As an investor, I’ll cut to the chase – I’m long agriculture. That’s to say I’m very optimistic about its potential despite the fact that the sector has been a disaster for the past 30 years – my own Commodities Index tells me that agriculture prices are just 75% of what they were in 1998. But where there’s disaster there’s always opportunity. The laws of supply and demand tell us that if prices stay low, then production tends to decrease due to lack of incentive. But if demand then outweighs supply, prices start to increase thus reinvigorating production.
It was back in the 1970s when we last had a bull market for agri-commodities and agriculture. With prices of food rising dramatically, large inventories (stock levels) developed as farmers were encouraged by the price to grow crops. Such were the levels of production, that by the 1980s, worldwide inventories of food were something like 35% of consumption, which is maybe the highest recorded in history. Prices eventually plummeted as a result. In 1974, for example, sugar prices were at an all-time high of 66 cents per pound but by 1987 it was just two cents per pound.
Have we seen much change over the past decade or so?Not really.There have been some spikes but overall we have been enjoying pretty low prices. Is that really a problem? Well it is if nobody wants to be a farmer because there’s no profit to be made.
In the USA, not only is the average age of a farmer 59 years but more young people are studying public relations than agriculture. In Japan, the average age is even higher – more like 67. Farms have been abandoned and villages are emptying out as people move to the cities. Such are the food security implications that the Japanese Government is now welcoming Chinese nationals to get the farms going again. In India, where yields and incomes are low, thousands of farmers have tragically committed suicide over the past decade and a half.
However, look back over the centuries and you’ll find times when agriculture was celebrated. I believe given the prevailing trends and demographics we’ll be seeing that again in the not too distant future. Current global consumption is already higher than production and reserves are being run down – that’s without taking into account the year on year rise in population and growing middle classes. If we don’t want to face a situation of no food at any price, something’s got to give. Ultimately, we will all have to start paying more for our groceries and farming will, once more, become a career and investment of choice.
However, public policy has a part to play here too. Olam’s theme of transcending boundaries for this blog is quite apt because governments need to stop putting boundaries on agriculture through intervention. In India it is illegal for a farmer to own more than five hectares of land. In a global market how can he now compete with an Australian farmer owning 50,000 hectares? India has the potential to be one of the greatest agricultural countries in the world – climate, soil, working age population – but it needs to think big. Similarly, price control causes distortion. If you cap the price of one crop as the Philippine government did with rice a few years ago, consumption goes up because it’s cheaper, but farmers stop producing because they can make more money growing something else. Discouraging production while increasing consumption had a predictable outcome in the Philippines: there wasn’t enough rice and the policy was revoked. In the long run nobody has the power to negate the laws of supply and demand. Instead markets must be allowed to take their course and attract investment and a new generation of farmers.
The problem, of course, is that you can’t attract people overnight – it takes a long time. In the 1960s nobody wanted to be a stockbroker – I was laughed at when I announced my intention at university in Oxford and yet look at how many there are now and the wealth that has been created. It always takes a while for people not only to see the opportunity but to make a move, so we have some years to go before people see the light and choose farming over finance.
In the meantime, the large scale agri businesses of today can help through increased investment, vision and management capability. We’ve all witnessed the tech revolution in banking and the media but there’s been much less investment in agriculture. While the reasons are evident (namely lack of profit), it has to improve.
Overall, however, there is a phenomenal opportunity ahead of farmers and investors. It’s the old adage of buy low and sell high. And if you are 19 years old and you like the outdoors, get ahead of the curve and become a farmer. You will be the one driving the Lamborghini one day.