China’s ongoing struggles with food price inflation aren’t unique. A spike in corn prices in Mexico in the summer of 2008 made corn tortillas, a national food staple, unaffordable for most Mexicans and sparked large-scale riots in parts of the country.
And in some countries across the Middle East and North Africa, food accounts for more than 40 percent of the average consumer’s budget. A rapid rise in food prices was a major cause of civil unrest in several countries during last year’s Arab Spring.
The cost of agricultural commodities rarely receives as much media attention as the price of oil in the developed world, but it’s of paramount importance for most fast-growing emerging markets.
A Long-Term Secular Shift
According to the World Bank, the global population is set to rise by nearly one-third between 2010 and 2050, from 6.9 billion to over 9 billion, adding to the challenge of meeting global food demand. But contrary to popular belief, the biggest problem isn’t the number of new mouths to feed, but a major secular shift in diets across the emerging markets.
As consumers’ disposable incomes rise, diets become more diverse and meat consumption tends to increase. In the least developed and poorest countries in the world, the vast majority of calories consumed are in the form of basic cereals, such as rice and wheat. In Bangladesh and Chad, for example, cereals account for 78 percent and 61 percent of total calories consumed by the average citizen, respectively. In Chad, the average consumer eats less than 15 kilograms of meat and fish per year, while in Bangladesh the total is less than 4 kilograms.
By contrast, in a developed, industrialized economy such as Germany or the U.S., basic cereals typically account for just 20 percent to 25 percent of the total diet, and the average consumer eats well over 100 kilograms of meat per year. There are historic, religious and cultural dietary differences between countries, but consumption of more expensive and resource-intensive products such as alcohol, fresh vegetables, fruits and edible oils also tends to rise with income.
Fast-growing emerging markets lie somewhere in-between these two extremes.
As the chart above shows, consumption of meats in the BRIC countries—Brazil, Russia, India and China—has risen from about 29 kilograms (64 pounds) per capita in 2001 to more than 35 kilograms (77 pounds) at the end of 2010, a gain of more than 20 percent. Nevertheless, the average consumer in the BRICs still consumes less than one-third as much meat as their counterparts in North America. And despite China’s cultural taste for pork, the average Chinese consumer still eats less than half as much meat as their peers in the U.S. and Canada.
But that gap is closing and continued strong economic growth means that the diets of citizens in the emerging markets will continue to evolve toward a greater resemblance to those of consumers in the U.S. or Western Europe.
From an agricultural standpoint, this well-established trend presents a significant challenge because meats, fruits and vegetables are far more agriculturally intensive products than basic cereals. It takes 7 kilograms (15.4 pounds) of feed grain to produce 1 kilogram of beef (2.2 pounds); 4 kilograms (8.8 pounds) of grain to produce 1 kilogram of pork; and 2 kilograms (4.4 pounds) of grain to produce 1 kilogram of chicken. As consumers increase their meat consumption, there’s a massive multiplier effect–demand for grains grows at a faster pace than meat demand.
And it’s important to note that these consumption figures are measured on a per capita basis. The BRIC countries account for nearly one-third of the world’s population–even small changes in per capita meat consumption can have a dramatic impact on the total tons of corn and soybeans needed to produce feed.
An equally important issue is how the world’s producers will be able to meet fast-rising global demand for key agricultural products like corn and soybeans.
Even as the global population grows and demand for key grains like corn and soybeans increases, the amount of arable land available worldwide has actually fallen over the past two decades. Some of the largest recent losses in arable land have occurred in countries that have fast-growing demand such as China. One of the big challenges China faces is desertification, a process where increased use of water resources means that some formerly arable land is turning into barren desert.
As the chart above shows, in 1961 each hectare of land (2.471 acres) had to feed less than 2.5 people. But by the end of 2008, agricultural intensity had doubled and that same hectare of arable land needed to feed about 5 people globally. And it’s only going to get worse: The United Nations optimistically predicts 10 percent global arable land growth by 2050 to support another 30 percent to 35 percent jump in the size of the population.
That might seem like an impossible feat, but it’s actually part of a long-term trend that began during the Agricultural Revolution of the 18th and 19th centuries. The secret behind such gains is the increase in crop yields, the amount of corn or wheat that a single acre of land can produce. Over the past few centuries, farmers have developed numerous methods to increase productivity, including crop rotation techniques, better irrigation, the use of machinery to harvest and plant crops, pesticides and herbicides to decrease plant stress, fertilizers and, most recently, the use of genetically modified (GM) crops.
GM crops may be controversial, but they are a major contributor to the growth in agricultural productivity. Modern GM variants are being designed to exhibit certain beneficial traits, such as resistance to pests and drought conditions. While few think of farming as a high-tech business, GM seed companies such as US-based Monsanto (MON) are developing corn and soybean seeds that offer 10 or more “stacked” traits in a single plant, boosting yields per acre to record levels.
The gains from rising crop yields have been dramatic. In 1960, world farmers could, on average, extract 1.95 metric tons of corn from a hectare of land compared to more than 5 metric tons from the same parcel of land today. Yield gains are evident for wheat, soybeans and rice and will be necessary in the future to support demand from emerging markets.
Although the introduction of GM crops has certainly helped push up yields in recent years, proper fertilization remains one of the most important steps farmers can take to boost yields. Global fertilizer sales are roughly $200 billion annually, making it among the more investable themes in agriculture.
Crops remove certain nutrients from soil over time, and if that process goes unchecked, yields per acre will drop precipitously. To replace those nutrients, farmers must fertilize their soil. The amount and types of fertilizer used depend to a great extent on varying soil conditions in different parts of the world, as well as the type of crops being cultivated.
There are three main types of fertilizer used in the world today: potassium chloride (potash), phosphate and nitrogen.
Potassium chloride is mined from ore deposits created when oceans and seas dried up millions of years ago. With the passage of time, most of the world’s ores have been covered by earth and are now located deep underground.
To create potash that’s used for crops, the potassium chloride is separated from impurities such as salt, and then dried and prepared into either solid pellets or a liquid product.
The largest producers of potash in the world, based in Canada, Russia and Belarus, account for about two-thirds of total global output. Because there are only a handful of global producers, about 80 percent of global potash supply is traded across international borders.
Fruits and vegetables account for nearly one-quarter of global potash consumption. Corn and rice are also big potash consumers, accounting for a further 28 percent of the global market combined.
Phosphate is also mined from underground ore bodies created from ancient sea life. Phosphate fertilizer is typically combined with ammonia to produce solid fertilizers known as DAP and MAP. Sulphur, which is mainly derived from oil and natural gas refining/processing, is a key raw material for converting phosphate rock into usable fertilizer.
As with potash, production of phosphate is concentrated in a handful of countries. China is the largest producer, followed by the U.S. and Morocco. The latter is the largest exporter of phosphate in the world because the U.S. and China consume most of their phosphate production in their domestic agricultural sector.
Because the largest producers of phosphate also tend to be the largest consumers, only 20 percent of global phosphate supplies move across international borders. The crops for which phosphate is in high demand include: fruits and vegetables (18 percent of total demand), wheat (16 percent), corn (12 percent), and rice (12 percent).
Nitrogen is the most common element in the air; however, plants rarely make direct use of atmospheric nitrogen. Nitrogen-based fertilizer is made from ammonia that is synthesized from natural gas. In fact, natural gas accounts for as much as 90 percent of the cost of making ammonia.
Urea is the most common form of nitrogen fertilizer, accounting for about half the world market. And most nitrogen fertilizer isn’t traded, but is used close to where it’s produced. The biggest crops for nitrogen fertilizer are corn, rice, and wheat, which account for half of total global nitrogen use worldwide.
Demand for all three types of fertilizer has been on the rise generally in recent years and that trend is likely to continue.
Agricultural chemical inputs, including pesticides, herbicides, fertilizers and GM seeds, account for between one-quarter and one-third of the cost of producing crops. Demand for fertilizer commodities and the price of the main types of fertilizer are sensitive to underlying crop prices and farmers’ income. If the supply of crops looks plentiful in a given year, then farmers can dial back their fertilizer consumption to cut costs, accepting the lower yields that result.
Strong growth in emerging market demand for key crops such as corn and soybeans coupled with the need to grow more crops on less land has led to a sustained, secular shift higher in global agricultural commodity prices. In order to incentivize farmers to spend more money on fertilizer, GM seeds, and massive new combines and tractors, agricultural commodity prices will remain elevated. That will support fertilizer producers’ profits over the long term.
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