An analysis of International Food Commodity Markets
Pre-1990 World Food Commodity Supply: “Butter Mountains”

Two things happened to worldwide land-use industries in the 150 years up until the year 2000. First was the opening up of new lands, like Australia, New Zealand (NZ), South Africa, Latin America, and the US Mid-West, to generate significant supply growth. Second, the industrial revolution made possible greatly increased production from those lands. Transport systems and better husbandry drove remarkable productivity gains. Both factors enabled agricultural supply to outstrip agricultural demand throughout most of the period, resulting in falling terms of trade for farmers, particularly in the period from 1972 to 2000, when NZ farmers’ incomes per unit of production fell by around 20% in real terms (graph below).

NZ Terms of Trade Index 1864-2004

Source: FAO, Craigmore analysis

Post-2000 Supply Factors: “Diminishing returns”…

Earlier supply gains from capacity and productivity surges (see high annual gains from introduction of chemical fertilisers in China prior to 1995 in graph below) are now slowing. The FAO estimate that cereal yields will now increase, going forward, at only 1-1.5% per hectare per year. This, indeed, was already the experienced rate of increase in maize yields in China (a country with no restrictions on GMO usage) over the past 15 years.

China – Growth in Cereal Productivity (annual growth based on 3 year moving average)


Source: FAO, Craigmore analysis

 …and “Peak Land”

Post 2000 the loss of land to desertification, urban/transport sprawl and diversion to bio-fuels is reducing the amount of hectares available to produce food and plantation forest products (first graph below)

Global Agricultural Land (bn ha)

Source: FAO, Craigmore analysis

Worldwide Agricultural Land (ha per capita)

Source: FAO, Craigmore analysis

World population is growing at 1.1% per year – roughly the same rate as estimated increases in cereal yields. This makes increases in yields and efficiency of agriculture vitally important, since this population growth means available land per person will fall dramatically (right hand graph above).

Population growth will drive demand for food post 2000

The OECD-FAO estimates an increase of 70 percent in world food production is required to meet demands of the estimated population in 2050.

And changes in tastes will magnify the demand surge

The nature of food demand is changing. A proportion of the 2.5+ bn people in China and India are seeking to upgrade from mainly vegetarian diets to ones with more proteins (graph below). Each calorie of these complex foods requires approximately 10 times more hectares for its production.

China – Consumption per Capita (1980=1)

Source: FAO, Craigmore analysis

Further, these shifts in tastes have, potentially, a long way to run. Average Chinese dairy consumption would need to rise from 15 kg to 59 kg per year to bring China up to Taiwanese average levels of dairy consumption in 1995:

Average Per Capita Annual Food Consumption (kgs)

Source: Taiwan Council of Agriculture, China Statistical Yearbook and Nomura Global Economics

Agricultural prices are rising

As the result of tightening of supply and increases in demand, prices of food have risen since 2000. They now track the price of oil:

Source: Reserve Bank of New Zealand

The year 2000, when China became a net food importer, marks the shift from oversupply to more balanced world food commodity markets. This is parallel to development of the oil market – where 1972 was the year the USA went from being a net oil exporter, to an importer.

Food commodity prices may yet rise significantly further

Wheat trades at 20 euro cents per kilo and each kilo bakes 2.6 loaves of bread. These loaves of bread costs EUR 1.50 at retail. Thus the wheat commodity makes up less than 6% of the EUR 1.50 retail price of bread. Thus agricultural commodities absorb only a small part of overall consumer spending. Prices may rise significantly before demand would be greatly affected.

New Zealand: the new “safe-haven”

I noted in earlier newsletters that NZ’s exports fell 1% in 2008 while German and Chinese exports fell 9%. As I argued last month investing in NZ assets and especially farmland, rather than the traditional flight to the dollar, swiss franc and consumer products companies, may be an appropriate “new paradigm’ response to soft economic conditions. New Zealand, rather than Switzerland, may be the new safe-haven!

Over-supply followed by equilibrium, but potential shortages

In summary food commodity supply demand dynamics mean that, as near-static supply meets increasing demand, food markets will more often face shortage. Given low price elasticity of demand for food, and food’s low fraction of consumers’ income, prices may rise significantly. Against this backdrop of world population growth, agricultural land shortages and magnified demand from emerging markets, most notably China, the attractions of land investments in New Zealand are profound. Its world leading approach to sustainable agricultural practices and techniques in combination with high agricultural productivity; temperate climate; sustainable water resources and very low incidence of pests and disease offers a worthy allocation in an investment portfolio. Moreover the major deleveraging of New Zealand land prices that we have witnessed in recent years (commencing in 2009) continues to offer a timely window of opportunity.

New Zealand Farmland Prices

Sources: Nartea and Eves, Statistics New Zealand


Published: 1 September 2011