Date posted: 7/01/2020 5 min read

The changing economics of feeding the world

A recent J.P. Morgan report looks at how climate change and population growth could affect agricultural markets.

In Brief

  • Crop yields have risen dramatically in recent times, but at the same time produce prices are at historically low levels.
  • An estimated 50% increase in food crops will be required over the next 30 years.
  • The effects of climate change will put upwards pressure on produce prices.

By Jessica Sier

The advent of precision farming and the profound effect of technology on agricultural yields have allowed humanity to unlock a new level of food production efficiency.

However, according to Feeding the World – The Future of Global Food Security, a recent report by J.P. Morgan, farmers are beginning to question the financial viability of their operations as corn, wheat, rice and soybean prices face sustained and heavy pressure.

Although crop yields have risen dramatically, at the same time prices have been at historically low levels. For example, in 2012 corn sold for US$330 per tonne; today the price is US$160. Wheat has gone from a high of US$350 per tonne to US$200 per tonne.

The impact at the farm gate is alarming. According to the US Department of Agriculture, net farm income has fallen by more than half since 2013. For every dollar that consumers spend on food, the farmer receives just 14.8 cents.

Report author Tracey Allen, an agricultural commodities strategist at J.P. Morgan, says these low prices are due to factors other than supply and demand; it’s to do with changing trading patterns in the agricultural commodities market.

Blame commodities traders

Allen points to the rise of automated trading – both algorithmic trading and price-following strategies – and the short-term horizons of many commodities market participants, for depressing prices.

The absence of stable long-term investors – such as the European pension funds that withdrew their investment from the sector in 2013 due to concerns they were inflating food prices – has meant markets have failed to find long-term support for food prices.

“In my view, this has accentuated the impact of price-trend followers in the market,” says Allen. “These days there are very few long-term investors holding positions based on a specific view on the commodities.

“With many of the dollars once invested with a long-term view on agricultural markets getting reallocated to systematic funds, prices have been pushed lower, ignoring basic production economics.”

The US-China trade war has also had an impact.

“China has effectively stopped buying US agricultural products, so that has put a lot of pressure on prices,” Allen comments.

“When you have incidents like the US-China trade war, there’s no confidence from the major market participants and prices can go into large selling spirals.”

“When you have incidents like the US-China trade war, there’s no confidence from the major market participants and prices can go into large selling spirals.”
Tracy Allen, J.P. Morgan

What are the changing fortunes of climate change?

J.P. Morgan data predicts that within the next 30 years the global population will grow from 7.6 billion to 10 billion, resulting in an estimated 50% increase in the amount of food crops required. Thanks to rising middle class incomes in economies such as China and India, the bank expects a 70% increase in meat demand.

To date, however, evolving farming techniques have easily kept up with population growth.

“Investments in technology have enabled crops to withstand more intense periods of heat and moisture stress, so despite the growth in consumption, we’ve basically seen supply outstripping demand in recent years,” says Allen.

But the threat of climate change looms large, with the bank expecting extreme weather events such as heatwaves, hurricanes or floods to hamstring supply, putting upward pressure on prices.

The likes of Australia, New Zealand, southern Chile, Argentina and South Africa, currently known as food bowls, are likely to suffer as droughts and flooding picks up in low-lying areas. However, regions in the northern hemisphere such as Russia, Scandinavia and Canada could see an improvement in agriculture.

According to Allen, the lack of cohesive global policy to combat climate change will compound the worsening environmental conditions and assist in boosting prices for the likes of corn, wheat, rice and soybeans.

“We fear that the world is making precious little effort to keep global warming below +3°C by 2100 and thus think it worthwhile adding some hedges against temperatures rising to over +4°C by 2100.

“For that reason, the advice for investors is to hold a broad long in agricultural commodities, and in particular wheat, the crop most vulnerable to water scarcity, as a hedge to the worsening impacts of climate change,” she says.

What are the world’s most important crops?

What are the world’s most important crops? Picture: The world’s most important crops. Source: Statista, Soybean.org.

CORN: Corn is the world’s most produced grain, used mainly as food for livestock and humans and in ethanol production. The US, China and Brazil are the leading producers and consumers.

WHEAT: Wheat has been a staple food source for more than 8000 years. It is the most important source of carbohydrate in most countries. China, the US, India and France are the biggest producers.

RICE: With most corn being used for animal feed, rice is the most important grain for human consumption. More than 90% of the world’s rice is produced in the Asia-Pacific region, with China and India being the main producers.

SOYBEANS: The world’s main source of animal food, production of soybeans has grown 350% in the past 30 years. The US, Brazil and Argentina are the main producers while China is by far and away the world’s leading importer, consuming more than double the amount of the US, the second-largest consumer.

Source: Statista, Soybean.org.

Read more:

Read the J.P. Morgan research Feeding the World – The Future of Global Food Security

Read it here