Agcapita Agriculture Update October 2009
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Summary
There has been considerable discussion recently about the “paradox” of bonds and stocks and commodities going up together - that the bond market is predicting a continuing recession via low interest rates and the stock market is predicting a recovery via high equity prices. Why is the bond market behaving so strangely in the face of a huge recovery stocks and commodities – surely one of these indicators must be wrong? Maybe, but perhaps there is an alternative interpretation that fits the facts. Markets always appear to act strangely to profit maximisers when non-profit maximisers are involved. I actually feel that the behavior of the sovereign debt market makes sense. Virtually every asset class is exhibiting the short-term effects of a massive monetary expansion. Once again assets that are liquid and traded - including LT sovereign debt – are rapidly “increasing” in price in nominal terms. Monetary authorities have expanded the global money supply aggressively allowing speculative activities to re-ignite via investment and commercial banking intermediaries and at the same time they are busy monetizing the rapidly expanding government debts - hence low interest rates and rapidly recovering equity prices. When cross-correlations between assets classes are very high and positive we should always be asking ourselves whether we are in a period of liquidity/money printing induced euphoria. Ultimately monetary authorities can control exchange rates or interest rates but not both. If they decide to sacrifice exchange rates for low interest rates then, in my opinion, inflation is sure to follow. Kind Regards Stephen Johnston - Partner
Contents 2 2 1 in 6 People Malnourished Canadian Farmland Continues to Increase in Value According to FAO Global Food Production Must Increase 70% by 2050 Wheat Exports Global Fertilizer Use Potash (K) Quick Facts Curious Meat Consumption Facts Food Prices Lagging Oil Prices Inventories Remain in Consistent Downtrend
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Agriculture Update
in 6 PeoPle Malnourished According to a new report by the United Nations, capital shortages created by the financial crises have caused a sharp uptick in global hunger levels with over 1 billion people now undernourished. Farmers in the developing world in particular are having more trouble sourcing working capital and investment into critical agriculture infrastructure in these markets is being delayed or cancelled. According to the report virtually all the world’s undernourished live in developing countries. − 642 million in Asia and the Pacific. − 265 million in sub-Saharan Africa. − 95 million in Latin America, the Caribbean, the Near East and North Africa. The financial crisis serves to highlight the enormous value of 1) first world agriculture infrastructure and 2) the much deeper pool of working capital financing available to western farmers. Farmers in the developed world have been much less affected by the financial crisis than their peers in the developing world. In western Canada in particular, the farming community has felt very little effect from the crisis with land values continuing to rise throughout this period. Canadian FarMland Continues to inCrease in Value Farm Credit Canada (FCC), Canada’s largest dedicated agricultural lender, says Canadian farmland values rose 2.9% during the first six months of 2009. That estimate is based on the firm’s semi-annual appraisal of its 245 benchmark farm properties. Those properties were first selected in 1985 and have been appraised in January and July each year since 1990. The benchmark properties are zoned for agriculture and represent current land use, FCC says. Weighting is assigned to each property and to each province, based on the improved farmland area recorded by the 1996 Census of Agriculture. FCC says the 2.9% increase recorded for the first half of 2009 follows increases of 5.6% and 5.8% posted in the two previous reporting periods. New Brunswick showed the highest percentage increase at 5.6% followed by a gain of 5.5% reported by Manitoba. The gain in New Brunswick was the second highest since 1999, when farmland values rose 11.6%. FCC said the province registered a rise of 6.3% during the six-month period ending Dec. 31, 2008. Manitoba’s 5.5% gain follows increases of 4.2% and 6.2% in the two previous reporting periods. On average, Manitoba’s farmland values rose almost 1% per month over the 18-month period. It is the only province to experience this trend, FCC states. Quebec reported a gain of 4.3% in the first half of 2009. This is the third consecutive semi-annual increase and follows increases of 5.9% and 5.5% in the two previous reporting periods. Nova Scotia reported an increase of 4.2% during the first six months of 2009 -- also the third consecutive semiannual increase. Increases of 4.3% and 5.2% were noted in the two previous reporting periods.
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Agriculture Update (continued)
Ontario reported a rise of 2.8% in the first half of 2009. This follows increases of 1.9% and 4.6% reported in the two previous reporting periods. Alberta reported a rise of 1% in the first six months of 2009. This was also the third consecutive semiannual increase, following increases of 2.2% and 6.7% in the two previous reporting periods. Saskatchewan farmland values increased 3.4% on average in the first half of 2009 or 7% on an annualized basis. According to FCC “Saskatchewan farmland remains attractive to investor groups and out-of-province buyers who view prices as reasonable when compared to other provinces. As well, local producers continue to expand their land bases.” aCCording to Fao global Food ProduCtion Must inCrease 70% by 2050 A recent Food Agriculture Organisation (FAO) paper predicted` that global food production must increase 70% by 2050. According to the FAO “world population is expected to grow by over a third (or 2.3 billion people) between 2009 and 2050” and that this increase in population to 9.1 billion from the current 6.8 billion would require an overall 70 per cent increase in food production because of the effect of population growth combined with rising incomes. The demand for cereals for food and animal feed is projected to reach some 3 billion tonnes by 2050. Annual cereal production will have to grow by almost a billion tonnes from the current 2 billion tonnes and meat output by over 200 million tonnes, the FAO said. The FAO also stated that “the production of biofuels could also
increase the demand for agricultural commodities, depending on energy prices and government policies.” FAO’s Assistant Director-General Hafez Ghanem noted that “feeding everyone in the world by then will not be automatic and several significant challenges have to be met.” Wheat exPorts Among the major exporters, only Australia and Canada are forecast to export more wheat into world markets, next year while shipments from Argentina, the European Union and the United States are likely to decline.
Chart 1: Wheat exPorters
Argentina Kazakhstan Ukraine Russian Federation Austrailia EU Canada United States 0 15 20 25 30 Million tonnes 2008/09 estimate 2009/10 forecast 5 10
Source:
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Agriculture Update (continued)
global Fertilizer use Global consumption of fertilizer has risen spectacularly, increasing tenfold between 1950 and 1989. The pattern of global fertilizer consumption has changed markedly over the past 30 to 40 years. In 1960, the developing countries accounted for just 12 percent of all consumption; today the figure is nearly 60 percent. Fertilizer use in the developing world has been fuelled by rapid population growth and growing demand for food grains. This is especially true of Asia, where the scope for land expansion is limited. By contrast, the industrialized countries (with the exception of the former Soviet Union) increased their fertilizer consumption only marginally after 1980; population growth was low, most people were adequately fed, and world agricultural exports had stagnated due to economic problems in many importing countries. Asia is now the dominant player, accounting for 50 percent of world fertilizer consumption, and 86 percent of developing country consumption. Fertilizer application rates vary widely among the major world regions and, perhaps surprisingly, are not strongly correlated either with national income or with need (as indicated by low soil fertility or food insecurity). Fertilizer use varies from a low of 10 kg/ hectare in sub-Saharan Africa to a high of about 216 kg/hectare in East Asia (by nutrient weight). The world average application rate is about 83 kg/hectare; the developing countries as a whole just exceed this figure, and the developed countries as a whole fall just short of it. Potash (K) QuiCK FaCts Potash is essential for plant growth and there are no suitable substitutes for this mineral. − Total world Potash Consumption Growth Forecast @ 3% rate = 8 million tonnes KCl − Currently, only 12 countries produce potash − These 12 supply the consumption needs of over 150 countries
Chart 2: World Fertilizer ConsuMPtion 1960 - 2001
160 140
120 100 80 60 40 20 0
Russia/USSR Europe (excl. Russia/USSR) Asia North America Central America/ Caribbean Middle East/ North Africa Oceania South America Sub-Saharan Africa
Million of metric tonnes
Source: World Resources Institute Earthtrends Database
1961
1965
1970
1975
1980
1985
1990
1995
2000
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Agriculture Update (continued)
− Over 65% of the world’s potash supply is located in two regions: Saskatchewan, Canada with 37% of the world’s production and the Former Soviet Union (FSU) with 30% of the world’s production.
Curious Meat ConsuMPtion FaCts According to a report by the UN Food and Agriculture Organization, livestock generates 18% of greenhouse gas emissions. This is expected to increase as developing countries increase their consumption of meat.
Chart 3: Meat ConsuMPtion
Meat Production
million tons 350 300 250 200 150 100 50 Projection ‘70 ‘85 ‘00 ‘15 ‘30 ‘50 ‘62 ‘70 0 Developed countries Developing countries
Chart 4: Co2 ProduCed
Pounds of CO2 per pound of product
Meat
Food consumption in developing countries
% +200 +150 +100 +50 Cereal Roots and tubers ‘80 ‘90 ‘03 Milk
Milk 1 Cheese 10.8 Chicken 1.8 Pork 4.9 Salmon 6 Shrimp 12 Beef (only meat) 20 Oat flakes .07 Flour, wheat .05 Carrots .02 Tomatoes, greenhouse 2.7 Source: “Livestock’s Long Shadow,” by the United Nations Food and Agriculture Organization, 2005; Lantmannen
Source: “Livestock’s Long Shadow,” by the United Nations Food and Agriculture Organization, 2005; Lantmannen
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Agriculture Update (continued)
Food PriCes lagging oil PriCes The UN Food and Agriculture Organization (“FAO”) recently commented that while “nominal food prices doubled between 2002 and 2008, energy prices, led by crude oil, began rising earlier in 1999, and have trebled since 2002.”
inVentories reMain in Consistent doWntrend Agricultural commodity inventories continue to trend downwards and are at record lows in many sectors – including wheat, rice, and coarse grains. This trend should be of concern to us, as consumers and also as investors.
Chart 5: long-terM Food and energy PriCe trends, real and noMinal
Index (2000=1)
4 3 2 1 0
72 74 76 78 80 82 84 86 88 90 94 96 98 00 02 04 06 08
Chart 6: ratio oF global stoCKs to use
Percentage
FAO food price Index FAO real food price Index Reuters-CRB Energy Index 50 40 30 20 10 0
62 64 66 68 70 72 74 76 78 80 84 86 88 90 92 94 96 98 00 02 04 06 08
Wheat Rice Coarse grains Total, wheat equivalent
Source: FAO
Source: FAO
Given the large energy inputs required to grow crops and the significantly more inelastic demand curve for food versus energy, crop prices must increase substantially to regain parity with energy prices.
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disClaiMer:
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