Peter Sharkey: Diary of a share punter
The final part of Peter Sharkey's look at world food production and the opportunities – and threats – facing investors…
Over the past few weeks, I've looked at the morality of what could be called a neo-colonial land grab, the fragile nature of the world's food chain and what the impact of farming a diminishing area of farmland could be. I've suggested that investors mindful of the agriculture sector's potential long-term benefits would be well advised to consider investing via a professional fund manager, one who sets great store in taking account of potential risks.
Ultimately, however, the problem we all face is that within 40 years, the world's population will rise from 7 billion people to 9 billion, an increase of 28%. Meanwhile, the UN estimates that total demand for agricultural products will leap by up to 60% by 2030, significantly faster than the population.
Elementary economic theory would appear to suggest that making a long-term investment in agricultural production would be a shrewd move.
Food demand is scheduled to rise, driven by more people and, significantly, by economic growth which makes populations in developing nations wealthier and, therefore, less reliant upon a traditional subsistence diet and more inclined to favour a meat-based diet.
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On the other side of the equation, the supply of arable land is, of course, fixed and in some parts of the world actually falling.
It follows that achieving better crop yields is the obvious solution and for investors, this is where the most compelling opportunities lie.
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Given the understandably furious reaction to the purchase by foreigners of farmland in parts of Africa and Latin America, it appears likely that countries such as China and India will improve their own agricultural productivity. Indeed, they have to.
Over the medium term, as massive, transformational agriculture projects are initiated in both nations, global demand for fertilisers is likely to continue rising as it did during the 2007-08 food crisis when the price of commodities such as urea and potash rose almost tenfold. Those prices have subsequently fallen, a factor which prompted BHP Billiton's bid for Potash Corp, one of the world's major producers of potash.
China's economic transformation has produced many benefits, not least for its own people who, according to one estimate, now eat an average of more than 100 lbs of meat a year. This represents a three-fold increase on levels of consumption in the late 1980s.
This trend, which might be labelled 'the gentrification of eating habits', looks set to continue for the foreseeable future. Higher food consumption will have enormous consequences for people in the developing world and also for investors exporting their capital from mature economies.
Vast untapped hinterlands of farmland lie in Africa and Latin America; they're not going to be developed by absentee landlords, but by companies making sensible investments for the benefits of the indigenous populations and their shareholders. Companies taking the view that 'better 50% of something rather than 100% of nothing' will be best placed to benefit.