It's no longer a world of full and plenty
Demand is growing faster than supply. That is not news anymore.
Profit margins in farming have remained low. That is not news either.
The reasons for these developments, and the possible lessons for Irish farming and food in this brave new world, were explored in considerable depth at the Agricultural Science Association conference last week.
Issues that got particular attention were the growth of China, the wid e fluctuations in prices, and the slowdown in the growth of productivity worldwide.
Let us start with China, which is the source of much of the increased demand for food. (For example, it accounts for 60% of world imports of soya beans).
China is important, as a potential market for Irish food but also — and primarily — for the wider impact its increased demand is having, in keeping prices high for agricultural commodities all over the world.
We are sometimes enthralled by the opportunities offered but need, as pointed out by Breiffini Kennedy, Bord Bia’s man in Shanghai, to remember that Chinese GDP per head is still only about 100th in the world. Our key market in China is not in the 1.4 billion people, but in the growing middle classes in the increasingly urbanised east of the country.
And this is going well. Irish exports to China are set to grow in value this year by 20%, to €150 million, on top of a 12% growth last year. Dairy products such as Kerrygold butter and Dubliner cheese, as well as baby food from Pfizer, accounted for over €100m of these exports last year.
China’s economy continues to grow by more than 8% per annum, generally exceeding commentators’ forecasts!. The population is growing and becoming more urbanised. By 2025, there will be 15 cities, each with a population exceeding 25 million. Urban consumers have incomes more than three times those in rural areas, but overall spending on food is still up to 32% of income, compared with 10% in the West.
China’s government and food companies clearly recognise their dependence on external sources of food and other commodities, and have been active in trying to secure their future supplies and protect themselves from market fluctuations. They have been particularly active in buying land in South America and Africa, in financing co-operatives in Argentina, and in contracting directly with farmers in these countries.
Price volatility has increased in the last 10 years for most agricultural products (the exceptions are beef and potatoes). While the volatility of prices within the EU is lower than for world prices, it has increased more (according to Thassos Haniotis of the EU Commission). This volatility cannot be explained by variability in yields, which in general have fallen over the decades.
The volatility of agricultural prices was dealt with in particular by Cyrille Fillot, an expert from Rabobank. Increased demand from south east Asia, arising from increased population, higher incomes and changing diets. had coincided with a slowdown in productivity improvements in agriculture. The world has moved from one of plenty to one where you need to manage the security of your future food supply, and there is widespread price fluctuation. He advanced a reason for these wide fluctuations.
Countries (like China) and companies were battling to secure supplies. The more they secured them, the smaller the proportion of total production which passes through the commodity markets. The open market, as a proportion of the total, is falling and has to bear the brunt of any shocks to supply caused by good or bad summers, wars or rumours of wars.
Another reason for the wide fluctuations was mentioned by Joe Gill of Goodbody Stockbrokers, namely the activities of financial institutions such as hedge funds in commodity markets who perform no legitimate role in the food chain. They don’t use commodities, merely speculate on them, sometimes selling within a day or two. Their activities resemble that of old time tanglers in the beef trade or those traders who buy grain in the autumn in the hope that price increases will more than compensate for the costs of holding it — but hedge funds are on a much larger scale.
The level of activity of financial institutions (including hedge funds) in the market has grown dramatically in recent years — and this could account for much of the increased fluctuation we see. And if hedge funds make money in the market, it can only be at the expense of legitimate players in the food chain — as with the tanglers. Whatever their cause, the wide fluctuations in prices of food commodities (and their increasing scarcity) are a concern to major industry players, who are adopting strategies to deal with it. They want to reduce the risks to their companies and countries.
Tesco and Walmart are taking possession of their supplies earlier in the food chain — cutting out more of the middlemen. The more they do this, the wider the likely fluctuations, and the more important it is for Irish food companies to adopt strategies where their sourcing policies become a competitive advantage. At the same time, big Irish food companies could become takeover targets for even bigger multinationals seeking to secure supplies of raw materials.
Another issue is the decline in the growth of agricultural productivity. Worldwide, yields used to improve by about 3% per annum. The growth of productivity is now down to about half that level, and it is not matching the growth in demand, which accounts largely for the increased prices seen in recent years and which are projected for the future.
WHY has productivity fallen? There was no obvious answer to this question. Decreased investment in research and development aimed at increasing production, particularly in the EU (understandable in the era of surpluses), was deplored by some speakers. A major source of slower growth over the decades must surely be increased controls on farming in most countries, in order to protect the environment.
A further statistic of interest was that the growth in agricultural prices (up 50% from 2003) was considerably less than the growth in prices for fertiliser (up 163%) and energy (up 223%) prices over the same period. Dr Richard Glauber of the USDA said that because of drought in major beef producing states such as Texas. and higher feed costs, there is no indication of any immediate recovery in the US beef herd.
The US is a relatively small exporter in the world beef market, accounting for around 15% of world beef trade. Nevertheless, Glauber expects world prices to remain high. Likewise, he and other speakers said that the outlook in cereals was for continuing high prices, which is good news for Irish cereal farmers but also for the Irish dairy sector, because it maintains and increases Ireland’s strategic advantage of being based predominantly on cheaper grass.
As long as cereal prices remain high, the likelihood of large increases in milk supply, when quotas disappear in the EU in 2015, is much reduced. The US use of cereals for ethanol is, however, likely to plateau.
