference of the Association from Chinese Economics Studies, Australia.

135 Henningsson et al. (2004). The value of resource efficiency in the food industry: a waste minimization project in East Anglia, UK. Journal of Cleaner Production 12 (5): 505-512.

136 Smil, V. (2000). Feeding the World: A Challenge for the Twenty-First Century. MIT Press, Cambridge, MA, USA.

149

137 Lundqvist et al. (2008). Saving Water: From Field to Fork – Curbing Losses and Wastage in the Food Chain. SIWI Policy Brief. SIWI. Available online at: http://www.siwi.org/documents/Resources/Policy_Briefs/PB_From_Filed_to_fork_2008.pdf [Accessed on the 20 January 2009].

138 Ibid.

139 WRAP (2008). Food waste report 2: The food we waste. WRAP, U.K. Available online at: http://www.wrap.org.uk/downloads/The_Food_We_Waste_v2__2_.d3471041.5635.pdf [Accessed on the 20 January 2009].

140 Knight, A. and Davis, C. (2007). What a waste! Surplus fresh foods research project, S.C.R.A.T.C.H. Available online at: http://www.veoliatrust.org/docs/Surplus_Food_Research.pdf [Accessed on the 20 January 2009].

141 United Nations Environment Programme Rapid Response Assessment (February 2009). The Environmental Food Crisis: The environment’s role in averting future food crises. Available online at http://www.grida.no/_res/site/file/publications/FoodCrisis_lores.pdf [Accessed on 20 April 2009]

142 IPCC (2007). Climate Change 2007: Impacts, Adaptation and Vulnerability. Contribution of Working Group II to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change. M.L. Parry, O.F. Canziani, J.P. Palutikof, P.J. van der Linden and C.E. Hanson (ed.). Cambridge University Press, Cambridge, UK.

143 WRAP (2008). Food waste report 2: The food we waste. WRAP, U.K. Available online at: http://www.wrap.org.uk/downloads/The_Food_We_Waste_v2__2_.d3471041.5635.pdf [Accessed on the 20 January 2009].

144 OECD-FAO (2008). Agricultural Outlook 2008-2017. OECD, Paris. http://www.agri-outlook.org/dataoecd/54/15/40715381.pdf [Accessed on 21 May 2009].

145 World Bank (2008). Rising Food and Fuel Prices: Addressing the Risks to Future Generations. World Bank, Washington, D.C. Available online at: http://siteresources.worldbank.org/DEVCOMMEXT/Resources/Food-Fuel.pdf?resourceurlname=Food-Fuel.pdf [Accessed on the 20 January 2009].

146 FAO (2008): The state of food insecurity in the world 2008. FAO, Rome. Available online at: ftp://ftp.fao.org/docrep/fao/011/i0291e/i0291e00.pdf [Accessed on the 03 June 2009].

147 Sanchez, Pedro A. (2002). Soil Fertility and Hunger in Africa. Science 205 (5562): 2019-2020.

148 World Bank (2009). Global Economic Prospects: Commodities at the Crossroads. World Bank, Washington, D.C. Available online at: http://siteresources.worldbank.org/INTGEP2009/Resources/10363_WebPDFw47.pdf [Accessed on the 20 January 2009].

149 Ibid.

150 Le Monde diplomatique (2006). Planet in Peril: Atlas of Current Threats to People and the Environment. Available online at http://mondediplo.com/maps/peril [Accessed on 20 April 2009]

151 Schmidhuber, J. and Tubiello, F.N. (2007). Global food security under climate change. Proceedings of the Natural Academy of Sciences of the United States of America (PNAS) 104 (50): 19703–19708.

152 IPCC (2007). Climate Change 2007: Impacts, Adaptation and Vulnerability. Contribution of Working Group II to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change. M.L. Parry, O.F. Canziani, J.P. Palutikof, P.J. van der Linden and C.E. Hanson (ed.). Cambridge University Press, Cambridge, UK.

153 Stern Review (2006). The Economics of Climate Change, Part II: The Impacts of Climate Change on Growth and Development, pp. 67 – 73. Stern Review, UK.

154 Lobell et al. (2008). Prioritizing climate change adaptation needs for food security in 2030. Science 319 (5863): 607-610.

155 Cline, William R. (2007). Global Warming and Agriculture: Impact Estimates by Country. Center for Global Development and Peterson Institute for International Economics. Washington, D.C.

156 Long et al. (2006). Food for thought: Lower-than-expected crop yield stimulation with rising CO2 concentrations. Science 312 (5782): 1918-1921.

157 Tubiello, F.N. and Fischer, G. (2006). Reducing climate change impacts on agriculture: Global and regional effects of mitigation, 2000–2080. Technological Forecasting and Social Change 74 (7): 1030-1056

158 IPCC (2007). Climate Change 2007: Impacts, Adaptation and Vulnerability. Contribution of Working Group II to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change. M.L. Parry, O.F. Canziani, J.P. Palutikof, P.J. van der Linden and C.E. Hanson (ed.). Cambridge University Press, Cambridge, UK.

159 World Bank (2009). Global Economic Prospects: Commodities at the Crossroads. World Bank, Washington, D.C. Available online at: http://siteresources.worldbank.org/INTGEP2009/Resources/10363_WebPDFw47.pdf [Accessed on the 20 January 2009].

160 United Nations Environment Programme Rapid Response Assessment (February 2009). The Environmental Food Crisis: The environment’s role in averting future food crises. Available online at http://www.grida.no/_res/site/file/publications/FoodCrisis_lores.pdf [Accessed on 20 April 2009]

161 World Bank (2009). Global Economic Prospects: Commodities at the Crossroads. World Bank, Washington, D.C. Available online at: http://siteresources.worldbank.org/INTGEP2009/Resources/10363_WebPDFw47.pdf [Accessed on the 20 January 2009].

162 Cline, William R. (2007). Global Warming and Agriculture: Impact Estimates by Country. Center for Global Development and Peterson Institute for International Economics. Washington, D.C.

163 United Nations Environment Programme Rapid Response Assessment (2009). The Environmental Food Crisis: The environment’s role in averting future food crises. Available online at http://www.grida.no/_res/site/file/publications/FoodCrisis_lores.pdf [Accessed on 20 April 2009]

164 Hanasaki et al. (2008a). An integrated model for the assessment of global water resources Part 1: Model description and input meteorological forcing. Hydrology and Earth System Sciences 12 (4): 1007-1025.

165 Hanasaki et al. (2008b). An integrated model for the assessment of global water resources Part 2: Applications and assessments. Hydrology and Earth System Sciences 12 (4): 1027-1037.

150

166 FAO. (1999) Poverty and irrigated agriculture. FAO, Rome. www.fao.org

167 De Fraiture et al. (2003). Addressing the unanswered questions in global water policy: A methodology framework. Irrigation and Drainage 52 (1): 21-30.

168 Shen et al. (2008). Projection of future world water withdrawals under SRES scenarios: Water withdrawal. Hydrological sciences journal 53 (1):11-33.

169 WHO (2007). The World Health Report. A Safer Future. Global Public Health Security in the 21st Century. WHO, Geneva, Switzerland. Available at: http://www.who.int/whr/2007/whr07_en.pdf [Accessed on the 20 January 2009].

170 United Nations Environment Programme Rapid Response Assessment (2009). The Environmental Food Crisis: The environment’s role in averting future food crises. Available online at http://www.grida.no/_res/site/file/publications/FoodCrisis_lores.pdf [Accessed on 20 April 2009]

171 UNEP (2005). Fall of the Water. UNEP/GRID-Arendal, Arendal, Norway. Available online at: http://www.grida.no/_documents/himalreport_scr.pdf [Accessed on the 20 January 2009]

172 Rosegrant, M.W. and Cai, X.M. (2002). Global water demand and supply projections part - 2. Results and prospects to 2025. Water International 27 (2): 170-182.

173 Yang et al. (2003). A water resources threshold and its implications for food security. Environmental science and technology 37 (14): 3048-3054.

174 FAO. (1999) Poverty and irrigated agriculture. FAO, Rome. www.fao.org

175 United Nations Environment Programme Rapid Response Assessment (February 2009). The Environmental Food Crisis: The environment’s role in averting future food crises. Available online at http://www.grida.no/_res/site/file/publications/FoodCrisis_lores.pdf [Accessed on 20 April 2009]

176 UNEP (2007). Global Outlook for Snow and Ice. UNEP, Nairobi. Available online at: http://www.unep.org/geo/geo_ice/PDF/full_report_LowRes.pdf [Accessed on the 20 January 2009]

177 UNEP (2005). Fall of the Water. UNEP/GRID-Arendal, Arendal, Norway. Available online at: http://www.grida.no/_documents/himalreport_scr.pdf [Accessed on the 20 January 2009].

178 UNEP (2008). In Dead Water. Merging of Climate Change With Pollution, Over-Harvest, and Infestations in the World’s Fishing Grounds. UNEP/GRID-Arendal, Arendal, Norway. Available online at: http://www.grida.no/_res/site/file/publications/InDeadWater_LR.pdf [Accessed on the 20 January 2009].

179 UNEP (2005). Fall of the Water. UNEP/GRID-Arendal, Arendal, Norway. Available online at: http://www.grida.no/_documents/himalreport_scr.pdf [Accessed on the 20 January 2009].

180 UNEP (2008). In Dead Water. Merging of Climate Change With Pollution, Over-Harvest, and Infestations in the World’s Fishing Grounds. UNEP/GRID-Arendal, Arendal, Norway. Available online at: http://www.grida.no/_res/site/file/publications/InDeadWater_LR.pdf [Accessed on the 20 January 2009].

181 Rost et al. (2008). Agricultural green and blue water consumption and its influence on the global water system. Water Resources Research 44 (9).

182 Ibid.

183 Böhner, J. and Lehmkuhl, F. (2005). Environmental change modelling for Central and High Asia: Pleistocene, present and future scenarios. Boreas 32 (2): 220-231.

184 UNEP (2007). Global Outlook for Snow and Ice. UNEP, Nairobi. Available online at: http://www.unep.org/geo/geo_ice/PDF/full_report_LowRes.pdf [Accessed on the 20 January 2009].

185 Jianchu, X., A. Shrestha, et al. (2007). The Melting Himalayas: Regional challenges and local impacts of climate change on mountain ecosystems and livelihoods. ICIMOD Technical Paper. Katmandu, Nepal, ICIMOD.

186 Liu, X.D. and Chen, B.D. (2000). Climatic warming in the Tibetan Plateau during recent decades. International Journal of Climatology 20 (14): 1729-1742.

187 Eriksson et al. (2008). How does climate affect human health in the Hindu Kush-Himalaya region? Regional Health Forum 12: 11-15. Available online at: http://www.searo.who.int/LinkFiles/Regional_Health_Forum_Volume_12_No_1_How_does_climate.pdf [Accessed on the 20 January 2009].

188 UNEP (2007). Global Outlook for Snow and Ice. UNEP, Nairobi. Available online at: http://www.unep.org/geo/geo_ice/PDF/full_report_LowRes.pdf [Accessed on the 20 January 2009].

189 IPCC (2007). Climate Change 2007: Impacts, Adaptation and Vulnerability. Contribution of Working Group II to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change. M.L. Parry, O.F. Canziani, J.P. Palutikof, P.J. van der Linden and C.E. Hanson (ed.). Cambridge University Press, Cambridge, UK.

190 United Nations Environment Programme Rapid Response Assessment (2009). The Environmental Food Crisis: The environment’s role in averting future food crises. Available online at http://www.grida.no/_res/site/file/publications/FoodCrisis_lores.pdf [Accessed on 20 April 2009]

191 USBC (2001). Statistical abstract of the United States. US bureau of the Census, US Government printing office, Washington D.C.

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193 Rossman, A. (2009). The impact of invasive fungi on agricultural ecosystems in the United States. Biological Invasions 11 (1): 97-107.

194 Pimentel et al. (2005). Update on the environmental and economic costs associated with alien-invasive species in the United States. Ecological Economics 52 (3): 273-288.

195 Rossman, A. (2009). The impact of invasive fungi on agricultural ecosystems in the United States. Biological Invasions 11 (1): 97-107.

196 OTA (1993). Harmful non-indigenous species in the United States. Office of Technology Assessment, United States Congress, Washington D.C.

197 Alig et al. (2004). Projecting large-scale area changes in land use and land cover for terrestrial carbon analyses. Environmental Management 33 (4): 443-456.

198 Anderson et al. (2004). Emerging infectious diseases of plants: pathogen pollution, climate change and agro-technological drivers. Trends in Ecology and Evolution 19 (10): 535-544.

151

199 Gan, J. (2004). Risk and damage of southern pine beetle outbreaks under global climate change. Forest Ecology and Management 191 (1-3): 61-71.

200 FAO (2008): The state of food and agriculture 2008. FAO, Rome. Available online at: http://www.fao.org/docrep/011/i0100e/i0100e00.htm [Accessed on the 20 January 2009].

201 Pyke et al. (2008). Current practices and future opportunities for policy on climate change and invasive species. Conservation Biology 22 (3):585-592.

202 Mooney, H.A. and Hobbs, R.J. (ed.) (2000). Invasive Species in a Changing World. Island Press. Washington, D.C.

203 CBD (2001). Status, impacts and trends of alien species that threaten ecosystems, habitats and species. CBD, Montreal. Available online at:http://www.cbd.int/doc/meetings/sbstta/sbstta-06/information/sbstta-06-inf-11-en.pdf [Accessed on the 20 January 2009].

204 Kenis et al. (2009). Ecological effects of invasive alien insects. Biological Invasions 11 (1): 21-45.

205 Sala et al. (2000). Global biodiversity scenarios for the year 2100. Science 287 (5459): 1770-1774.

206 Gaston et al. (2003). Rates of species introduction to a remote oceanic island. Proceedings of the Royal Society of London Series B-Biological Sciences 270 (1519): 1091-1098.

207 MA (2005). Ecosystems & Human Well-being: Wetlands & Water. World Resources Institute, Washington, DC.

208 Pinstrup-Andersen, P. and Pandya-Lorch, R. (1998). Food security and sustainable use of natural resources: A 2020 Vision. Ecological Economics 26 (1): 1-10.

209 Bai et al. (2007): Land cover change and soil fertility decline in tropical regions. Turkish Journal of Agriculture and Forestry 32 (3): 195-213.

210 Investment and Pensions Europe (November 2007). The answer lies in the soil. Spotlight on: Alternatives.

211 Wikepedia (2009). List of cities proper. Available online at http://en.wikipedia.org/wiki/List_of_cities_by_population [Accessed on 08 April 2009]

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214 Henao, J. and Baanante, C. (2006). Agricultural Production and Soil Nutrient Mining in Africa. Summary of IFDC Technical Bulletin. IFDC, Alabama, USA.

215 FAO (2006b). Livestock’s long shadow, pp. 416. FAO, Rome. Available online at: ftp://ftp.fao.org/docrep/fao/010/a0701e/a0701e.pdf [Accessed on the 20 January 2009].

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217 Ibid.

218 Stoorvogel et al. (1993a). Calculating Soil Nutrient Balances in Africa at Different Scales 1. Supra-national Scale. Fertilizer Research 35 (3): 227-235.

219 Stocking, M. (1986). The cost of soil erosion in Zimbabwe in terms of the loss of three major nutrients. Consultant’s Working Paper No. 3., Soil Conservation Programme. Rome, FAO Land and Water Division.

220 UNEP (1994). Land Degradation in South Asia: Its Severity, Causes and Effects upon the People. INDP/UNEP/FAO. World Soil Resources Report 78.

221 Lal, R. (1998). Soil erosion impact on agronomic productivity and environment quality. Critical reviews in plant sciences 17: 319-464

222 den Biggelaar et al. (2004). The global impact of soil erosion on productivity. Advances in Agronomy 81: 1-95.

223 Henao, J. and Baanante, C. (2006). Agricultural Production and Soil Nutrient Mining in Africa. Summary of IFDC Technical Bulletin. IFDC, Alabama, USA.

224 United Nations Environment Programme Rapid Response Assessment (February 2009). The Environmental Food Crisis: The environment’s role in averting future food crises. Available online at http://www.grida.no/_res/site/file/publications/FoodCrisis_lores.pdf [Accessed on 20 April 2009]

225 Investment and Pensions Europe (November 2007). The answer lies in the soil. Spotlight on: Alternatives.

226 Maizel et al. (1998). Historical interrelationships between population settlement and farmland in the conterminous United States, 1790 to 1990. In: T.D. Sisk (ed.) Perspectives on the land use history of North America: a context for understanding our changing environment, U.S. Geological Survey, Biological Resources Division, Biological Science Report, USGS/BRD/BSR 1998-0003.

227 Klein, Goldewijk K. (2001). Estimating global land use change over the past 300 years: the HYDE database. Global Biogeochemical Cycles 15 (2): 417- 433.

228 Klein, Goldewijk K. (2005). Three centuries of global population growth: A spatial referenced population density database for 1700 – 2000. Population and Environment, 26 (4): 343-367.

229 Klein, Goldewijk K. and Beusen, A. (2009). Long-term dynamic modelling of global population and built-up area in a spatially explicit way. In preparation.

230 Potere, D. and Schneider, A. (2007). A critical look at representations of urban areas in global maps. Geojournal 69 (1-2): 55-80.

231 Klein, Goldewijk K. and Beusen, A. (2009). Long-term dynamic modelling of global population and built-up area in a spatially explicit way. In preparation.

232 UN (2008). United Nations, Department of Economic and Social Affairs, Population Division.

233 Stehfest et al. (2008). Climate benefits of changing diet, Climatic Change, in press.

234 Wikipedia (2009). United Kingdom. Available online at http://en.wikipedia.org/wiki/United_kingdom [Accessed on 20 April 2009]

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236 ICIMOD (2008). Food Security in the Hindu Kush-Himalayan Region. ICIMOD, Chengdu.

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238 Ibid.

239 Waggoner, P. E. How much land can ten billion people spare for nature? Does technology make a difference? Technol. Soc. 17, 17–34 (1995).

240 Manning, R. Food’s Frontier: The Next Green Revolution (North Point, New York, 2000).

241 Plucknett, D. L. International agricultural-research for the next century. Bioscience 43, 432–440 (1993).

242 United Nations Environment Programme Rapid Response Assessment (2009). The Environmental Food Crisis: The environment’s role in averting future food crises.

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243 Tilman et al. (2002). Agricultural sustainability and intensive production practices. Science 418 (6898): 671-677.

244 EBBC (2008). European Breeding Bird Census Report. Available online at: http://www.ebcc.info/index.php?ID=367&indik%5BE_C_Fa%5D=1 [Accessed on the 20

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245 FAO (2006b). Livestock’s long shadow, pp. 416. FAO, Rome. Available online at: ftp://ftp.fao.org/docrep/fao/010/a0701e/a0701e.pdf [Accessed on the 20 January

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246 Millennium Ecosystem Assessment (2005). Ecosystems and Human Well-being: Biodiversity Synthesis. World Resources Institute, Washington. D.C.

247 United Nations Environment Programme Rapid Response Assessment (2009). The Environmental Food Crisis: The environment’s role in averting future food crises.

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248 Bruijnzeel, L.A. (2004). Hydrological functions of tropical forests: not seeing the soil for the trees? Agriculture Ecosystems & Environment 104 (1): 185-228.

249 UNEP (2005). Fall of the Water. UNEP/GRID-Arendal, Arendal, Norway. Available online at: http://www.grida.no/_documents/himalreport_scr.pdf [Accessed on the 20

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250 Fischlin et al. (2007): Ecosystems, their properties, goods, and services. Climate Change 2007: Impacts, Adaptation and Vulnerability. Contribution of Working

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251 Nepstad et al. (2007). Mortality of large trees and lianas following experimental drought in an amazon forest. Ecology 88 (9): 2259-2269.

252 Cline, William R. (2007). Global Warming and Agriculture: Impact Estimates by Country. Center for Global Development and Peterson Institute for International

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253 MNP (2006) (Edited by A.F. Bouwman, T. Kram and K. Klein Goldewijk), Integrated modelling of global environmental change. An overview of IMAGE 2.4.

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254 Ibid.

255 Commission of the European Communities (2009). Towards a comprehensive climate change agreement in Copenhagen: Communication from the Commission

to the European Parliament, the Council, The European Economic and Social Committee and the Committee of the Regions. Available online at http://ec.europa.eu/

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256 MNP (2006) (Edited by A.F. Bouwman, T. Kram and K. Klein Goldewijk), Integrated modelling of global environmental change. An overview of IMAGE 2.4.

Netherlands Environmental Assessment Agency (MNP), Bilthoven, The Netherlands.

257 Commission of the European Communities (2009). Towards a comprehensive climate change agreement in Copenhagen: Communication from the Commission

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258 The Economist (27 March 2008). New ways to save trees. Available online at http://www.economist.com/world/international/displaystory.cfm?story_id=E1_

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260 Ibid.

261 Cline, William R. (2007). Global Warming and Agriculture: Impact Estimates by Country. Center for Global Development and Peterson Institute for International

Economics. Washington, D.C.

262 United Nations Environment Programme Rapid Response Assessment (2009). The Environmental Food Crisis: The environment’s role in averting future food crises.

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263 BBC (19 November 2008). Daewoo leases African plantation. Available online at http://news.bbc.co.uk/2/hi/business/7737643.stm [Accessed on 20 May 2009]

153

264 Financial Times (18 March 2009). Madagascar scraps Daewoo farm deal. Available online at http://www.ft.com/cms/s/0/7e133310-13ba-11de-9e32-0000779fd2ac.

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265 Wikipedia (2009). Magagascar. Available online at: http://en.wikipedia.org/wiki/Madagascar [Accessed on 14 August 2009]

266 The New Review (9 August 2009). Wish you weren’t here. The Independent on Sunday.

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268 The New Review (9 August 2009). Wish you weren’t here. The Independent on Sunday.

269 Land Centre for Human Rights (15 October 2008). Once more the farmers of the village of El-Mrashda are standing in the face of the blowing wind.…Who will

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270 Down to Earth (August 2008). Merauke mega-project raises food fears. Available online at: http://dte.gn.apc.org/78dpad.htm [Accessed on the 20 January 2009].

No. 78.

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272 Ibid.

273 Ibid.

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275 Wikepedia (2009). Price elasticity of demand. Available online at http://en.wikipedia.org/wiki/Price_elasticity_of_demand [Accessed on 05 May 2009]

276 A.H. Maslow, A Theory of Human Motivation, Psychological Review 50(4) (1943):370-96

277 OECD-FAO (2008). Agricultural Outlook 2008-2017. OECD, Paris. http://www.agri-outlook.org/dataoecd/54/15/40715381.pdf [Accessed on 21 May 2009].

278 World Bank (2009). Global Economic Prospects: Commodities at the Crossroads. World Bank, Washington, D.C. Available online at: http://siteresources.worldbank.

org/INTGEP2009/Resources/10363_WebPDFw47.pdf [Accessed on the 20 January 2009].

279 IFPRI (2007). The World Food Situation: New Driving Forces and Required Actions. IFPRI, Washington D.C. Available online at: http://www.ifpri.org/pubs/fpr/pr18.pdf

[Accessed on the 20 January 2009].

280 World Bank (2009). Global Economic Prospects: Commodities at the Crossroads. World Bank, Washington, D.C. Available online at: http://siteresources.worldbank.

org/INTGEP2009/Resources/10363_WebPDFw47.pdf [Accessed on the 20 January 2009].

281 OECD-FAO (2008). Agricultural Outlook 2008-2017. OECD, Paris. http://www.agri-outlook.org/dataoecd/54/15/40715381.pdf [Accessed on 21 May 2009].

282 Ibid.

283 Ibid.

284 Ibid.

285 Ibid.

286 Ibid.

287 Ibid.

288 Banse et al. (2008). Will EU biofuel policies affect global agricultural markets? European Review of Agricultural Economics 35 (2): 117-141.

289 United Nations Environment Programme Rapid Response Assessment (February 2009). The Environmental Food Crisis: The environment’s role in averting future food

crises. Available online at http://www.grida.no/_res/site/file/publications/FoodCrisis_lores.pdf [Accessed on 20 April 2009]

290 OECD-FAO (2008). Agricultural Outlook 2008-2017. OECD, Paris. http://www.agri-outlook.org/dataoecd/54/15/40715381.pdf [Accessed on 21 May 2009].

291 United Nations Environment Programme Rapid Response Assessment (February 2009). The Environmental Food Crisis: The environment’s role in averting future food

crises. Available online at http://www.grida.no/_res/site/file/publications/FoodCrisis_lores.pdf [Accessed on 20 April 2009]

292 World Bank (2007). World Development Report 2007: Development and the Next Generation. World Bank, Washington, D.C.

293 World Bank (2008). Rising Food and Fuel Prices: Addressing the Risks to Future Generations. World Bank, Washington, D.C. Available online at: http://siteresources.

worldbank.org/DEVCOMMEXT/Resources/Food-Fuel.pdf?resourceurlname=Food-Fuel.pdf [Accessed on the 20 January 2009].

294 FAO (2008): The state of food and agriculture 2008. FAO, Rome. Available online at: http://www.fao.org/docrep/011/i0100e/i0100e00.htm [Accessed on the 20

January 2009].

295 Telegraph Online (12 July 2008). The Great Biofuels Con. Available online at: http://www.telegraph.co.uk/earth/3347046/The-Great-Biofuels-Con.html [Accessed on

154

20 August 2009]

296 Searchinger et al. (2008). Use of US croplands for biofuels increases greenhouse gases through emissions from land-use change

297 Fitzherbert et al. (2008). How will oil palm expansion affect biodiversity? Trends in Ecology and Evolution 23 (10): 528-545.

298 UNEP (2008). In Dead Water. Merging of Climate Change With Pollution, Over-Harvest, and Infestations in the World’s Fishing Grounds.

299 Ethridge et al. (2006). World cotton outlook: Projections to 2015/16. Beltwide Cotton Conferences, San Antonio, Texas January 3-6, 2006. Available online at:

http://www.aaec.ttu.edu/Publications/Beltwide%202006/206-234.pdf [Accessed on the 20 January 2009].

300 Ibid.

301 OECD (2008) OECD Environmental Outlook to 2030. Available online at: http://www.oecd.org/dataoecd/29/33/40200582.pdf [Accessed on 20 April 2009]

302 United Nations Environment Programme Rapid Response Assessment (February 2009). The Environmental Food Crisis: The environment’s role in averting future food

crises. Available online at http://www.grida.no/_res/site/file/publications/FoodCrisis_lores.pdf [Accessed on 20 April 2009]

303 OECD-FAO (2008). Agricultural Outlook 2008-2017. OECD, Paris. Available online at: http://www.agri-outlook.org/dataoecd/44/18/40713249.pdf [Accessed on the

20 January 2009].

304 Ibid.

305 OECD (2008). Rising Food Prices, Causes and Consequences. OECD, Paris. Available online at: http://www.oecd.org/dataoecd/54/42/40847088.pdf [Accessed on the

20 January 2009].

306 David Strahan (14 June 2009). We need a stable oil price – but we’re at the mercy of Opec. The Independent. Available online at: http://www.independent.co.uk/

news/business/analysis-and-features/we-need-a-stable-oil-price-ndash-but-were-at-the-mercy-of-opec-1704577.html [Accessed on 23 June 2009]

307 FAO (2008): The state of food and agriculture 2008. FAO, Rome. Available online at: http://www.fao.org/docrep/011/i0100e/i0100e00.htm [Accessed on the 20

January 2009].

308 Wikipedia (2009). Peak Oil. Available online at: http://en.wikipedia.org/wiki/Peak_oil [Accessed on the 22 May 2009].

309 Hirsch et al (2005). Peaking of World Oil Production: Impacts, Mitigation, & Risk Management. Science Applications International Corporation, commissioned by the US Department of Energy.

310 Hirsch et al (2007). Peaking of World Oil Production: Recent Forecasts. Science Applications International Corporation, commissioned by the US Department of Energy.

311 Cohen, Dave (2007-10-31). “The Perfect Storm”. Association for the Study of Peak Oil and Gas. Available online at: http://www.aspo-usa.com/index.php?option=com_content&task=view&id=243&Itemid=91 [Accessed on 27 July 2008]

312 Badrya Darwish (16 June 2008). What lies beneath? Kuwaiti Times. Available online at: http://www.kuwaittimes.net/read_news.php?newsid=MjM0ODI5MzU= [Accessed on 23 June 2009]

313 The Oil Drum (2009). World Oil Production. Available online at: http://www.theoildrum.com/files/PeakOil1.png [Accessed on 23 June 2009]

314 David Strahan (14 June 2009). We need a stable oil price – but we’re at the mercy of Opec. The Independent. Available online at: http://www.independent.co.uk/news/business/analysis-and-features/we-need-a-stable-oil-price-ndash-but-were-at-the-mercy-of-opec-1704577.html [Accessed on 23 June 2009]

315 UNCTAD (2007). The Least Developed Countries Report 2007. UNACTAD, Geneva, Switzerland. Available online at: http://www.unctad.org/en/docs/ldc2007_en.pdf [Accessed on the 20 January 2009].

316 Arabian Business (4th February 2009). Oil output could fall by 30m bpd by 2015 – Merrill. Available online at: http://www.arabianbusiness.com/545723-oil-output-could-fall-by-30m-bpd-by-2015---merrill [Accessed on the 27 May 2009].

317 Business 24/7 (11th February 2009). Global oil production will decline further – Merrill Lynch. Available online at: http://www.business24-7.ae/Articles/2009/2/Pages/02112009_2605ba6d866a4f20ae95fcbf54cb6ca5.aspx [Accessed on the 27 May 2009].

318 Arabian Business (4th February 2009). Oil output could fall by 30m bpd by 2015 – Merrill. Available online at: http://www.arabianbusiness.com/545723-oil-output-could-fall-by-30m-bpd-by-2015---merrill [Accessed on the 27 May 2009].

319 John Kemp (4 August 2009). Peak Oil is right answer to wrong question. Reuters. Available online at http://www.reuters.com/article/reutersComService4/idUSTRE57335G20090804?pageNumber=2&virtualBrandChannel=0 [Accessed on 5 August 2009]

320 Steve Connor (3 August 2009). Warning: Oil supplies are running out fast. The Independent, Science. Available online at: http://www.independent.co.uk/news/science/warning-oil-supplies-are-running-out-fast-1766585.html [Accessed on 05 August 2009]

321 Oil Voice (5 August 2009). US$200 Oil Price Predicted by UK Energy Expert in Adelaide. Accessed online at: http://www.oilvoice.com/n/US200_Oil_Price_Predicted_by_UK_Energy_Expert_in_Adelaide/f6365f77b.aspx [Accessed on 6 August 2009]

322 World Bank (2009). Global Economic Prospects: Commodities at the Crossroads. World Bank, Washington, D.C. Available online at: http://siteresources.worldbank.org/INTGEP2009/Resources/10363_WebPDFw47.pdf [Accessed on the 20 January 2009].

323 Hirsch et al (2007). Peaking of World Oil Production: Recent Forecasts. Science Applications International Corporation, commissioned by the US Department of Energy.

324 Eric Reguly (16 June 2009). BP retreats to a paler shade of green. The Globe and Mail.

155

325 Hirsch et al (2007). Peaking of World Oil Production: Recent Forecasts. Science Applications International Corporation, commissioned by the US Department of Energy.

326 Financial Times (24 June 2009). US carmakers offered green car incentives. Financial Times Companies & Markets.

327 Peter Hughes (2009). The beginning of the end for oil? Peak oil: A Demand-side Phenomenon? Arthur D Little Consulting. Available online at: www.adl.com/peakoil [Accessed on 11 July 2009]

328 Yves Engler & Bianca Mugyenyi (June 2005). China’s cars on road to ruin? People and Planet. Available online at: http://www.peopleandplanet.net/doc.php?id=2484 [Accessed on 11 July 2009]

329 Dave Cohen (December 2007). Car Crazy. Association for the Study of Peak Oil and Gas. Available online at: http://www.aspo-usa.com/archives/index.php?option=com_content&task=view&id=257&Itemid=91 [Accessed on 11 July 2009]

330 Yves Engler & Bianca Mugyenyi (June 2005). China’s cars on road to ruin? People and Planet. Available online at: http://www.peopleandplanet.net/doc.php?id=2484 [Accessed on 11 July 2009]

331 Heller, Martin C., and Gregory A. Keoleian. Life Cycle-Based Sustainability Indicators for Assessment of the U.S. Food System. Ann Arbor, MI: Center for Sustainable Systems, University of Michigan, 2000: 42.

332 Horrigan, Leo, Robert S. Lawrence, and Polly Walker. “How Sustainable Agriculture Can Address the Environmental and Human Health Harms of Industrial Agriculture.” Environmental Health Perspectives 110, no. 5 (May 5, 2002) (accessed August 29, 2006).

333 Heller, Martin C., and Gregory A. Keoleian. Life Cycle-Based Sustainability Indicators for Assessment of the U.S. Food System. Ann Arbor, MI: Center for Sustainable Systems, University of Michigan, 2000: 42.

334 United Nations Environment Programme Rapid Response Assessment (February 2009). The Environmental Food Crisis: The environment’s role in averting future food crises. Available online at http://www.grida.no/_res/site/file/publications/FoodCrisis_lores.pdf [Accessed on 20 April 2009]

335 FAO (2003). World agriculture: towards 2015/2030. FAO, Rome. Available online at: ftp://ftp.fao.org/docrep/fao/004/y3557e/y3557e.pdf [Accessed on the 20 January 2009].

336 Green et al. (2005). Sparing land for nature: exploring the potential impact of changes in agricultural yield on the area needed for crop production. Global Change Biology 10 (11): 1594-1605.

337 Heller, Martin C., and Gregory A. Keoleian. Life Cycle-Based Sustainability Indicators for Assessment of the U.S. Food System. Ann Arbor, MI: Center for Sustainable Systems, University of Michigan, 2000: 40.

338 Manning, Richard. “The Oil We Eat: Following the Food Chain Back to Iraq.” Harper’s, July 23, 2004.

339 United Nations Environment Programme Rapid Response Assessment (February 2009). The Environmental Food Crisis: The environment’s role in averting future food crises. Available online at http://www.grida.no/_res/site/file/publications/FoodCrisis_lores.pdf [Accessed on 20 April 2009]

340 Ibid.

341 Ibid.

342 Financial Times (30 May 2009). Landowners cast net wider to make a living. Financial Times Newspaper.

343 Ibbotson Associates (1991). Stocks, Bonds, Bills, and Inflation: 1991 Yearbook.

344 Kaplan, H.M. (1985). Farmland as a Portfolio Investment. Journal of Portfolio Management (12): 73-78.

345 Hancock Agricultural Investment Group (2009). From the website of Hancock Agricultural Investment Group, an MFC Global Investment Management Company. Available online at: http://www.haig.jhancock.com/ [Accessed on 1st June 2009]

346 Webb, J.R. and J.H. Rubens (1988). The Effect of Alternative Return Measures on Restricted Mixed-Asset Portfolios. Journal of the American Real Estate and Urban Economics Association (16): 123-37.

347 David A. Lins, Bruce J. Sherrick, Aravind Venigalla (1992). Institutional Portfolios: Diversification through Farmland Investment. Journal of the American Real Estate and Urban Economics Association 20 (4): 549-571. http://www.areuea.org/publications/ree/articles/V20/REE.V20.4.4.PDF

348 Ibid.

349 Howard, B (2005). Farmland Investing: An Overview. Callan Investments Institute.

350 Painter, M.J. (2000). Efficient Investment in Saskatchewan Farmland. University of Saskatchewan.

351 The Economist (2009). Green Shoots, The Economist News Article, 19/03/2009.

352 Savills (2009). Savills Agricultural Land Market Survey 2009. Savills.

353 Bloomberg (22 January 2009). Queen Skirts U.K. Real Estate Slump as Farmland Gains in Value. Available online at: http://www.bloomberg.com/apps/news?pid=20601208&sid=aywFbc47MhdQ [Accessed on 23 April 2009]

354 Money Management Letter (10 December 2008). The Alaska Retirement Management Board has been successfully tapping high-return asset classes without losing sight of risk, volatility and costs. Available online at: http://www.moneymanagementletter.com/articleFree.aspx?ArticleID=2065965 [Accessed on 23 April 2009]

355 Hardin, W. and Cheng, P. (2002). Farmland Investment Under Conditions of Certainty and Uncertainty. Journal of Real Estate Finance and Economics, 25 (1): 81-98.

356 Savills (2009). Savills Agricultural Land Market Survey 2009. Savills.

357 Financial Times (30 September 2008). Agriculture: The battle to bring more land into production

156

358 Hardin, W. and Cheng, P. (2002). Farmland Investment Under Conditions of Certainty and Uncertainty. Journal of Real Estate Finance and Economics, 25 (1): 81-98.

359 Barras, Laurent, Scaillet , O. and Wermers, Russ R. (April 20, 2009). False Discoveries in Mutual Fund Performance: Measuring Luck in Estimated Alphas. Journal of Finance, Forthcoming; Swiss Finance Institute Research Paper No. 08-18. Available online at SSRN: http://ssrn.com/abstract=869748 [Accessed on 16 June 2009]

360 Lence, Sergio H. and Douglas J. Miller (1999). “Transaction Costs and the Present Value Model of Farmland: Iowa, 1900-1994.” American Journal of Agricultural Economics 81, May, 257-272.

361 FTSE Index Company (2007). FTSE APCIMS Private Investor Index Series Fact Sheet. Available online at: http://www.ftse.com/Indices/FTSE_APCIMS_Private_Investor_Index_Series/Downloads/FTSE_APCIMS_Private_Investor_Index_Series_0607.pdf [Accessed on 23 April 2009]

362 Ibid.

363 FTSE Index Company, APCIMS (2009). Ground Rules for the FTSE APCIMS Private Investor Indices. Version 2.4 January 2009. Available online at: http://www.ftse.com/Indices/FTSE_APCIMS_Private_Investor_Index_Series/Downloads/apcims_indexrules.pdf [Accessed on 23 April 2009]

364 Howard, B (2005). Farmland Investing: An Overview. Callan Investments Institute.

365 Lins, D., A. Kowalski, and C. Hoffman (1992). “Institutional Investment Diversification: Foreign Stocks vs U.S. Farmland.” In Proceedings of Regional Research Committee NC-161, Department of Agricultural Economics, Kansas State University, Manhatten, Kansas. February.

366 Moss, Charles B., Allen M. Featherstone, and Timothy G. Baker (1987). “Agricultural Assets in an Efficient Multi-Period Investment Portfolio.” Agricultural Finance Review. 47: 82-94

367 Lins, D., A. Kowalski, and C. Hoffman (1992). “Institutional Investment Diversification: Foreign Stocks vs U.S. Farmland.” In Proceedings of Regional Research Committee NC-161, Department of Agricultural Economics, Kansas State University, Manhatten, Kansas. February.

368 Fortune Magazine (16 June 2009). Betting the Farm: As world population expands, the demand for arable land should soar. At least that’s what George Soros, Lord Rothschild, and other investors believe. Available online at: http://money.cnn.com/2009/06/08/retirement/betting_the_farm.fortune/index.htm?section=money_latest [Accessed on 10 August 2009]

369 UK Land & Farms (2009). Banking On It - “The asset for this economic climate”. UK Land & Farms is a website operated by The Agricultural Mortgage Corporation Plc, a member of the Lloyds TSB Group. Available online at: http://www.uklandandfarms.co.uk/agricultural-land-prices-news/FARMLAND-Market-Banking-On-It/ [Accessed on 10 August 2009]

370 Fortune Magazine (16 June 2009). Betting the Farm: As world population expands, the demand for arable land should soar. At least that’s what George Soros, Lord Rothschild, and other investors believe. Available online at: http://money.cnn.com/2009/06/08/retirement/betting_the_farm.fortune/index.htm?section=money_latest [Accessed on 10 August 2009]

371 Money Week (29 May 2009). Cover Story, Can farms bear fruit for investors?

372 Knight Frank (2009). The Wealth Report, Knight Frank and Citi Private Bank, 2009.

373 Shiha, Amr N. and Jean-Paul Chavas (1995). “Capital Market Segmentation and U.S. Farm Real Estate Pricing,” American Journal of Agricultural Economics 77, May, 397-407.

374 Author’s conversation with Gordon Verrall (June 2009). Gordon Verrall is a director of Farmanco, a leading Australian agricultural management consulting firm.

375 Ibid.

376 Fortune Magazine (16 June 2009). Betting the Farm: As world population expands, the demand for arable land should soar. At least that’s what George Soros, Lord Rothschild, and other investors believe. Available online at: http://money.cnn.com/2009/06/08/retirement/betting_the_farm.fortune/index.htm?section=money_latest [Accessed on 10 August 2009]

377 Alex Evans (2009). The Feeding of the Nine Billion, Global Food Security for the 21st Century. Chatham House (Royal Institute of International Affairs). Available online at: http://www.chathamhouse.org.uk/files/13179_r0109food.pdf [Accessed on 21 July 2009]

378 United Nations Environment Programme Rapid Response Assessment (2009). The Environmental Food Crisis: The environment’s role in averting future food crises. Available online at http://www.grida.no/_res/site/file/publications/FoodCrisis_lores.pdf [Accessed on 20 April 2009]

379 John Roach (2nd June 2008). With U.S. Farmland Maxed Out, Growers Tap Into Reserves. National Geographic News. Available online at: for http://news.nationalgeographic.com/news/food_crisis_02.html. [Accessed on 20 January 2009]

380 Alex Evans (2009). The Feeding of the Nine Billion, Global Food Security for the 21st Century. Chatham House (Royal Institute of International Affairs). Available online at: http://www.chathamhouse.org.uk/files/13179_r0109food.pdf [Accessed on 21 July 2009]

381 United Nations Environment Programme Rapid Response Assessment (2009). The Environmental Food Crisis: The environment’s role in averting future food crises. Available online at http://www.grida.no/_res/site/file/publications/FoodCrisis_lores.pdf [Accessed on 20 April 2009]

382 Ibid.

383 World Bank (2009). Global Economic Prospects: Commodities at the Crossroads. World Bank, Washington, D.C. Available online at: http://siteresources.worldbank.org/INTGEP2009/Resources/10363_WebPDFw47.pdf [Accessed on the 20 January 2009]

384 UN Population Division (2007). UN 2006 population revision. UN, New York. Available online at: http://esa.un.org/unpp/ [Accessed on 20 January 2009].

385 World Bank (2009). Global Economic Prospects: Commodities at the Crossroads. World Bank, Washington, D.C. Available online at: http://siteresources.worldbank.org/INTGEP2009/Resources/10363_WebPDFw47.pdf [Accessed on the 20 January 2009]

386 United Nations Environment Programme Rapid Response Assessment (2009). The Environmental Food Crisis: The environment’s role in averting future food crises. Available online at http://www.grida.no/_res/site/file/publications/FoodCrisis_lores.pdf [Accessed on 20 April 2009]

157

387 FAO (2006b). Livestock’s long shadow, pp. 416. FAO, Rome. Available online at: ftp://ftp.fao.org/docrep/fao/010/a0701e/a0701e.pdf [Accessed on the 20 January 2009].

388 Donald Mitchell (July 2008). A Note on Rising Food Prices. The World Bank Development Prospects Group. Available online at: http://wwwwds.worldbank.org/servlet/WDSContentServer/WDSP/IB/2008/07/28/000020439_20080728103002/Rendered/PDF/WP4682.pdf [Accessed on 3 August 2009]

389 IMF (2008). World Economic Outlook 2008. Available online at: http://www.imf.org/external/pubs/ft/weo/2008/01/pdf/text.pdf [Accessed on 31 July 2009]

390 Nikos Alexandratos (December 2008). Food Price Surges: Possible Causes, Past Experiences and Relevance for Exploring Long-Term Prospects. Population and Development Review, 34 (4): 663–697. Available online at: http://www.fao.org/es/ESD/FoodPriceSurges-Alexandratos.pdf [Accessed on 31 July 2009]

391 Jeffrey Currie (2007). Food, Feed and Fuels: An outlook on the agriculture, livestock and biofuels markets. Goldman Sachs International. Available online at: http://www.gceholdings.com/pdf/GoldmanReportFoodFeedFuel.pdf [Accessed on 31 July 2009]

392 United Nations (1999). The World at Six Billion. The United Nations Population Division. Available online at: http://www.un.org/esa/population/publications/sixbillion/sixbilpart1.pdf [Accessed on 21 July 2009]

393 Alex Evans (2009). The Feeding of the Nine Billion, Global Food Security for the 21st Century. Chatham House (Royal Institute of International Affairs). Available online at: http://www.chathamhouse.org.uk/files/13179_r0109food.pdf [Accessed on 21 July 2009]

394 Ibid.

395 UN Population Division (2007). UN 2006 population revision. UN, New York. Available online at: http://esa.un.org/unpp/ [Accessed on 20 January 2009]

396 Wikipedia (2009). Green Revolution. Available online at: http://en.wikipedia.org/wiki/Green_revolution [Accessed on 03 August 2009]

397 FAOSTAT (2009). Available online at: http://faostat.fao.org/ [Accessed on 03 August 2009]

398 UN High Level Task Force on the Global Food Crisis (2008). Comprehensive Framework for Action. New York: United Nations.

399 Alex Evans (2009). The Feeding of the Nine Billion, Global Food Security for the 21st Century. Chatham House (Royal Institute of International Affairs). Available online at: http://www.chathamhouse.org.uk/files/13179_r0109food.pdf [Accessed on 21 July 2009]

400 Jim Rogers (15 June 2009). Buy Farmland. The Best Investment Of Our Lifetime. Jim Rogers Blog. Available online at: http://jimrogers-investments.blogspot.com/2009/06/buy-farmland-best-investment-of-our.html. [Accessed on 31 July 2009]

401 Jim Rogers (3 June 2009). Interview to the Economic Times. Jim Rogers Blog. Available online at: http http://jimrogers-investments.blogspot.com/2009/06/interview-to-economic-times-june-2009.html. [Accessed on 31 July 2009]

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