This year, the world's urban population will equal the rural for the first time in human history. China will also become a net food importer for the first time ever. Both developments have profound implications for long term food prices. It's remarkable than China, with over 20% of the world's population and just 13% of the country classified as arable land, has managed to be largely self-sufficient until now in meeting grain demand of about 510m tonnes a year (550m by 2010). Now facing a serious deficit, the country has scrapped export rebates for wheat, rice, maize and soybeans, and it will start imposing export duties of up to 25 percent to conserve local stocks. Food inflation is already running at over 20% and it comprises a third of household budgets. Not only is China struggling to raise production given the speed at which arable land is being gobbled up by development in the South and desertification in the North, but it's estimated by the Chinese state environmental agency that about 10% of farmland is dangerously polluted by heavy metals in the soil, acid rain and untreated sewage. Water shortages are a growing crisis, as discussed in a previous post. Meanwhile, the Asian diet is becoming increasingly Westernised with Chinese meat consumption up from 20 to 54kg since 1980. The Chinese PM said recently that he hoped every child will drink 500mls of milk a day; it might help grow a few more Chinese basketball players but all those extra ruminants won't help global warming much, and the country is already importing a third of all traded supplies. In food as in many other areas, for Western consumers globalisation is now biting back as they compete for supplies from the rising middle classes of the developing world. Perhaps 500m consumers from Brazil to India are now reaching the critical income threshold at which discretionary spending accelerates ($3-4,000); consumption of meat and processed non-traditional foods will soar, along with the fridges and microwaves needed to store and cook them.
Land is not the only constraint. World fertilizer use has grown more than 11x from 14.5 million tonnes in 1950 to 169.4 million in 2007, while population ballooned from 2.5 billion to 6.6 billion. In the past year the price of key fertilisers has doubled, tracking soaring energy prices. China agreed in May to pay 200% more for imported supplies of Potash as in 2007, or $650 a tonne. Many emerging nations are scrambling to buy or lease land overseas to grow crops and guarantee food supplies. China has taken the lead by contracting land in Tanzania, Laos, Kazakhstan, and Brazil. India has set its eyes on Uruguay and Paraguay, while South Korea is looking for farming deals in Sudan and Siberia. Libya and Egypt for their part have been negotiating deals to lease abandoned collective farms in Ukraine. So far the bulk of Chinese imports have been soybeans; China became the world's largest soybean importer in 2000 when it imported 1m tonnes; by 2007 imports exceeded 30 million tonnes. If China were to import just 10% of it grain consumption or 50m tonnes, it would have the same effect on the grain market medium term as it has had on oil. James Rice, chief of China operations for Tyson Foods, the world's biggest meat producer has said "This year will be the last in which China produces enough corn for itself, and the last that it is self-sufficient in protein." The upward trend in Chinese imports has been a major factor in soybean prices doubling in just the past year. Although corn prices are touching all time highs, wheat and rice have fallen dramatically in recent months despite even a bumper harvest this year doing little to replenish reserves at 30 year lows, and the marginal cost of production soaring with energy prices. An imminent bursting of the investment bubble in industrial commodities from copper to oil will drag the agriculture complex in its wake, but the chart below gives some long term perspective on how cheap food still is in real terms despite the dramatic rises in recent years; wheat fell 80% in real terms between the mid 1970's and 2000, making even efficient commercial farming uneconomic without heavy subsidy, let alone investment in expanding capacity. Input cost rises have offset much of the margin improvement from higher prices thus far. The UN FAO takes a typically bureaucratic extrapolation of current real price levels flat lining into the distant future, despite a more immediate supply response than for other commodities, I would expect real prices for food to trend strongly higher over coming years and to approach and even exceed their 1970's peaks over the next decade, as they have for oil and many mineral resources. On that view, agriculture stocks, land and related ETFs should provide some of the most profitable exposures for a long term investor, and should be accumulated on a looming sell-off in the overheated commodity sector.
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