THE FOOD TIME bomb is ticking. With global food prices nearing a record high, radical action is needed if the kind of shocks witnessed earlier this year and in 2007/08 are not to become disturbingly regular occurrences.
The impact of high and volatile food prices can be immediate and devastating. Since June 2010 an extra 44 million people have fallen into poverty – defined as a daily income of less than $1.25 – thanks to the surge in food prices.
"Uncertain and volatile food prices are the single-greatest threat facing the developing world," said Robert Zoellick, president of the World Bank, ahead of a G20 agricultural ministers meeting earlier this year.
Jeremy Grantham, co-founder of global investment manager GMO, argued in a research note published in April that the world has undergone a paradigm shift, with price pressures now a permanent feature of our lives.
Invoking Thomas Malthus’s famous argument that population growth would eventually outstrip that of the world’s finite resources, Grantham wrote: "The prices of all important commodities except oil declined for 100 years until 2002, by an average of 70%. From 2002 until now, this entire decline was erased by a bigger price surge than occurred during World War II."
Describing the change as perhaps the most important economic event since the Industrial Revolution, Grantham argued that a fast-growing and increasingly wealthy population, declining crop yield growth per acre (from 3.5% in the 1960s to 1.2% today) and limited available productive new land have all led to inexorably higher prices.
Production needs to greatly improve to narrow the demand-supply imbalance – the demand for foodstuffs is growing at 2% a year but supply is only increasing at 1% – with the long-term outlook worrying.
The UN’s Food and Agriculture Organization reckons that by 2050 food production will have to increase by 70% from current levels to meet the demands of a population estimated to have grown to 9.1 billion, up from 6.8 billion today.
That means that agricultural investment needs to increase by about 50%. Or to put it another way: $83 billion of net investment a year needs to be made in primary agriculture and downstream services, such as storage and processing facilities, if there is to be enough food to feed those 9.1 billion people by 2050. And that’s excluding the investment required in roads, ports, large-scale irrigation projects and other necessary infrastructure.
It’s a daunting prospect.
Decisive role
Where will this money come from? Clearly governments and multilateral agencies will need to invest large sums on infrastructure, education, technology and extension systems to create the conditions that will enable sustainable investment in agriculture and agri-related businesses.
But equally there is a limit to how much cash the public sector can deploy – especially at a time when government budgets are under such intense pressure.
Instead the decisive role in addressing the food security challenge – in providing more capital, in trying to increase yield growth, in opening up new land and getting it into production – will be performed by the private sector, from corporates to investors and the global and local banks that intermediate them.
As providers of finance and risk capital, banks have a pivotal part to play in allocating resources, helping mitigate price-risk volatility for both producers and consumers, and in supplying fundraising and advisory services to corporates and sovereigns.
The business potential cuts across the full range of a bank’s product suite – lending, risk management, commodity trading, structured finance, project finance, trade finance, M&A, sovereign advisory, equity and debt capital markets, fund indices, research.
Getting some of these disparate internal groups to pull in the same direction is a big challenge, although worthwhile, especially if it encourages greater cross-selling of products.
While returns from agriculture are small compared with other natural resources, the opportunity could be substantial, especially for those banks that get the structure right and understand the industry’s dynamics.
"When I was interviewed for this job my boss said to me: ‘I’m not really interested in the millions of dollars to be earned in this sector, I’m interested in the billions,’" says one investment banker.
"I thought: ‘Good, you’re ambitious. You understand the opportunity because that’s how big it is’."
Big hurdles
It will not be easy, however. Agriculture is a notoriously challenging sector to invest in. That is why most banks pick their spots carefully.
Almost none has globally connected agriculture teams cutting across different products. There is no agriculture or food equivalent of a global council on climate change or centre for environmental markets as there is at international banks as part of their commitment to green finance.
For the most part, banks’ coverage of agriculture is diffuse and disparate. Dutch lender Rabobank is one notable exception (see Rabo’s farming roots), while others such as Standard Chartered and Standard Bank have regional agriculture businesses. Russian investment bank Renaissance Capital has also built a dedicated agriculture unit.
Some international banks have very little exposure to the sector at all outside of the big food companies, such as Nestlé, Kraft, Mars or Tate & Lyle or the main agriculture commodities, such as wheat, corn or maize.
The biggest problem in the agriculture industry is that farming is very fragmented. In Africa, for example, the agricultural sector is typified by subsistence farming by families still using traditional methods. For the most part these farms fall outside the supply chain, which is one of the reasons why Africa has suffered from chronic food shortages.
