Will you share in the riches?

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In 2008, a combination of factors resulted in the sharpest increase in food prices ever. Experts spoke of a ‘brave new world’ and predicted a decade of high prices. However, this boom was cut short by the financial crisis caused by bankers’ irresponsible actions, which led to the worst depression since 1933.

Prices dropped to very low levels as consumers in developed countries, hard-hit by the collapse of property values and rising unemployment, battled to make ends meet. Most countries managed to limit the effect and duration of the recession by pumping massive sums into their economies – and growth returned to positive figures in 2010 in all countries.

Unfortunately, the enormous government expenditure in 2008 and 2009 resulted in unmanageable budget deficits in European countries, especially Portugal, Ireland, Greece and Spain, named ‘PIGS’ by the media. The International Monetary Fund (IMF) regards these financial problems as so serious that it has adjusted its forecast economic growth for 2012 and 2013 downwards, with negative growth of 0,3% expected in the EU.

Yet, despite this pessimistic growth outlook, investment experts still promote investment in agriculture. Shares in agribusinesses and farming operations and investment in farm land are promoted as better than putting one’s money into more traditional investment sectors. Amid huge financial uncertainty, fund managers are looking for investments based on sound fundamental factors.

Agricultural profitability
Population growth is faster in developing countries than in the developed world, where, in many countries, a stable  population has been reached. These large populations are also becoming urbanised. Already, more than half of the world’s population live in cities, and urbanisation is taking place faster in developing than in developed countries.  Economic growth is also uneven, with faster growth in developing countries than in developed countries.

The IMF predicts that the US economy will grow by 2,1% in 2012, the EU economy will shrink by 0,3% and the UK economy will grow by 0,8%. On the other hand, growth of 6,9% and 8,2% is expected in India and China respectively. Larger growth is also expected in African countries. The faster growth in developing countries allowed millions of new consumers to enter the mainstream economy.

As their income levels rise, they tend to replace their starch-based diets with more protein, increasing the demand for livestock products. The production of meat and milk in turn uses more grain than that needed for grain consumption on its own. Grain production has also been increased to meet demand for biofuels, alhough this use of grain has decreased somewhat in the last year. 

Finally, the infrastructure development to support the new mega cities has resulted in less land being available for food production. Commercial agriculture already performs efficiently and there is little chance of a significant increase in production in the short term. The effect of all these factors is a sharp increase in demand for food and fibre – and hence higher prices.

Taking advantage
The positive future for agriculture will not translate directly to higher income for farmers. The probability is that the bulk of this income may end up in the hands of agricultural processors and sellers, or agricultural suppliers. But farmers still have a number of options if they want to share in the higher income stream. The first is to become a partner in the farm-to-fork value chain. There are several good examples of farmers who have done this through direct investment in processing companies. Farmer-controlled businesses allow farmers to share in the value chain.

Investment in agricultural companies is another alternative. Unfortunately, most farmers sold their shares in the former co-operatives when these were transformed into companies. Those who kept their shares are currently probably better off. The JSE-listed agribusinesses also offer a way to invest in the agricultural value chain. 

To sum up, although the worldwide recession hit farmers as well, all indications are that fundamental factors will keep product prices buoyant for the time being. Farmers would do best by adopting a cautiously optimistic attitude to the future of agriculture.

Dr Koos Coetzee is an agricultural economist at the MPO. All opinions expressed are his own and do not reflect MPO policy. Contact Dr Coetzee at [email protected]. Please state ‘Global farming’ in the subject line of your email.

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