I have written for several years about the looming commodity price rises. Now rising food prices are causing riots from Cairo to Mexico. Virtually all food prices have begun to go up and are being felt everywhere. Could it be that the greatest threat to the global economic boom is not a global financial meltdown, but rather a widespread shortage of key commodities? Most economists dismiss this notion – but then, even economists can sometimes get it wrong.
When demand exceeds supply, the price goes up until there is more supply or less demand, i.e. equilibrium. However, I have previously argued that there is evidence suggesting global agricultural production may have peaked a while ago while food-demand is clearly not going down.
For example, in South Asia approximately half of the land has been degraded so it no longer has the capacity for food production. China has seen an irreversible loss of nearly a third of its arable land, equalling 2500 square kilometres per year. Now 36 countries, which are home to more than half the world’s population, are facing a food crisis and a negative water balance, according to the UN’s Food and Agriculture Organization..
In China, for example, two thirds of all water wells are now dysfunctional because they no longer reach groundwater-levels which have declined to 100 metres below sea-level. As a consequence, Chinese authorities have recently confirmed, that several large cities like Beijing will run out of groundwater in the next five years. In order to replace its annual groundwater deficit with seawater, China would have to build desalination capacity equal to 400 times the maximum capacity of today’s biggest desalination plant in the world. Bear in mind that the energy bill alone for operating these plants would add - at current prices – a whopping $40bn (€26bn) to China’s annual electricity bill.
Countries are scrambling to ensure supplies and shield their populations from rising prices. But by imposing price ceilings, they prevent demand from declining enough to balance it against supply. Secondly, price ceilings prevent supply from expanding as most farmers are reluctant to produce food below market prices.
Two trends are adding to the woes. Firstly, traditional agricultural exporters such as Argentina, Brazil, Russia, Ukraine and Canada have begun to impose export restrictions. It is only a matter of time for countries such as the US to follow. Inevitably, this moves agricultural markets further into disequilibrium.
Secondly, changing lifestyles are driving up meat consumption. This could prove even more fatal for water consumption. Producing one kg of meat requires about 15 times more water than one kg of grain. Cattle-farming is the world’s leading source of CO2 emissions and contributes more to climate change than all global transportation (air, water, roads) combined. Since 1970, the global livestock population has outgrown the human population by a factor of ten. This is only the beginning of the massive pent-up demand for meat and fish from emerging economies. As a consequence, once mighty rivers now carry only a fraction of their former water volume; groundwater tables are steadily falling and peak food and water prices may scare investors even more than peak oil prices.
But before vindicating Thomas Malthus (1766-1834), whose gloomy predictions of food and water-shortages have been wrong for over 200 years, we should be mindful of the traps which proved him wrong for so long. Malthus failed to see the green revolution, the great productivity increases in agricultural production. Monsanto’s Chief Executive Hugh Grant surely believes that in many fields, productivity can still be raised through better genetic engineering, more sustainable irrigation, fertilization and farming technology. The question is whether new technologies can boost the supply of water and food fast enough to meet the rapidly growing demands. If they do, then the Malthusian day of reckoning will be averted again. In any case, I am confident that both commodity- and equity-investors in water, food and agriculture will continue to do very well in relative and absolute terms.
Burkhard Varnholt, chief investment officer, Bank Sarasin.
