In the first half of 2011, the price of pork-a staple meat in
the Chinese diet-surged nearly 40 percent, hitting consumers'
disposable incomes hard. To combat runaway prices and ease supply
shortages, the Chinese government resorted to releasing frozen pork
supplies from its 200,000 metric ton national pork reserve. And
food prices were one of the key drivers of the spike in China's
official inflation figures to a high of 6.5 percent last July,
prompting the government to raise interest rates and hike bank
China's ongoing struggles with food price inflation aren't
unique. A spike in corn prices in Mexico in the summer of 2008 made
corn tortillas, a national food staple, unaffordable for most
Mexicans and sparked large-scale riots in parts of the country.
And in some countries across the Middle East and North Africa,
food accounts for more than 40 percent of the average consumer's
budget. A rapid rise in food prices was a major cause of civil
unrest in several countries during last year's Arab Spring.
The cost of agricultural commodities rarely receives as much
media attention as the price of oil in the developed world, but
it's of paramount importance for most fast-growing emerging
A Long-Term Secular Shift
According to the World Bank, the global population is set to
rise by nearly one-third between 2010 and 2050, from 6.9 billion to
over 9 billion, adding to the challenge of meeting global food
demand. But contrary to popular belief, the biggest problem isn't
the number of new mouths to feed, but a major secular shift in
diets across the emerging markets.
As consumers' disposable incomes rise, diets become more diverse
and meat consumption tends to increase. In the least developed and
poorest countries in the world, the vast majority of calories
consumed are in the form of basic cereals, such as rice and wheat.
In Bangladesh and Chad, for example, cereals account for 78 percent
and 61 percent of total calories consumed by the average citizen,
respectively. In Chad, the average consumer eats less than 15
kilograms of meat and fish per year, while in Bangladesh the total
is less than 4 kilograms.
By contrast, in a developed, industrialized economy such as
Germany or the U.S., basic cereals typically account for just 20
percent to 25 percent of the total diet, and the average consumer
eats well over 100 kilograms of meat per year. There are historic,
religious and cultural dietary differences between countries, but
consumption of more expensive and resource-intensive products such
as alcohol, fresh vegetables, fruits and edible oils also tends to
rise with income.
Fast-growing emerging markets lie somewhere in-between these two
As the chart above shows, consumption of meats in the BRIC
countries-Brazil, Russia, India and China-has risen from about 29
kilograms (64 pounds) per capita in 2001 to more than 35 kilograms
(77 pounds) at the end of 2010, a gain of more than 20 percent.
Nevertheless, the average consumer in the BRICs still consumes less
than one-third as much meat as their counterparts in North America.
And despite China's cultural taste for pork, the average Chinese
consumer still eats less than half as much meat as their peers in
the U.S. and Canada.
But that gap is closing and continued strong economic growth
means that the diets of citizens in the emerging markets will
continue to evolve toward a greater resemblance to those of
consumers in the U.S. or Western Europe.
From an agricultural standpoint, this well-established trend
presents a significant challenge because meats, fruits and
vegetables are far more agriculturally intensive products than
basic cereals. It takes 7 kilograms (15.4 pounds) of feed grain to
produce 1 kilogram of beef (2.2 pounds); 4 kilograms (8.8 pounds)
of grain to produce 1 kilogram of pork; and 2 kilograms (4.4
pounds) of grain to produce 1 kilogram of chicken. As consumers
increase their meat consumption, there's a massive multiplier
effect-demand for grains grows at a faster pace than meat
And it's important to note that these consumption figures are
measured on a per capita basis. The BRIC countries account for
nearly one-third of the world's population-even small changes in
per capita meat consumption can have a dramatic impact on the total
tons of corn and soybeans needed to produce feed.
An equally important issue is how the world's producers will be
able to meet fast-rising global demand for key agricultural
products like corn and soybeans.
Even as the global population grows and demand for key grains
like corn and soybeans increases, the amount of arable land
available worldwide has actually fallen over the past two decades.
Some of the largest recent losses in arable land have occurred in
countries that have fast-growing demand such as China. One of the
big challenges China faces is desertification, a process where
increased use of water resources means that some formerly arable
land is turning into barren desert.
As the chart above shows, in 1961 each hectare of land (2.471
acres) had to feed less than 2.5 people. But by the end of 2008,
agricultural intensity had doubled and that same hectare of arable
land needed to feed about 5 people globally. And it's only going to
get worse: The United Nations optimistically predicts 10 percent
global arable land growth by 2050 to support another 30 percent to
35 percent jump in the size of the population.
That might seem like an impossible feat, but it's actually part
of a long-term trend that began during the Agricultural Revolution
of the 18th and 19th centuries. The secret behind such gains is the
increase in crop yields, the amount of corn or wheat that a single
acre of land can produce. Over the past few centuries, farmers have
developed numerous methods to increase productivity, including crop
rotation techniques, better irrigation, the use of machinery to
harvest and plant crops, pesticides and herbicides to decrease
plant stress, fertilizers and, most recently, the use of
genetically modified ((
GM crops may be controversial, but they are a major contributor
to the growth in agricultural productivity. Modern GM variants are
being designed to exhibit certain beneficial traits, such as
resistance to pests and drought conditions. While few think of
farming as a high-tech business, GM seed companies such as
U.S.-based Monsanto (
) are developing corn and soybean seeds that offer 10 or more
"stacked" traits in a single plant, boosting yields per acre to
The gains from rising crop yields have been dramatic. In 1960,
world farmers could, on average, extract 1.95 metric tons of corn
from a hectare of land compared to more than 5 metric tons from the
same parcel of land today. Yield gains are evident for wheat,
soybeans and rice and will be necessary in the future to support
demand from emerging markets.
Although the introduction of GM crops has certainly helped push
up yields in recent years, proper fertilization remains one of the
most important steps farmers can take to boost yields. Global
fertilizer sales are roughly $200 billion annually, making it among
the more investable themes in agriculture.
Crops remove certain nutrients from soil over time, and if that
process goes unchecked, yields per acre will drop precipitously. To
replace those nutrients, farmers must fertilize their soil. The
amount and types of fertilizer used depend to a great extent on
varying soil conditions in different parts of the world, as well as
the type of crops being cultivated.
There are three main types of fertilizer used in the world
today: potassium chloride (potash), phosphate and nitrogen.
Potassium chloride is mined from ore deposits created when
oceans and seas dried up millions of years ago. With the passage of
time, most of the world's ores have been covered by earth and are
now located deep underground.
To create potash that's used for crops, the potassium chloride
is separated from impurities such as salt, and then dried and
prepared into either solid pellets or a liquid product.
The largest producers of potash in the world, based in Canada,
Russia and Belarus, account for about two-thirds of total global
output. Because there are only a handful of global producers, about
80 percent of global potash supply is traded across international
Fruits and vegetables account for nearly one-quarter of global
potash consumption. Corn and rice are also big potash consumers,
accounting for a further 28 percent of the global market
Phosphate is also mined from underground ore bodies created from
ancient sea life. Phosphate fertilizer is typically combined with
ammonia to produce solid fertilizers known as DAP and MAP. Sulphur,
which is mainly derived from oil and natural gas
refining/processing, is a key raw material for converting phosphate
rock into usable fertilizer.
As with potash, production of phosphate is concentrated in a
handful of countries. China is the largest producer, followed by
the U.S. and Morocco. The latter is the largest exporter of
phosphate in the world because the U.S. and China consume most of
their phosphate production in their domestic agricultural
Because the largest producers of phosphate also tend to be the
largest consumers, only 20 percent of global phosphate supplies
move across international borders. The crops for which phosphate is
in high demand include: fruits and vegetables (18 percent of total
demand), wheat (16 percent), corn (12 percent), and rice (12
Nitrogen is the most common element in the air; however, plants
rarely make direct use of atmospheric nitrogen. Nitrogen-based
fertilizer is made from ammonia that is synthesized from natural
gas. In fact, natural gas accounts for as much as 90 percent of the
cost of making ammonia.
Urea is the most common form of nitrogen fertilizer, accounting
for about half the world market. And most nitrogen fertilizer isn't
traded, but is used close to where it's produced. The biggest crops
for nitrogen fertilizer are corn, rice, and wheat, which account
for half of total global nitrogen use worldwide.
Demand for all three types of fertilizer has been on the rise
generally in recent years and that trend is likely to continue.
Agricultural chemical inputs, including pesticides, herbicides,
fertilizers and GM seeds, account for between one-quarter and
one-third of the cost of producing crops. Demand for fertilizer
commodities and the price of the main types of fertilizer are
sensitive to underlying crop prices and farmers' income. If the
supply of crops looks plentiful in a given year, then farmers can
dial back their fertilizer consumption to cut costs, accepting the
lower yields that result.
Strong growth in emerging market demand for key crops such as
corn and soybeans coupled with the need to grow more crops on less
land has led to a sustained, secular shift higher in global
agricultural commodity prices. In order to incentivize farmers to
spend more money on fertilizer, GM seeds, and massive new combines
and tractors, agricultural commodity prices will remain elevated.
That will support fertilizer producers' profits over the long
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