FBA Issue 34: September / October 2010
Asian agribusiness renaissance: Feed & livestock shake off the financial crisis
by Eric J. BROOKS
With the recession over and 2008's financial crisis a fading memory, feed and meat's tight supply/demand fundamentals are once more reasserting themselves. Speaking at its Agribusiness Outlook seminar in Singapore, John Baker, Rabobank's Food & Agribusiness advisory head for Asia noted that, "Long-term supply and demand fundamentals are beginning to exert a greater influence on agricultural commodity prices." With financial volatility declining, "fundamentals are playing an increasing role in the pricing of agricultural markets."
Meat demand, biofuels to thin out inventories
With economic normalcy returning to Asia, shortages of arable land are again coinciding with rising developing country meat consumption. Having just emerged from the recession, inevitable supply shortfalls are not yet readily apparent but will manifest themselves over the next few years.
That is because several large corn and soy harvests are weakening feed grain prices over the short-term. Baker explained that today's large harvests are a reaction to the 2008's record high corn and soy prices: "Whenever we have a spike in price, in subsequent years, we tend to have overproduction."
However, modest CBOT futures and rising fuel and fertiliser costs means that profit margins have been narrowing. This is expected to swing grain and oil seed output below feed demand growth over the next two years. Faltering supply growth amid expanding Asian demand, particularly China, will start inflating feed prices. Moreover, as the accompanying graph shows, particularly in the case of coarse feed materials like corn, a long-run trend towards thinner supply base is merely intensifying.
Towards the end of this 2010 to 2025 year period, supply shortfalls could be made worse if China's heavy reliance on imported soy is joined by a similar dependency on imported corn. Baker states that, "It is a growing challenge for China to grow enough corn to meet growth in meat demand. Unless there is a structural change in the corn crop yield curve for China, there will be an increasing need for imports of corn."
Palm oil-petroleum linkage to strain soy supplies?
The impending coming supply-side crunch is made more severe by the way biofuel output resumed its rapid growth after the crisis had passed. This year's record American ethanol production is mopping up surplus corn while rising EU biodiesel output helped trigger this year's strong rapeseed price rally.
Interestingly, the use of palm oil to make diesel is also causing its price to converge with that of soy oil –even as both of them track petroleum price trends. With palm oil's conversion into biodiesel raising its price relative to soy oil, countries like India may be forced to import more soy oil and less palm oil.
Over the long run, a biofuel-induced substitution of soy oil in place of palm oil may cause demand for soy beans to outrace supplies. Such emerging links between energy markets and vegetable oils are poised to raise the cost of protein feeds such as soymeal. In that respect, Baker notes that biofuels represent, "A layer of demand that did not even exist ten years ago."
Demand growth, scarce inputs & faltering crop yields
Going forward however, input shortages will define the market far more than biofuels. This is especially true in Asia, which has 35% less arable land per person than the global average, and where China and India face acute shortages of water to irrigate feed crops.
Going forward, global arable land per capita will drop from 0.20 acres today to 0.18 acres in 2025. Baker explains that, "Land availability is only marginally incremental at best and we are reaching limits with respect to expanding our arable land."
With available per capita arable land falling by 10% over the next 15 years, feed grain yields must increase by at least this amount just to compensate for the plunge in per capita arable land.
On top of this implied 10% yield increase must be added an additional 14.3% to cover global population growth of 1 billion people, from 7 billion to 8 billion. To all this must again be added yet another sum, to keep pace with rising per capita meat consumption.
Unfortunately, as the accompanying chart indicates, this not turning out to be the case.
Instead, crop yields have consistently fallen behind population growth. According to Baker, "Since 2004 we've seen a divergence in the crop yield curve from the consumption curve. As we move forward, we'll have to rely on increases in productivity to bring that yield curve closer to the consumption curve."
For the last seven years, crop yields even failed to compensate for declining arable land per capita, let alone population increases or higher personal consumption.
In Asia especially, this scarcity of additional land is compounded by a very high population density and very little water per capita. In particular, India and China, have the largest populations and fastest growing meat demand, but find themselves constrained by extremely scarce supplies of water per capita.
Grains for quick gains, crop land for sure, steady returns
Much like before the financial crisis, the resulting tight feed and livestock markets all this entails is attracting considerable investment capital.
Renewed investment activity can be seen in the number of open interest CBOT grain and oil seed contracts. After rising to new peaks in the second half of the last decade, institutions and speculators abandoned CBOT grains and oilseeds during the recession.
With feed fundamentals rapidly tightening up, open interest in CBOT grain and oil seed contracts now stands at pre-recession levels among speculators and exceeds pre-crisis volumes among institutional investors. Baker notes that, "despite the [post-crisis] reduction in risk appetite, participation in agricultural markets has reverted to pre-crisis levels."
Aside from investments in grain futures, much investment is going into agricultural land. At a time when urban land prices are crashing, investors are impressed with the fact that everywhere in the world, agricultural land is offering consistent, high returns with very little risk or volatility. Everywhere from Brazil to Australia, Argentina to Iowa, the last decade has seen crop land appreciate in value by the hundreds of percent –and completely shake off the subprime crisis's real estate deflation.
At the same time, grain futures have been even more unstable than usual, offering even greater-than-usual immediate gains –and losses. All of which stimulates interest in agribusiness commodity assets, be they grains or arable land.
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