The false security of state-sponsored “land grabs”

While the jury is still out regarding whether the recent IPO of the Swiss commodity trading giant: Glencore represents the end of the recent bull run in both soft and hard commodities, some trends are fairly settled. First, is that long-run demand for agricultural commodities outstrips current capacity with major capex investments needed in the coming decades to fix this imbalance. Secondly, food prices over the next half century will be broadly higher than they have been in the last half-century. Lastly, there will be increasing imbalance between where food can be effectively grown and where it is most needed. China, South Korea, the Gulf Cooperation Council (GCC) amongst other places are examples of places that will definitely experience increasing food import bills. This trend has started with the Saudis: as they have decided to phase out the growing of wheat and revert their policy of wheat self-sufficiency as a response to declining water tables in the country. While it may seem transparently absurd in the 1st instance to attempt to turn desert land into a wheat growing region. A better understanding of food and its role in politics will make the initial decision to grow wheat more understandable.

Over the years, governments have tended to fall when their citizens are unable to feed themselves. You can often get away with toying with people’s freedoms but you are best advised to make sure their bellies are filled! Moses in the biblical era faced a rebellion and may have been toppled in a “coup” if it were not for the miracle of manna (“heavenly food”) falling from the sky! The French revolution was as much a reaction to the rising cost of bread as it was a desire for greater political self determination. Given this history of food driven revolts it is therefore understandable that many governments with high food import dependence are fretting over their security and are seeking to acquire vast tracts of land across the world, especially in Africa.

There has been increasing reports of massive “land grabs” in various African countries (Ethiopia, Sudan etc) by various state-sponsored entities with a main aim of exporting the products of such farms to the countries sponsoring these land purchases. While a lot of people have written about the human and property rights issues involved with such purchases, my view on the topic has more to do with how secure this strategy will be for these food dependent countries.

While I completely respect the drive of these food import dependent countries to act to protect their interests, I think they may be falling into the fallacy of mistaking ownership with control. Import dependent countries can own millions of hectares of land in agricultural producing countries and it is unclear at best whether these assets will prove useful in a crisis. This is because while foreign governments or foreign entities may own farms overseas, it is the governments of host countries that determine if exports will be allowed or not. And history has shown over and over again (from the Biblical story of Pharaoh’s wheat storage during the “years of plenty” to the Russian wheat export ban of 2010) that governments will act primarily to first secure food for their own citizens. For example, ownership and export plans meant next to nothing in 2010 when the Russian government imposed an export ban on wheat following after droughts and fires. That means a government of X foreign country could have invested billions of dollars in farmland and export infrastructure and they would be of no value just at the time that they needed it the most. Generally, I struggle to see how continuous exports of food will be sustainable without domestic demand being fully met regardless of what ownership documents and supply contracts say.

In conclusion, while I do not have an answer for what the best strategies for food import dependent nations are. I am quite convinced that buying up huge swaths of land overseas will be of little value in ensuring their food security in times of crisis. Their energy, time and money are better spent in ensuring more efficient global agricultural markets

Feeding the world – The Next Big Thing?

Every now and then it seems the world develops some level of collective hysteria around an emerging or ever-present scare topic with these “scary issues” running the gamut. During the cold war, we had the threat of a nuclear Armageddon, the world fretted about fuel supplies during the Arab oil embargo of the 70s, the 90s brought with it the threat of a world where nothing works because of a nice little bug called “Y2K”. The 2000s was not about to be outdone as that decade brought a litany of worries including: escalated global terrorism, potential global financial ruin due to some folks deciding to buy houses they could not afford and a worry about “peak oil” that led to crude oil reaching highs of $140+ per barrel. It seems this decade may be one of genuine worry regarding the world’s ability to feed itself in the long run.

When a magazine with the gravitas of Foreign Policy decides to wade in the issue with no less than an entire edition tagged “the Food Issue”, I guess we all have to sit up and listen. The articles in the edition (click here) were particularly insightful as they brought to light – in a cohesive and succinct way – the myriad of interlocking factors that are contributing to make this a real threat and why the threat of a hungry world is not one to be ignored or sniffed at. The article illustrated various tell-tale signs of the world’s worsening food situation: ranging from land grabs in Sub-Saharan Africa to grain riots in Asia to export bans placed on food in producing countries (e.g. the wheat export ban initiated by the Russian government last year)

What I find most intriguing about the world’s food situation is the multi-faceted nature of the factors acting simultaneously on both the demand and supply sides of the “food equation”. The demand side for food is driven by many things among which include the steady growth in human population: the world is projected to be home to 9 Billion people by 2050. Accompanying this headline population growth is income growth. And there are few relationships that are more certain than that between calorie intakes and income as people transit from starvation to maintenance rations, to comfortable diets and almost surely to indulgent consumption (seriously, no one needs a McDonalds Triple-Decker Burger or fine cuts of prime steak to survive or maintain healthy growth). As China, India and other lower-income countries become middle and/or high income economies, their protein intakes are expected to rise and demand for livestock will spike. And due to the weird construct of the Agriculture-Industrial complex, it seems cows and poultry can’t seem to get enough corn in their bellies. So greater absolute and relative quantities of the world’s grain output will be diverted to feed animals.

If diverting vital grain to feed animals rankles you, then it may be interesting to know that cars have started and are likely to continue “eating” corn in increasingly greater volumes. Renewable energy standards will see more ethanol use in cars as countries across the world enact clean-fuel standards that mandate minimum ethanol levels. What this means is that: 1) there will be increased competition for the world’s grain by the world’s cars (which we will continue to buy more of!) and 2.) the price of crude oil – which is getting scarcer as well – will set some sort of floor for the price of corn. As at higher oil prices, farmers will be incentivized to divert more of their output to ethanol production until equilibrium is reached that takes this incentive away. So consumers, brace up for a period during which the price of what goes into your car’s tank may very well determine the cost of what goes into your belly!

If the demand picture seems somewhat dire, the supply picture does not seem to be cutting the world any slack. Probably the biggest challenge to the supply picture is the rearing ugly head of climate change: droughts are getting longer and more frequent while floods are becoming more commonplace and severe. Both of these scenarios do not bode well for the planting process. Drought in Russia in 2010 delayed the planting season, which led to sharply reduced output and disruptions across the world. An equivalent drought in the United States would have had the same impact. Worsening climate conditions are also happening at a time when the world may be hitting the ceiling on farm productivity that is the result of a natural drop-off after years of gains and possible “over farming” of land and nutrient loss in major planting regions of the world.

Although I am no expert in this area (or anything for that matter), I’d wager that given the expected tightness in supply and boost in demand it may be prudent to be long food and the infrastructure and support systems required to deliver it to our bellies!.