New report’s world ag outlook is bleak

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Highlights from a new report indicate that the world is about five years into a chronic global food crisis that is not expected to abate for many decades. Despite improvements in agricultural technologies, the global industry faces too many uphill battles to overcome significantly as world population continues to increase, according to the report, “Welcome to Dystopia! Entering a long-term and politically dangerous food crisis,” by Jeremy Grantham, GMO, a global investment management firm. 

The quarterly report points out the biggest challenges the agriculture industry faces. The report points out problems from water scarcity, little increase in yields from the increased use of fertilizer, rapidly rising food and resource prices and bad farming practices.

Here are the top highlights directly from the report.

1. Last year we reported the data that showed that we are 10 years into a paradigm shift or phase change from falling resource prices into quite rapidly rising real prices.

2. It now appears that we are also about five years into a chronic global food crisis that is unlikely to fade for many decades, at least until the global population has considerably declined from its likely peak of over nine billion in 2050.

3. The general assumption is that we need to increase food production by 60% to 100% by 2050 to feed at least a modest sufficiency of calories to all 9 billion+ people plus to deliver much more meat to the rapidly increasing middle classes of the developing world.

4. It is also widely assumed that at least the lower end of this target will be achieved. I believe that this is substantially optimistic. At very best, if we reach that level we will not be able to hold it. Much more likely, we will not come close because there are too many factors that will make growth in food output increasingly difficult where it used to be easy:

• Grain productivity has fallen decade by decade since 1970 from 3.5% to 1.5%. Quite probably, the most efficient grain producers are approaching a “glass ceiling” where further increases in productivity per acre approach zero at the grain species’ limit (just as race horses do not run materially faster now than in the 1920s). Remarkably, investment in agricultural research has steadily fallen globally, as a percent of GDP.

• Water problems will increase to a point where gains from increased irrigation will be offset by the loss of underground water and the salination of the soil.

• Persistent bad farming practices perpetuate land degradation, which will continue to undermine our long-term sustainable productive capacity.

• Incremental returns from increasing fertilizer use will steadily decline on the margin for fertilizer use has increased five-fold in the last 50 years and the easy pickings are behind us.

• There will be increased weather instability, notably floods and droughts, but also steadily increasing heat.

The last three years of global weather were so bad that to draw three such years randomly would have been a remote possibility. The climate is changing.

• The costs of fertilizer and fuel will rise rapidly.

5. Even if we could produce enough food globally to feed everyone satisfactorily, the continued steady rise in the cost of inputs will mean increasing numbers will not be able to afford the food we produce. This is a key point that is often missed.

6. On the positive side, scientists are now very optimistic that they will be able to engineer more efficient photosynthesizing “C4” genes (corn belongs to that family) into relatively inefficient but vital “C3” plants such as rice and wheat, in 20 to 30 years. If successful this would increase output up to 50% and would buy time for a less painful transition to a sustainable population.

7. Many of these increasing difficulties were reflected in the original 2008 food crisis and the 2011 rebound. The last six weeks’ price rise is more threatening because it occurred despite very much larger plantings than were available in 2008. Global demand is now so high and rising so fast and reserves are so low that price sensitivity to weather setbacks has become extreme.

8. It seems likely that several countries dependent on foreign grain imports have in fact never recovered from the 2008 shock. Countries like Egypt saw the percent of their consumer budget for food rise to 40%. At this level, social pressures may be at an extreme and probably have already contributed to the Arab Spring.

Any price increases from here may cause social collapse and a wave of immigration on a scale never before experienced in peacetime. Another doubling in grain prices would be catastrophic.

9. Strong countermeasures to prevent a food crisis would be effective in curtailing the current crisis and preventing the development of a much greater crisis, but these measures will likely not be taken. This is because the price signals for the rich countries are too weak – they can afford the higher price – and there is inertia in all parts of the system. Also, the problems of malnutrition in distant countries are not generally felt as high-order priorities in the richer countries.

10. If food pressures recur and are reinforced by fuel price increases, the risks of social collapse and global instability increase to a point where they probably become the major source of international confrontations.

China is particularly concerned (even slightly desperate) about resource scarcity, especially food.

11. The general public, the media, the financial markets, and governments badly underestimate these risks. Only the military of some countries, including the U.S. and the U.K., seem to appreciate them appropriately.

12. Natural gas supply increases buy some time, mainly for the U.S., but seem more likely to create complacency and continued dependence on hydrocarbons. The energy situation is less pressing globally in the short term than is the food problem. Supplies are sufficient to cause merely a slow and erratic price increase. The main problem with oil is in its contribution to the food problem through higher farming costs and generally increasing cost pressures on poorer countries.

13. In the longer term, in contrast, energy costs and absolute shortage in the case of oil form a serious problem second only to food shortages and will result in prices so high that they will impact global growth and even the viability of modern, rather fragile, economies.

14. On paper, though, the energy problem can be relatively easily addressed through very large investments in renewables and smart grids. Those countries that do this will, in several decades, eventually emerge with large advantages in lower marginal costs and in energy security. Most countries including the U.S. will not muster the political will to overcome inertia, wishful thinking, and the enormous political power of the energy interests to embark on these expensive programs. They risk being left behind in competiveness.

15. Availability of metals is, in contrast, a minor problem in the next few decades. The prices will steadily rise but the consequences will be less. In the long run though, metals are the most intractable problem. There is no brain-intensive solution as there is for agriculture (i.e., organic farming), nor is there any capital-intensive or technology-intensive solution as there is for energy. We will just slowly run out and prices will rise.

16. The results of these problems will be felt mainly as price pressure in rich countries. The need to obtain adequate resources will squeeze national budgets, profit margins, and economic growth. For poor countries, though, it is literally a matter of survival.

17. We are badly designed to deal with this problem: regrettably we are not the efficient species of investment theory, but ill-informed, manipulated, full of inertia, and corruptible. Only once in a blue moon – like World War II – do we perform anywhere near our theoretical capabilities and this time the enemy is amorphous and delivers its attack very, very slowly. But the stakes globally are very high indeed. We must try harder.

18. The following comments on this topic are mine personally [Jeremy Grantham] and reflect my Foundation’s portfolio (and a total lack of career risk!). These comments are based on a time horizon of 10 years and beyond. The portfolio investment implications are that investors should expect resource stocks – those with resources in the ground – to outperform over the next several decades as real prices of the resources rise. Farming and forestry, though, are at the top of the list. Serious long-term investors should have a very substantial overweighting in a resource package. I suggest for long-term investors a resource position of at least 30%. Another relative beneficiary of resource pressure is the quality group of equities. Resources are a smaller fraction of final sales than average and higher profit margins make them more resilient to margin pressures.

19. Perhaps more importantly, the resource squeeze, coupled with other growth-reducing factors (to be discussed next quarter), is likely to reduce the return from the balance of the portfolio.

To read the full report, click here.




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chemiebabe    
California  |  August, 07, 2012 at 12:48 PM

No one ever mentions population control. If we don't do it , nature will do it for us. I just don't get it! No one needs needs to have childern anymore. Reproduction is becoming a luxury the planet can ill afford. Just a thought.

Ken    
Batavia, NY  |  August, 08, 2012 at 11:30 AM

The problem is not reproduction. The problem is the segment of the population that is doing the reproducing are the dumbest people that can not feed themselves. Look at food stamp recipients, that have the most kids who will also not be able to feed themselves. The Africans sure know how to reproduce, yet even though their countries have many natural resources, they can not feed themselves. And why do the Egyptians keep cranking out kids when they live in a desert?

Joe Horner    
Missouri  |  August, 08, 2012 at 08:17 AM

As food producers, following sustainable farming practices on our own farms, why should we see a situation of food demand outstripping supply as "bleak"?

Kyle Booth    
Vermont  |  August, 08, 2012 at 08:45 AM

No one mentions the fact that much of the food on the market gets wasted. Reducing this waste and increasing the efficiency of utilizing the food produced could increase the amount of food available without having to produce more food. Also, junk food is produced in surplus, and this does not help people survive. In fact, it helps contribute to health issues that have negative impacts on our economy. Reducing the manufacturing of junk food will help increase nutritious food supply. There are solutions that do not require increasing resource use or genetically modifying crops to be slightly more efficient. Systemic change is what really needs to happen.

JK    
Texas  |  August, 08, 2012 at 11:25 AM

Totally agree with Kyle reduce the waist from "all you can eat buffet" the waist is out of control on every plate you see at least 25% ending up in the garbage, people get it because it is there too waist No buffet, less waist, less overeating, healthier people

J Roth    
August, 08, 2012 at 07:34 PM

I agree with the highlights from this report. Policy makers are not thinking broadly enough. The aspect that is missing from this perspective is that the forces of nature are not likely to let the increasing population scenario to play out. Influenza, or a new, unforeseen infectious disease is likely to intervene. If mankind does not figure out how to stop the rapid growth in human population, the forces of nature will intervene and introduce a new infectious disease to control human population growth. We will not like the methods used by the forces of nature. It may be similar to the black death in the middle ages. The earth will survive and heal over the eons. Mankind may not.

David Bell    
Sault ste Marie MI  |  August, 08, 2012 at 08:32 PM

Show me the money and I could grow enough crops between the highway lanes to feed a couple million people


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