In the last decade or so we’ve seen regular bouts of record-busting food prices. This is the market’s way of warning us that our supply of the stuff is running low.
And as the global population grows and also becomes wealthier, demand for food will only keep rising.
Clearly, rising prices are bad news for consumers, and particularly for the world’s poor. But these price spikes aren’t entirely bad. In the long run, higher prices encourage farmers and food processors around the world to raise food production.
Suffice to say that growing populations and richer diets mean the world’s farmers will need to produce a lot more food in the future. And Latin America is the perfect place to do it.
The first essential in farming is that you need the right conditions to grow crops. Latin America has these in abundance.
Take South America. It’s divided between mountains, jungle, flatlands and coastal regions. This diversity is good for farmers because – aside from extremes such as Chile’s arid Atacama desert or the frozen southern tip of Argentina – it means that almost anything can be grown there.
To the south, the cool slopes of the Andes provide the perfect conditions for wine production. To the west of the mountains, the temperate prairie-like pampas give Argentina, Brazil and Paraguay excellent land for rearing cattle and growing grains. Indeed, thanks to the pampas, Argentina and Brazil are two of the world’s ‘big six’ grain growers, and major livestock producers.
As you move north towards the equator, the four seasons merge into two. This means farmers in Ecuador, Colombia, Venezuela and northern Brazil can plant two harvests per year.
Meanwhile, countries on the east coast benefit from the warm waters of the Pacific and have strong fisheries. Chile and Peru are both in the world’s top ten fish producers.
Once you reach Central America, the tropical climate provides the perfect conditions for sugar cane, coffee and tobacco.
Latin America still isn’t using all of its farmland. For example, the UN’s Food and Agriculture Organisation reckons that Brazil has the most ‘spare farmland’ in the world. The country has 350 million hectares of potential arable land, which isn’t currently being used to produce food.
Latin American farmers have suffered “a great lag in the increase of yields” over the last 50 years. There are some highly productive farms in Argentina, Uruguay and Brazil, but many of the region’s farms rely on out-dated techniques and machinery.
The problem is that Latin American countries “invest little in R&D in agriculture”, says the IICA. But now, thanks to the generous prices on offer, and a more investor-friendly political atmosphere, that’s changing.
In the cattle-farming industry, it is said that it takes 6 kg of grain to produce 1 kg of meat, so 1.3 billion Mainland Chinese changing their diet to eat much more meat will severely strain the resources of a planet already struggling to feed a growing population. Chinese dairy consumption is rising by 20% compounded per year. That sort of growth requires a lot of feed and land to grow it on.
The investment yields on farmland are in general lower than you might think. But properly managed farmland (bought at the right price) can be a nice alternative asset.
I could make the case that agricultural land is yet another form of gold. It too is central bank insurance. Over the long term, its value will rise in relation to the fiat currency in which it was purchased.
Demand is far outpacing food supply, farmers continue to retire around the world, and global inventories and feed stocks are now hovering at historic lows.
Add in lingering concerns about last season's crippling drought and potential food shortages in the future, and it's easy to understand why corn was a top performing asset in the second half of 2012 and will likely remain so for the better part of the decade.
And it's not just investors pointing out why food prices are likely heading north.
According to the United Nations, the world population is set to grow to nearly 9 billion by 2040, up from 7 billion today.
But the real driver of food demand stems from rising global wages and a three-billion-person expansion of the global middle-class, which points to exponential growth in demand for food.
According to U.N. estimates, the world will require a 50% increase in food production, a 45% increase in energy, and a 30% increase in water. But while these problems might scare the average person, such concerns have long been alleviated by the agricultural sector's resilience and unrivaled ability to innovate in order to meet new challenges.
Another bubble that is forming and will pop is agricultural land in many places in the United States (although agriculture in other countries can be found at compelling values). The bubble really started going once the Fed started its Code Red policies. Land prices in the heart of the Corn Belt have increased at a double-digit rate in six of the past seven years. According to Federal Reserve studies, farmland prices were up 15 percent last year in the most productive part of the Corn Belt, and 26 percent in the western Corn Belt and high plains. Iowa land selling for $2,275 per acre a decade ago is now at $8,700 per acre. As you can see from Figure 9.2, the increase in farmland prices beats almost anything the United States saw during the housing bubble. A lot of banks in the Midwest will have problem with their lending.