The competition for the control of food has started

Posted on July 2, 2009 by Christophe Pelletier

A couple of recent articles (Foreign cropland deals and Professional investors look toward overseas farmland) show clearly how much action there currently is about securing food sources in the future. Many players are involved, from countries buying or leasing foreign land, to investment firms and hedge funds.

Agricultural commodities have become quite hot and are expected to become even hotter.

In the future, we can expect to see more of such land acquisition, we will see more alliances, like the “Black Sea Wheat Pool” in which Russia, Ukraine and Kazakhstan are supposedly joining forces to build a strong wheat sort of OPEC. Although considering the relationship between Russia and Ukraine about natural gas, one can wonder what will happen with this.

Taking control one piece at a time We must expect strategies about food supplies that will remind us of what we have seen about oil supplies. Politics are going to play an increasingly important role. After all, we can live without oil, but not without food. There will be aggressive moves from countries that are not self-sufficient, first friendly like the land purchases and leases, but there probably will be a point when this might not be enough and regional conflicts will happen. Some exporting countries will also take a more aggressive stance on prices and on availability, but they also will have to be aware that too much arrogance might end up in serious tensions.

In my view, we are going to see very interesting tactics that will include food, energy, trade agreements, diplomacy and military threats as part of the whole bargaining process.

Similarly, we can expect to see more tensions between private firms involved in food and governments. Locally, we can expect nationalizations of land and factories. More regulations of the markets will take place, probably after excesses from privately owned money, investors and businesses will create another “bubble” with agricultural commodities futures contracts, that will end up destabilizing food markets in a somehow similar manner as the financial world has acted for many years before it faced a meltdown.

Will globalization lead us back to local thinking?

Posted on June 22, 2009 by Christophe Pelletier

This might sound contradictory, but one of the effects of globalization could very well be a new impulse for the development of a local economy, with energy as the main driver.

Let’s review a few things! One driver of globalization has been the search for low wages, therefore making corporations relocating their manufacturing units to the emerging countries. Another pillar of globalization has been the ability to transport goods across the world at a low cost, as energy has been in fact quite cheap. A clear effect of the success created by the above is an economic boom in the emerging countries, where employment has risen and where the standard of living has increased, on average. Currently, we are going through this difficult economic situation, but in the future, we very likely will face an increase in the price of oil. This is the energy effect that I just mentioned. Higher energy costs and food prices will drive inflation higher, although not to alarming levels. Nonetheless, this will be pushing wages up in the emerging countries, while unemployment will stay high for a while in the West, where the main consumer markets are. Therefore, we can expect to see the wage differential between those two groups of countries shrink, while transporting goods will become more expensive. In such a situation, it is not unreasonable to think that some manufacturing will come back closer to the Western consumers market. In addition, in the same time, emerging countries should have been able to develop a middle class that will drive domestic consumption, and thus sustain a certain level of economic momentum, even if their exports decrease in relative volume. An interesting consequence of the above would then be global trend towards a more local economy. The currently emerging countries would produce to satisfy their domestic markets and exporting lower surpluses, while the Western countries would repatriate some of the production units back home since it might be cheaper to produce and to transport goods that way to satisfy their own consumers.

Agriculture has followed the same pattern as other industries, and regions have specialized for the foods that they could produce at the cheapest cost. Of course, the cost of production and of distribution to consumers depends largely on the price of inputs, such as energy, fertilizers, animal feed, etc, but from a pure financial, and also climatic, point of view, it could not make sense to try to produce everything everywhere. Thanks to cheap fuel, the model was to go to global trade and transport foods over long distances. This is quite a change compared with the local agricultural model that dominated until the nineteenth century.

This search for the lowest cost of production will not go away, for a very simple reason. The overwhelming majority of the world population has a limited budget and keeping food affordable is an absolute necessity. We have seen during the sharp food price increase of 2008 that it would not take much to create a panic and riots, because even a slight price increase is almost unbearable for most people, especially in developing countries. This is quite a contrast with the wealthy Westerners who claim that cheap food is a bad thing, and that agriculture should be local and small-scale.

Another aspect that is not addressed very often is the actual carbon footprint of food transport. In the partisan debate, most of the arguments focus on the number of miles travelled, but they rarely look at the qualitative aspect of the transport. Depending on whether we transport food by road, by rail or on water, the results vary greatly. For instance, in Brazil, only 5% of exported products were transported by waterway in Brazil, compared to 61% in the U.S. Conversely, 67% of Brazil’s exported products are transported on highways, compared to just 16% in the U.S. In the European Union, almost 90% of the external freight trade is moved by water, and short sea shipping represents 40% of trade within the European Union in terms of ton-kilometers. As you can imagine, the consequences for the environment, as well as in terms of transportation costs differ greatly.

There are also significant differences between transporting fresh foods or frozen foods. A study carried out by Astrid Scholz, Ulf Sonesson and Peter Tyedmers on salmon showed that consuming frozen salmon transported by sea was the better environmental choice for salmon. To illustrate this, their conclusion was “If seafood-loving Japanese consumers, who get most of their fish via air shipments, were to switch to 75 percent frozen salmon, it would have a greater ecological benefit than all of Europe and North America eating only locally farmed or caught salmon.”

Another important parameter in the environmental impact of the distribution of food is the filling rate of the transportation unit. An efficient fleet of trucks that organize back transport for other goods is more efficient than a small truck used by a farmer to bring his products to the city’s farmers’ market 400 kilometers away and who drives back empty.

As you can see, in the choice between global or local, we need to think in pragmatic terms because the reality is more complex than it may seem at first.

The transition from a consumption society towards a maintenance society

Posted on June 22, 2009 by Christophe Pelletier

The days of our consumption society are numbered. We are going to have to find another economic system to prosper in the future as it is part of solving the climate change and CO2 emission issue. Over the last 60 years, all our economy has been based in encouraging consumer demand for goods that have been produced with relatively very cheap energy, very cheap raw materials and as cheap labour as possible, with as cheap credit as possible. This has lead us where we are, which is a group of very wealthy nations wasting very precious resources, to the point of exhaustion and suffocation. Although some still try to resist and deny the obvious, this system is no longer sustainable and we must rethink what should drive our economy. In an earlier article, I made a reference of how previous generations used to be very cautious about what and how they consumed. The positive side of the last 60 years has been the incredible progress we have made in science, knowledge and technology, which offers possibilities unthinkable for the previous generations I was referring to. We understand our world and how it functions like never before. We have all the technological solutions to solve the climate issue, but the key is the will and the determination to change and to act. This cannot happen as long as we keep thinking the economy in terms of growth only. Growth will not go on for ever, simply because our space and our resources are limited. As there are more and more people needing more and more energy, food and other goods, the law of offer and demand will rule. Prices will inevitably go up and consumption will slow down. A new time has come. The priority must now be quality, not quantity, we must think about having enough, not having always more. This thinking is not a nostalgia to a past that also had its limitations. It is not about rejecting a market-based economy. It is about looking at the market that has always been here, but that has been pushed in the background for the easier approach of just producing more and selling it. What we will have to bring to market is not so much products as services. These services are the ones that are directly related to making all the natural and industrial cycles run harmoniously in a durable way. Just to name a few examples, I would mention all activities that are related to cleaning the damage we have caused, and recycling activities will become more and more important in our whole economy. In the same way, water treatment is going to be a crucial activity, even more so than it has been so far. Clean industries producing durable goods and services will prevail. This change will also make some jobs disappear and some appear or even reappear. As usual change always brings opportunities. It is to us to recognize them and to take them. The time has come to make the transition from this consumption society, based on wasting resources, and with no future, to a maintenance society, where wealth, and not growth, will be the economic success indicator. By acting today, we can ensure this process to happen in a smoother way than if we wait until we have no choice anymore.

Photos from AgriVision 2009 – Feeding the globe in 2050

Posted on June 19, 2009 by Christophe Pelletier

Here is a link on a photo report published in World Poultry about the recent AgriVision 2009 held in the Netherlands.

Their objective was to answer the question of how to feed the world population by 2050, which is the basis of my own quest.

They seem to have come to rather optimistic conclusions. This is good news, but that will require the proper leadership as well from the world of politics as from the business world.

Managing water is paramount for the future of food production

Posted on June 17, 2009 by Christophe Pelletier

With an increasing population that needs more food and more water to live, we can expect that water is going to become a highly strategic and needed resource. As climate changes, the current rain distribution and geographic availability of water is likely to change dramatically, too. This increasing competition between agricultural areas and urban areas will bring major changes on how we use water for both personal use and for food production. On the personal side, we certainly can expect that current bathroom systems to disappear, as they use too much water. Every time we flush a toilet tank, we actually waste the daily drinking water needs of a couple of people, and local water reserves are gradually depleted as well. Clearly, this has no future. Similarly, we can expect the legislation on water use for lawn sprinkling and car washing to change.

Food production will become more and more focused on water efficiency. The main themes will be about taking what we need, but no more, and about collecting, conserving and recycling water. This will bring us to rethink our crop production, the watering systems we use and develop systems aimed at collecting and conserving water.

Our choice of crops will get under review. Some plants have such high needs for water that their production systems will have to be altered, or maybe even we will have no other choice of limiting them to small selected areas. The use of combined crop productions on the same field is likely to gain some popularity back, as this is a way of saving water and protecting the plants and the soil from excessive evaporation. This, of course, will mean a different look on yields and on harvesting systems. More efficient irrigation systems will replace the old ones. Computerized systems are already in use in wine production, using sensors for humidity and temperature, to determine how much water the plants needs at the most optimal time of the day and deliver it at the exact spot. You can expect that such an optimization approach will prevail. The path that Monsanto follows with the production of genetically modified (GM) wheat that needs only a third of regular wheat varieties is quite interesting. The tricky part is the GM part, as on the contrary to natural “mutations”, such a process does not undergo natural selection, and therefore we do not know what possible side effects it might bring. Nonetheless, this is an attempt to deal with future water shortages. Hopefully, other less controversial solutions can be found that will deliver a similar result. Once again, we can shape our future through continuing innovation.

Food processing, such as slaughterhouses or washing stations for produce, uses large amounts of water. In these sectors, too, new more efficient systems will have to be designed to reduce water use, and they will have to guarantee to meet hygiene and food safety standards. Water treatment and recycling have already been in use for years and they will continue to gain market share.

Next to the above, which is mostly in the hands of individuals and companies, there is a need for political action to address water shortages and water quality issues that expand far beyond the local operations. A number of agricultural areas suffer from drought on a regular basis, such as Australia and some parts of Canada. Other areas have seen the flow of rivers drop dramatically, like for instance the Yang Tse River in China, which has more and more difficulties to reach the sea. In other areas, such in the Arabic Peninsula, the countries realize that traditional irrigation systems are meeting some serious limitations because of the competition between need for drinking water and need for irrigation. Some very interesting projects are in the works to offer alternatives. For example, there are studies to consider the use of floating islands covered with solar panels in order to produce on the spot the energy necessary to desalinize seawater, therefore providing these areas with water that does not originate from underground reserves.

These problems affect the availability, the quality of the water and strongly affect the environment. Failure to address and more importantly to solve such problems properly would have catastrophic consequences for large populations. A balanced plan to offer the availability to water for people, agriculture and industries is absolutely necessary.

Sustainability: As Natural As Balance

Posted on June 2, 2009 by Christophe Pelletier

With the increasing awareness about climate change and our endangered environment, sustainability has become a widespread concept through all industries and the food value chains have embraced it like everyone else.

Yet, I do not quite understand why sustainability seems to be such a “revelation”, or even almost a revolutionary idea. Sustainability is the way that our societies have lived for thousands of years, probably because scarcity of goods made conserving and recycling a necessity of survival. Only over the last 50 years or so have we seemed to forget about it, because of our consuming frenzy and the abundance of goods that we thought to be about infinite.

To put the importance, and the obvious need for sustainability, let’s just look at its definition. What is not sustainable disappears. There is no need for any further philosophical or political discussion. Survival can (note that I only say can) come only from sustainability. All processes in nature that deal with life are all about recycling of organic matter in one form or another, and about balance. If the environment is favorable for a particular species, you will see this species thrive and its population grow quite strongly, to the point that it exceeds its abilities to provide for itself in its original ecosystem. Then, it starts to use more and other resources that nature can replace at the natural pace and this always results in a strong reduction of the population, as the weakest cannot find food and perish, or as the population density helps the spreading of diseases much faster than it would otherwise. Does this sound somehow familiar?

The soil that feeds us There are many discussions in scientific, economic and political circles about whether we have reached such a stage either regarding pandemics or regarding food supplies. The specter of pandemics recently raised its head with the “swine flu” originating from Mexico. Last year, there were severe disruptions of food supplies in some parts of the world, not as much as the result of an actual shortage, but as the result of prices skyrocketing and fears that food would run out.

Are we about to run out of food? Malthus was warning about such a risk in the early nineteenth century, but since then, the world population has increased far further than he estimated was possible. Today, we probably are not in that dire a situation, yet the main food supply issue is more one of distribution between geographic regions. Some parts of the world are underfed while others die of all sorts of ailments related to overfeeding. This is more a matter of politics than purely of agricultural (including seafood) potential.

Sustainability is about allowing nature to do its work at its own pace. This is all about staying in balance and keeping natural cycles complete their courses. Since you cannot live without eating much more than 2 months, you cannot live without drinking for much more than 2 days and you cannot live without breathing for much more than 2 minutes, these cycles can be reduced to just a few critical areas for life:

The cycle of air, necessary to remove, or to help nature remove the contaminants, so that air remains breathable.
The cycle of water, necessary to remove, or to help nature remove, the contaminants that can make it undrinkable.
The cycle of soils, necessary to preserve the fertility of the soils, and thus allow a continuous agricultural/livestock production to feed people.

Agricultural challenges ahead This is why, with a growing human population, agriculture and food production at large, managed in a sustainable manner, will become increasingly strategic in the future, and sensible management of water resources will be a key factor for the success of agriculture as well.

Biofuels may be a non issue

Posted on May 23, 2009 by Christophe Pelletier

Biofuels is a topic that divides many people. To some, it is a solution to reduce dependence on oil, and to others it is an insane idea.
I do not think that biofuels will be a discussion topics for very long, and here is why.
Very likely, the future of cars will be electricity. Inevitably, at some point oil prices will rise again to very painful levels and stay there. This is what will make alternative energy sources economically interesting, even without government subsidies.
One of the major opposition to the electric car is being handled in a very smooth way by the Obama administration. General Motors and Chrysler were strong opponents of the electric car, and helped send it to the landfill for a while, but neither company is around anymore. The Obama administration just put an end to the outdated automobile gas guzzler model once and for all, with the new regulations on gas mileage and car emissions. Fact is that an important page has been turned for good.
Just realize that if all US cars have a similar mileage as their Europeans counterparts, the gasoline use would reduce to substantial amounts, in the vicinity of an equivalent of 80-100 million cars less (old US mileage standards). Normally, this should make the price of oil drop, therefore reducing the need for biofuels. And when oil prices increase again, then electricity will take over.
Other signs that biofuels do not have that much of a future is the lack of excitement from the investment community for it. Wind energy attracts investors (for instance think of Boone Pickens’s energy plan). Solar energy attracts investors. But biofuels? The main party that seems to be pushing for it is Brazil, for internal reasons mostly.
The fundamentals do not look good for biofuels, either. They score negatively on all three bottom line criteria.
As such, this is good news for food supplies. If biofuels made out of edible grains do not have much of a future, the situation is different when it comes to biofuels made out of cellulose. These probably have a decent future, as they do not compete with human consumption, and can be a good way of using and recycling materials that further would be of little interest.

The Great Unseen Land Grab

Posted on May 21, 2009 by Christophe Pelletier

Interesting article from The Economist on how some countries are already organizing and securing their food supplies for the future. Major political-economic chess game in the running.

Buying farmland abroad – Outsourcing’s third wave

It connects quite well with my previous article about Jim Rogers buying land in Canada and Brazil.

And it also connects well with the move made by the Canadian investment firm Sprott Asset Management to secure a land lease of a million acres in partnership with First Nations on the Canadian prairies to grow crops as an investment in agricultural commodities.