I was listening to Bill Doyle, the CEO of PotashCorp, this weekend. For those that are reading this blog who question what the agricultural story is about, I would recommend that you go to the PotashCorp website and spend about a half hour listening to his comments at the Goldman Sachs Agricultural and Biotechnology conference.
The story is not quite what you hear in the media. It is not a story about ethanol and biofuels. And it is not a story about one-time droughts in Australia leading to a short-term spikes in wheat prices and other grains.
What the story is about is the shift of 80% of the world’s population from low-protein diets to higher protein diets.
History has shown that when people move to an income above $3000 per year, they begin to spend money improving their diets. In fact, they spend a disproportionate amount of their additional income on improving their diets, moving up the food chain to higher protein foods.
We are now at a time in history where a disproportionate amount of the world’s population is approaching and exceeding that $3000 per year threshold.
The Story is a Food Demand Story.
“We are in a long term fundamental human development story that is extraordinarily powerful. It is going to take years. We are going to go through this process of increasing food to meet the protein demand of hundreds of millions of people that are coming into the time when they can afford to eat protein. It is enormously powerful, and if you don’t believe it, visit India and China and take a look at the food markets and come back and we’ll talk about it.”
This is a human development story. I can't stress that enough. For me, once I recognized that this is a human development story, then the only question that needed to be answered was whether its sustainable.
That's where the theories of Jane Jacobs, Walt Rostow, and to a certain extent economists like Paul Romer and Robert Lucas have become so crucial to me. Because these folks have outlined the process by which development occurs. They have taken the empirical evidence of how societies have developed in the past and come up with general theories of how development takes place. And those theories are identical to what is now unfolding in China, in India, and around the world.
The process is one of cumulative expansion. This is not China or India unsustainably relying on exports to the United States. This is these countries internally replacing the goods that they previously imported, and in the process building up capacities in their cities where they will be able to replace more imports, and create new innovations.
Rostow called it "compound interest" development. To quote Guilermo Algaze, an athropologist who has written about the exact same process occuring in the very first human civilization ever, that of Southern Mesopotamia:
"At it simplest, [it] involves the recognition that forces of production and urbanization are interlocked in a circular process whereby a change in one causes a change in the other... [resulting in] expanding urban employment, drawing in workers from the countryside and other regions, and in doing so, expanding both the local markeet and the range of skills possessed by the population."
It happened in Southern Mesopotamia. It happened in Egypt, later it happened in southern Europe and then northern Europe. It happened in Taiwan, Korea, and in Singapore. And now it is happening on a scale that would have been previously unimaginable.
Back to Agriculture
Up until now, the world has not done a good job in creating agricultural productivity to meet the rising demand. Instead, we have been ‘drawing off of our savings account’. As a result, global grain stocks are at decades low levels. Decades low. In January, the USDA lowered its world grains stocks-to-use ratio for the 2007/08 crop year to a record-low 14.1 percent.
The only solution to this problem is to increase productivity. The alternative, bringing on new acreage, is not going to work. To quote Doyle:
The only acreage really available globally of any substance is in Brazil. And I think you will see some of that acreage coming. Brazil will focus on the existing acreage. China has no more acreage, they set the redline of 296m acres that they will not go below…”
Moreover, the acreage in the developing world is decreasing per capita as these countries expand.
Productivity increases are the only solution.
The Worry of a Crisis
Donald Coxe has pointed out, our inability to improve productivity fast enough is leading us down a treacherous path.
“We're drifting towards a global food crisis in the next very few years. And none of these other alternative fuels can do more than postpone that by a few weeks or months. All we need is a crop failure in the Midwest - not that I'm predicting that but we're overdue for one - and then we're going to have the worst global food crisis that we've ever seen.”
$10 wheat, $13 soybeans, and $5 corn may be just the beginning.
How do we increase productivity? There are a few ways. We improve the nutrition of crops. We improve the planting techniques we use. And we improve the species we plant.
Fertilizer. Precision agriculture (such as GPS, auto-steering, etc). Biotechnology. These are the solutions available.
IMO, these are the investments that you want to be aligned with. Yes, they seem expensive in some cases. But keep in mind that they are expensive based on current and past prices. If the human development story continues to play out along the lines that it has past prices will not be an indicator of future performance. Future performance will far exceed anything that has taken place up until now.
I would invite you to go and listen to Doyle talk and to draw your own conclusions. The conclusion that I draw is clear:
“The movie hasn’t even started yet”.