Food crunch

By bne IntelliNews November 26, 2009

Nicholas Watson in Prague -

It's said that bad things come in three's, so pessimists at least won't be surprised to hear that after the global financial and economic crises, the next storm on the horizon is the global food crisis.

Actually, the food crisis was already evident before the financial and economic crises struck in the autumn of 2008; in 2007 and 2008, food riots broke out in developing countries across the world, from Haiti to the Philippines, as grain and rice prices skyrocketed. But this growing press coverage suddenly shifted tack when the bankruptcy of Lehman Brothers in September 2008 precipitated the meltdown of the financial system, which plunged the world into its worst recession since the 1930s. "The urgency of the financial crisis, together with the recent drop in food prices, relegated food issues to the background," says Claire Schaffnit-Chatterjee of Deutsche Bank Research.

Though governments are still grappling to varying degrees with the problems of that economic slowdown, all but the most pessimistic economists believe the world in general has avoided another Great Depression. So as the financial and economic crises fade, the food crisis, which has been overshadowed by the other two, is set to return to the fore.

Multilateral institutions are already pressing governments for more action on the problem. In October, the UN World Food Programme warned that 200m more people had joined the ranks of the hungry in the past two years, meaning the number of "urgently hungry" had reached its highest ever of 1.02bn, or about one-sixth of the world's population, with most of the developing world now paying more for food despite drops in commodity market prices during the global economic slowdown, because of climate change, escalating fuel costs and falling incomes. "The food crisis is not over," said the UN World Food Programme's executive director, Josette Sheeran. "We have an anomaly happening where on global, big markets, the prices are down, but for 80% of commodities in the developing world, prices are higher today than they were a year ago, and the prices a year ago were double what they were the year before that. What it means is for about 80% of the developing world, people can afford one third as much food today as they could two or three years ago."

On November 16-18, the UN hosted a summit on food security, its second such meeting since last year's riots. Earlier this year, 14 countries and the European Commission committed at least $20bn over the next three years to agriculture development. Yet this latest summit was given a mark of only two out of 10 by aid agencies, which lamented the failure of the delegates from 192 nations to agree to commit themselves to $44bn annually in agricultural development aid. The UN had hoped the summit would also commit to eradicating hunger by 2025. Jacques Diouf, director general of the Food and Agriculture Organization, said in his closing speech that countries had taken "important steps" by pledging in the final summit declaration to increase aid to agriculture. "Alas, I note that this declaration does not contain any quantified objectives, nor any precise deadline," said Diouf.

Even so, events will mean that the phrase "food security" is set to enter the everyday lexicon just as "energy security" did after a spat between Russia and Ukraine caused a cut-off in Europe's gas supplies in 2006. In fact, in a neat mirror image of the West's quest to secure energy supplies, Middle Eastern and Asian governments have bought up significant tracts of land in the Americas, Africa and Europe. In Eastern Europe, land valuations are significantly lower than elsewhere in the world: in Argentina, the cost of farmland is about $8,000 per hectare (ha), whereas in Russia it's less than $800. For example, Chinese concerns own about 80,400 ha in Russia and another 7,000 ha in Kazakhstan; South Korean concerns own about 270,000 ha in Mongolia. "Nervousness about food security among countries importing agricultural commodities has led to land grabbing in order to secure agricultural supplies to feed their own population," says DB Research's Schaffnit-Chatterjee. "Current and pending investments in farmland could amount to 15m-20m ha, which is around 150% of the cropland area of Germany."

Even without climate change, rising populations meant the world was headed for a food crunch. "The food price crisis of last year really was a wake-up call to a lot of people that we are going to have 50% more people on the surface of the Earth by 2050," says Gerald Nelson, author of a report prepared by the International Food Policy Research Institute (IFPRI) for the World Bank and Asian Development Bank, which predicts food shortages and soaring prices for staples such as rice, wheat, maize and soya beans. "Meeting those demands for food coming out of population growth is going to be a huge challenge - even without climate change."

Green Revolution II

There is little argument over the main drivers behind the global food crisis: a growing world population whose diet is rapidly changing.

The world population is projected to grow from 6.5bn in 2005 to over 9bn by 2050, most of that growth coming in the developing world and in urban areas. At the same time, increasing affluence and the rising expectations of people in many parts of the developing world like China will prompt more people to eat a resource-intensive diet that's rich in meat and dairy products. This increases demand for crops used as animal feedstocks disproportionately. "In 1985,

Chinese people ate, on average, 20 kilograms of meat compared with 97 kg in Germany; they are now eating over 50 kg," says Schaffnit-Chatterjee.

According to the UN Food and Agriculture Organization, to feed a population of more than 9bn and free the world from hunger, global food production must nearly double by 2050. But how?

The most obvious way is to simply increase the amount of land under cultivation - this is the way that agriculture has grown throughout most of history. The amount of land in agricultural use has remained largely flat since the 1970s at around 800m hectares, according to USDA data. Although in theory there is still land that could be converted to agricultural use, the cost of bringing it into production will be high, either financially or from an environmental point of view. Furthermore, there are also increasing new demands for land such as for biofuel production or for reforestation projects to sequester carbon and mitigate climate change. This means, according to John Coast Sullenger, managing director of GAIA Capital Advisors, which runs an agricultural fund, that just an additional 3% of the world's land could be put into production, leaving the only way to increase production is to raise the amount produced per hectare. "Grain production stands at 10 tonnes per ha in the developed world, but in many other parts of the world it's very low at ½ tonne per hectare - that's the essence of the growth opportunity in many of these regions like Eastern Europe," says Sullenger.

Thus, another so-called "Green Revolution", the post-war change in agriculture practices that allowed food production to keep pace with worldwide population growth, has to happen, and will be centred on areas like Eastern Europe that are under-producing given the chronic underinvestment over the past few decades during communism. "Today, we stand on brink of new green revolution that will come from the pure necessity to produce more for the growing population," says Sullenger.

At one end of the spectrum, this revolution could involve simply transferring best agricultural practices from west to east to raise crop yields. "Talking about Eastern Europe, Russia and Ukraine, it's very similar to where Latin America, specifically Brazil and Argentina, was 15 years ago, so growth opportunities are tremendous," Sullenger says. As an example, he cites the harvest yields in Eastern Europe averaging around 2 tonnes of grain per ha, despite having some of the most fertile land in the world. "So it is a question of lack of modern inputs and capital today. The harvest yields in this region can triple in the next 10 years or so - this is a significant growth opportunity for investors."

Two examples of this approach are NewAgro Group's potato farm in Russia, which is looking to raise Russian potato yields of less than 1 tonne per ha to the US average of 7 tonnes per ha, and Ukraine's agro-industrial enterprise Mironivskiy Hliilboproduct (MHP), which owns the country's largest poultry farm and is applying western standards of production to export its chickens to the EU.

At the other end of the spectrum is the raising of crop yields through biotechnology. Experts say it's not clear how much further the yield potential of the world's main cereal crops - wheat, rice and maize - can be raised. However, in the fields crop yields rarely reach their theoretical potential because of constraints such as water, nutrients, imperfect adaptation to local environments, and pests, diseases and weeds. This is where biotechnology can help.

"For the next generation of [genetically modified] crops, R&D is focusing on traits like allowing crops to cope with too much or not enough water, extremes of temperature, salinised or acidified soils," says Schaffnit-Chatterjee. "These advances have the potential to improve both the resilience of crops to climate change and land degradation, and their sustainability if they are more efficient in their use of water."

Related Articles

Drum rolls in the great disappearing act of Russia's banks

Jason Corcoran in Moscow - Russian banks are disappearing at the fastest rate ever as the country's deepening recession makes it easier for the central bank to expose money laundering, dodgy lending ... more

Kremlin: No evidence in Olympic doping allegations against Russia

bne IntelliNews - The Kremlin supported by national sports authorities has brushed aside "groundless" allegations of a mass doping scam involving Russian athletes after the World Anti-Doping Agency ... more

PROFILE: Day of reckoning comes for eccentric owner of Russian bank Uralsib

Jason Corcoran in Moscow - Revelations and mysticism may have been the stock-in-trade of Nikolai Tsvetkov’s management style, but ultimately they didn’t help him to hold on to his ... more

Notice: Undefined index: subject_id in /var/www/html/application/controllers/IndexController.php on line 335