The Land Commodities Global Agriculture &

Farmland Investment Report 2009

A Mid-Term Outlook

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Executive Summary

Chapter 1

An Introduction to the Relationship between Agricultural Commodity Prices, Cropland Availability and
Farmland Values

Chapter 2

Agricultural Productivity and Commodity Prices in a Historical Context

Agriculture in a Historical Context
The Recent Commodity Boom A Cyclical Normality or a Fundamental Shift?

Chapter 3

The Resource Scarcity Debate Is the Planets Carrying Capacity at or Near a Tipping Point?
The Malthusian Debate
The Current State of the Debate
Technological Innovation and its Implications with Respect to Farmland Values in the
Foreseeable Future

Chapter 4

Commodity Price Forecasts and the Implications for Farmland Values

The Challenge of Predicting Future Commodity Prices
Commodity Price Forecasts According to the United Nations, OECD and World Bank

Chapter 5

The Limiting Effects of Diminishing Returns and the Implications for Global Food Production

Chapter 6

Population, Economic Growth and Other Demand Drivers

Increases in Food Demand Due to Population and Economic Growth
The China Factor
The Importance of Livestock, Meat and Other Animal Products
Shifts in Dietary Preference and the Effect on Food Demand
Forecasts of Future Demand for Meat and Animal Products
Trends in Urbanisation and the Effect on Food Demand
Food Wastage Trends and the Implications for Food Demand
Increased Market Volatility and Low Food Stocks and the Implications for Commodity Prices
The Effects of Rising Demand on Policy Decisions and the Implications for Agricultural
Commodity Prices

Chapter 7

Constraints to Current Supply and Limitations to Further Increases in Agricultural Productivity

Impacts of Climate Change and Human Induced Disasters
Impacts of Water Scarcity
Impacts of Drought
Impacts of Species Infestations
Loss of Cropland and Reductions in Agricultural Productivity Due to Land Degradation

Loss of Cropland Area Due to Urban Development

Limitations to Future Cropland Expansion and the Implications for Future Increases in Production
Capacity
Ecological Constraints to Cropland Expansion
Global Carrying Capacity and the Implications for Cropland Expansion
Socio-political Constraints to Cropland Expansion
The Limitations of Neo-colonialism and the Implications for Future Increases in Production Capacity
Forecasts of Future Expansion of Total Global Agricultural Land

Chapter 8

Price Elasticity of Demand for Food and the Implications for Future Agricultural Commodity Prices and
Farmland Values

Chapter 9

Fossil Fuel Shortages and the Potential Consequences for the Agricultural Economy
Trends in Biofuel Consumption and the Increasing Correlation between Energy and Food
Peak Oil and the Implications for Agricultural Commodity Prices and Farmland Values
Supply Side Implications of Peak Oil and Gas

Chapter 10

Farmland as an Asset Class

Investor Appetite for Farmland under Current Market Conditions
A Note about the Perils of Assumptions Based on Historical Data
Farmland as a Portfolio Diversification Tool
Farmland as an Inflation Hedge
High Level of Capital Security and Low Level of Risk
Farmlands Superior Risk- Adjusted Returns
A General Look at Farmlands Performance against Other Asset Classes
Investment Appeal in Times of Market Turmoil
Farmland as a Real Estate Investment
Fiscal Advantages of Farmland Investment

Chapter 11

Investing In Agriculture Guidance for Investors

A Comparison of Agricultural Investment Strategies
A Discussion about Portfolio Weightings in Farmland Investment
Things to Consider When Choosing a Direct Farmland Investment
Risk Considerations in Direct Farmland Investment
Current Market Conditions and the Implications for Investment Timing
Liquidity and Investment Horizons in Farmland Investment
Choice of Geographic Location - Factors to Consider

Chapter 12

Conclusion

Executive Summary

Population growth, resource scarcity and climate change are

the three defining economic trends of our modern times.
Individually, each constitutes a major issue, but they are all
the more potent by virtue of being inextricably linked. Over
time, their paths will increasingly converge and their effects
on global commerce will become ever more pronounced.
Any sector positioned at the nexus of their convergence
will offer investors the best mid-term opportunity and the
potential for stellar returns over the long-term.
Agriculture is one such sector. With more mouths to feed,
increasingly affluent populations in developing countries
demanding a higher protein, more resource intensive diet and
the emergence of biofuels, world demand for agricultural
commodities is soaring. Yet on the supply side, keeping up
with rising demand is becoming increasingly challenging due
to climate change, fundamental limits to further growth and
a plethora of pressures on existing production.
Per capita production of grain has been in decline since
the mid 80s and per capita availability of agricultural
land since well before that.1 In 2008 this state of affairs
culminated in the lowest global grain stocks for over 40
years and the most pronounced increase in agricultural
commodity prices on record.2 Although the second half of
2008 saw a downward correction in grain prices, they have
since resumed their upward trend despite the worst global
recession in two generations. World food production sits at
the cusp of a new era characterised by simultaneously (and
in many cases exponentially) increasing pressure from both
supply and demand forces.
Every day the total population of planet earth increases by
over 200,000 people.3 There are 1,402 million hectares of
arable land, 138 million hectares of perennial croplands
and 3,433 million hectares of pasture lands feeding the
current population of 6.7 billion (2009).4,5 The total of 4,973
million hectares of agricultural land amounts to an average
of 0.74 hectares per person. In addition to industrial crops
like cotton and rubber, each of these 0.74 ha units must
produce almost all the food each person consumes.
Based on these figures, and assuming the same conditions
and levels of agricultural productivity, an additional 148,460
hectares of land are required daily to feed the 200,000
new arrivals. To put this into perspective, 148,460 hectares
(1,485 km2) is an area roughly the size of Greater London
(1,580 km2) or twice the size of New York City (789 km2),
Tokyo (617 km2) and Singapore (701 km2).6 Whilst this is
a much simplified calculation, it clearly demonstrates the
extreme demand pressure being placed upon the worlds
agricultural land resources. In reality, the world is not adding
anything like this amount of agricultural land on a yearly, let
alone daily basis. Indeed, for the last three consecutive years
the record shows that total global agricultural land area
(and the arable subcomponent) has actually diminished.7

These startling figures dramatically illustrate the challenge of

feeding the worlds exponentially growing population with
an arithmetically growing farming base. The consequent,
increasing scarcity of farmland has resulted in rapidly rising
farmland prices across almost all regions of the world.
Farmland values are driven by the relationship between
demand on the one side, driven primarily by the profitability
of agricultural enterprise, and supply of productive
farmland on the other. More specifically, rising demand for
agricultural commodities will exert demand side pressure
on farmland values, whilst the restrictions on cropland
expansion will exert supply side pressure.
The interrelationships between supply and demand for
farmland are complex. Demand for land increases when
commodity prices rise. In response, supply increases if
further land is brought under cultivation. However, there are
many other factors at play. For example, efficiency increases
or yield enhancing technologies might mean that less land
is required to produce the greater supply of commodities
required in the future. On the other hand, losses in
productivity from climate change and land degradation
could have the opposite effect.
The core objective of this document is to assess prevailing
and emerging trends in supply and demand in the
agricultural sector. The intention is to provide the reader
with a clear understanding of the interrelationships
between these forces and what this might mean for the
investment prospects of farmland as an asset class in the
mid to long-term.
It is important to recognise that, to be successful, farmland
investment should be considered a long-term strategy.
Whilst an understanding of short-term trends is important
for identifying purchasing opportunities, this document
attempts to cut through the prevailing market noise of
fluctuating commodity prices (which are dictated primarily
by short-term supply and demand relationships). The
objective is to gain a clear understanding of the longer term
trends required to assess the best opportunities for reliable,
long-term investment performance.
Current economic conditions in terms of credit availability
and market sentiment have depressed asset prices in an
almost arbitrary manner across the board. This is creating
unique buying opportunities for farmland in many key
markets. At the same time, the long-term fundamentals of
rising population and increasingly strained food resources
will weigh in favour of farmland values in the long-term.
As this document will demonstrate, there is substantial
evidence to support the view that under current conditions
both demand and supply factors will exert strong upward
pressure on farmland values in the foreseeable future
(meaning at least the next 10 to 20 years).

The document begins with a brief look at the dynamics

of supply and demand for farmland and how this affects
farmland values. It highlights the fact that both farmland
incomes and values are rising in step with agricultural
commodity prices despite rising input costs. Chapter 1 also
looks at the fundamental principles governing patterns in
cropland expansion. It describes the observed tendency of
farming economies to exploit the most productive land first,
meaning that in many farming regions, only marginal land
remains undeveloped.
Chapters 2 and 3 look at agricultural productivity and
commodity prices in a historical context. The impression is
of an agricultural economy which has displayed a long-term
cyclical trend throughout recent history. It has alternated
between periods of supply tension characterised by
rising commodity prices and periods of supply expansion
characterised by falling commodity prices.
Chapter 4 discusses the implications for commodity prices
in the foreseeable future. The recent surge in commodity
prices was unique in many respects. Despite increased
speculation in commodities, this chapter demonstrates
how the unprecedented rises were supported by real
fundamentals of rapidly rising demand and against a
backdrop of comparatively fixed supply, leading to the
historic lows seen in global food inventories in 2008.
A comparison of a number of forecasts illustrates the
general consensus amongst the majority of industry experts
that commodity prices will continue to rise in the mid-term
and that last years fall in the price of some commodities
is a temporary dip in the long-term rising trend. Indeed,
a historical look at the commodity super cycle indicates
that the world is at the beginning of a supply tension
phase. Chapter 5 looks in more detail at the fundamental
indicators supporting this view such as diminishing returns
from the application of pesticides and fertilisers resulting
in decreasing per capita grain production (set against a
backdrop of decreasing per capita availability of cropland).
Chapters 6 and 7 analyse in more detail the fundamental
tug of war between growing demand on the one hand and
constraints to supply growth on the other. Agriculture sits
at the centre of this struggle. The greater the tension, the
higher agricultural commodity prices, farm incomes and
farmland values will rise. Per capita income continues to
grow, especially in developing countries. As incomes rise,
people typically demand more meat in their diet. Because it
requires 3-10 kg of grain- based livestock feed to produce
each kg of meat, there is a real demand multiplier as
incomes rise.8
On the supply side, additional land capable of growing food
economically and sustainably is limited. As most of the most
productive and economically viable land is already being
used, expanding the supply of irrigated land is difficult
and expensive. Diminishing global water supplies and the
loss of land due to rising urbanisation, land degradation

and desertification are further reducing the supply of land

suitable for crop production.
Extreme weather events caused by climate change are
already having a noticeable effect on food production. That
is what is happening now. As for the future, whilst they may
disagree on detail, the various climate forecasting models
are unanimous with respect to global warmings increasingly
negative impacts on global food production. In early 2009
the United Nations summed up the potential combined
effects as follows:
Land degradation and conversion of cropland for non-food
production including biofuels, cotton and others are major
threats that could reduce the available cropland by 820%
by 2050. Species infestations of pathogens, weeds and
insects, combined with water scarcity from overuse and the
melting of the Himalayan glaciers, soil erosion and depletion
as well as climate change may reduce current yields by at
least an additional 525% by 2050.9
This represents a total potential drop in agricultural
production of 45% by 2050. Whilst this is happening,
global population is forecast to be roughly 50% over todays
levels by 2050.10 When combined with increases in global
GDP, this will result in a doubling of global food demand
during that period.11 Whether or not a 45% drop in
agricultural production is accurate, there seems little doubt
that the effects this number quantifies will at least severely
hamper efforts to meet the growing demand for food.
A future of such fundamentally discordant market
conditions is hard to comprehend, especially when
considered in the context of an already overstretched food
supply. At the present time, demand growth is already
outstripping supply growth by a factor of almost two to
one. Demand for agricultural commodities is currently rising
at 2.5% annually whilst supply is rising by less than 1.5%.12
Chapter 8 goes on to highlight how even the existing
disconnect between supply and demand could be
substantially surpassed in the not too distant future. It
discusses the potential for high oil prices to produce a step
change in demand acceleration as a result of the use of
grain-based feedstocks, such as wheat and maize (corn), for
the production of transport fuels.
The use of grains for the production of biofuels has
increased by over 200% since the year 2000.13 Maize can be
profitably transformed into ethanol at conventional oil prices
in excess of $50 per barrel.14 Thus, should oil prices remain
high, or continue to rise further in the foreseeable future,
demand creation from the biofuels sector has the potential
to outstrip food demand, even in the short to mid-term. The
implications for farmland values are clearly apparent.
Looked at together, these convergent trends lead to the
inescapable conclusion that the upward pressure on
agricultural commodity prices will not be letting up any

time soon. Chapter 9 looks at the extent to which this

may result in rising agricultural commodity prices in the
coming years. Food demand is by its very nature price
inelastic. After all, no matter what the price of food is, we
all need to eat it. Adjusted for inflation, current agricultural
commodities prices remain well below previous highs.
Despite the appearance of rising prices, food expenditures
as a percentage of total consumer spending remain near alltime lows. These factors imply significant scope for further
increases in agricultural commodity prices, and with them,
farmland values.
For example, when the non-food component of food costs
(e.g. processing, packaging etc) in the United States is taken
into account, a 500% increase in food commodity prices
would only result in a doubling of US consumer spending
on food (on a percentage of total expenditure basis), taking
food expenditures to 20% of total consumer spending from
its current level of 10%.15
Chapter 10 discusses farmlands attributes as an asset
class. Farmland is a stable income producing asset which
has, throughout history, been the most basic repository
of wealth and value through good times and bad. A large
number of studies across a range of markets and timescales
have demonstrated that farmland has consistently produced
superior total and risk adjusted returns compared to other
asset classes.
The asset class also has a number of features that make
it particularly appealing under current market conditions.
Farmland returns have a low or negative correlation with
traditional asset classes such as stocks and bonds and only
a modest positive correlation with commercial real estate.
This makes farmland an attractive diversification tool that
can help reduce the impact of broader market volatility.
Additionally, farmland values generally increase faster
than the rate of inflation, making farmland an effective
inflation hedge and capital preservation vehicle. This may
be especially appealing to investors concerned about
inflationary government policies of low interest rates and
quantitative easing. These characteristics, combined with
underlying supply and demand fundamentals, have resulted
in farmland in many parts of the world outperforming
almost all other asset types during the recent financial crisis.
The document rounds up in Chapter 11 with a discussion
about farmland investment practice. It compares direct
farmland investment with other mechanisms for investing
in the agricultural sector. Recent events have highlighted
some of the risks and inefficiencies of the current
market paradigm. Investors are concerned about a lack
of transparency in accounting standards and corporate
fraud making it difficult to properly assess the true
value of assets. They have become disillusioned with
the institutionalised greed of the financial world where
managers in complex and opaque investment structures
charge extortionate fees when the markets perform well

but leave clients with the losses when they underperform.

In contrast, the simplicity of direct freehold ownership of
renewable resource real estate holds a refreshing appeal
for a growing number of investors.
There is also some discussion about appropriate portfolio
weightings. Surprisingly, despite being on the rise,
farmland has yet to generate a level of interest among
asset managers commensurate with its importance in the
economy or its historically proven investment potential.
Given its superior performance and portfolio optimisation
potential, the lack of recognition can only be attributed to
a deficiency of knowledge and expertise on the part of the
mainstream asset management community. This of course is
a positive thing for investors with the foresight to get into a
sector still dominated by non-speculative agricultural buyers,
because speculative pressure on prices remains lower than
in many other asset classes.
Finally, the document finishes with the conclusion that this
point in the agricultural business cycle represents a textbook
investment opportunity both from the perspective of timing
and fundamentals. Looking back through history at the
agriculture super cycle, each early period of productivity
growth was based upon cropland expansion. The last bout
of supply growth, however, stemmed primarily from the
Green Revolution. This was so successful at increasing farm
yields that per capita grain production actually increased
(despite rapidly rising population) for some years prior to
recommencing its decline in the mid 80s. As a result, this
period was accompanied by a prolonged downward trend
in the real prices of food commodities.
Now humankind finds itself at the bottom of the hill again.
The next cyclical growth phase wont come from cropland
expansion. The Green Revolution finds itself staring down
the cul-de-sac of diminishing returns. How will we increase
production in step with a doubling of demand by 2050 in
the face of numerous supply pressures? This is an interesting
and perhaps even scary question. What is certainly the case
is that humankind will be paying a lot more for food whilst
we figure out the answer.

(Note: For readers seeking a more in depth analysis than this

document is intended to provide, over 200 data sources are
referenced throughout its 12 chapters. All of these are detailed
in the bibliography at the back of the document (with internet
addresses wherever possible). In addition, the Land Commodities
website, www.landcommodities.com/farmlandresearch details a
number of useful research resources.)

CHAPTER 1

An Introduction to the Relationship

between Agricultural Commodity Prices,
Cropland Availability and Farmland Values

Land is scarce and will become scarcer as the world has to double food output
to satisfy increased demand by 2050. With limited land and water resources,
this will automatically lead to increased valuations of productive land.
Joachim von Braun, Director General at the International Food Policy Research Institute, 2009

As with all assets - from commodities to real estate farmland values are dictated by the relationship between
supply (measured by the per capita availability of farmland)
and demand (for the limited supply available). The recent
global financial crisis has shown that other market factors
such as the availability of credit (which influences demand
by enabling it) and negative buyer sentiment can also have
an effect in the short-term.
Over the long-term however, supply and demand
fundamentals will dictate trends. In the words of legendary
long-term value investor, Warren Buffett: In the short-term,
the market is a voting machine, in the long-term the market
is a weighing machine.16 Buffet actually made his first ever
investment in farmland. With savings from his two paper
rounds, he spent $1,200 on 40 acres of Nebraska farmland,
which he leased to a tenant farmer.17
On the demand side of the equation, farmland values are
driven primarily by the profitability of agricultural enterprise.
The greater the income yield a farmer is able to earn from
farming activities, the higher the price they will be prepared
to pay for the land upon which that yield is derived. This
relationship applies for both farmer landowners and investor
landowners. Tenant farmers will be prepared to pay higher
rents on land if the financial incentive to do so exists and
investors will be prepared to pay a higher price for land as
yield ratios improve.

relationship between agricultural commodities and farmland

values which goes a long way to explaining the marked
gains in farmland prices in recent years, particularly during
2007 and 2008 when commodities were experiencing
unprecedented highs.
Figure 1.1 which compares farmland prices in the United
Kingdom with the global price of a mixed basket of
agricultural commodities illustrates the relationship between
the two. Over the last 5 years farmland values have risen
in line with agricultural commodity prices. As a result of
the rise in food commodity prices, per capita farm incomes
rose by 36% between 2007 and 2008 (despite rising input
prices) thus supporting higher farmland prices.18
Figure 1.1: Trends in UK farmland and food prices from
Q3 2004 to Q2 2009
200%
UK Farmland Index

170%

Global Food Price Index

140%

110%

Rise in UK farm income between

2007 and 2008.

The profitability of an agricultural enterprise is dictated by

the relationship between input prices such as fertilizers,
pesticides, herbicides and fuel (all of which influence
yield per unit of land area) and the output value of the
crops these inputs produce. Thus, agricultural commodity
prices play a crucial role in dictating land value. It is this

20
09

20
08

20
07

20
06

20
05

36%

20
04

90%

Source: Knight Frank Farmland Index, 2009;

International Monetary Fund, 2009

On the supply side, if there is a high level of availability of

farmland in a particular market, then prices will likely be
lower compared to a market with more limited availability.
In any given market, the most productive land is taken
into production first as this land provides agricultural
enterprises with a higher level of income. For two different
regions in which land characteristics are broadly similar, the
availability of farmland explains much of the variation in
farmland prices.

10

CHAPTER 1

As an example, the agricultural land-supply curve for

Canada shown in Figure 1.2 demonstrates this effect.
Despite a large availability of land (6.5 million km2) only a
small proportion is able to produce premium yields (due to
factors affecting productivity, such as sunlight, temperature,
water availability and soil conditions). Competition for this
land will be highest and it will be the most valuable, whilst
less productive land will be less valuable.

Figure 1.2: Land productivity and supply curve

for Canada
Yield
0.4

0.3

As the most productive land is developed first, in a mature

farming region, land currently under cultivation generally
commands higher prices than land yet to be brought into
production. This land use pattern was first formalised in
1817 by the great theoretical economist David Ricardo
whose theory of rent stated that: Those lands favoured
by location or other attributes command higher prices
[rents] and are quickly appropriated and exploited.19
In order for land at the less productive extremity of the landsupply curve to be brought into production, commodity
prices and agricultural enterprise profits would need to be
high enough to justify the Greenfield development costs
whilst taking into account the diminished returns from
lower productivity. As shown in Figure 1.2, average yield
rates for the first million square kilometres of land are
over 50% higher than those of the second million. At the
right hand extremity, yields are extremely low. In reality,
the situation in Canada is that most of the viable land
has already been exploited. The majority of the remaining
land is either protected ecosystems such as natural parks
or forests or unable to produce viable yields at prevailing
commodity prices (due to being too cold, too dry etc).

Agricultural Land use in 2007

0.2

0.1

0.0
0

Land area (million km2)

Source: Integrated Model to Assess the Global Environment (IMAGE),
Netherlands Environmental Assessment Agency, 2006; Food and
Agriculture Organisation, 2009

Figure 1.3: Trends in land prices and rental rates in Japan between 1955 and 2000
1000

2000

1800
900
1600

Rent

800

1400

1200

700

Rent (yen/are)

Price (1,000 yen/are)

Price

1000
600
800

500

600
1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

Source: Tokyo University of Agriculture and Technology and Newcastle University (UK), Published in Agricultural Economics, 2008

11

CHAPTER 1

David Ricardos definition of rent applies equally to the

profits that are derived from farming activity by a farmer
landowner or the sum paid by a tenant farmer for the use
of the land (as these are paid to the landowner by the
tenant from the surplus cash flow, or profit, remaining after
production). This means that there is also proportionality
between rental rates paid by tenant farmers and land values
(see Figure 1.3 which shows the long-term relationship
between rental rates and land prices in Japan).
Figure 1.3 also demonstrates the fact that land values
can trend away from rental rates in densely populated
regions such as Japan. This is because farmland prices can
also experience upward price pressure from development
speculators thus driving prices beyond pure agricultural
value. In the UK for example, the average value of an acre
of arable land in the South East of England in 2008 was
8,214, whereas the average value of an acre of residential
building land (i.e. land with authorisation for residential
development) was 3,300,000.20,21 This price differential
can encourage the market to pay prices over and above
the level dictated by agricultural earnings in more densely
populated regions.The land use pattern observed in a given
region like Canada also applies on a global scale. In recent
years the planet as a whole has experienced a slower rate
of expansion in cropland area compared to periods in
the past when higher quality land was more abundantly
available. Throughout early human history the aggregate
amount of agricultural land increased at the same rate as
the population.

Figure 1.4: Trends in total global arable cropland area

between 1961 and 2007
Total arable land (1,000 Ha)
1,450,000

1,400, 000

1,350, 000

1,300, 000

This direct proportionality between cropland expansion

and rising population has collapsed in recent years (see
Chapter 2, Agricultural Productivity and Commodity Prices
in a Historical Context, which talks in more detail about
how productivity growth has been maintained despite lower
rates of cropland expansion). As Figure 1.4 shows, the
expansion rates for total global arable land have levelled off
quite markedly since the early 60s. Indeed, in the last three
years for which data is available, the amount of arable land
has actually decreased.
This makes perfect sense when considered in the context of
Ricardos theory of rent. Less productive land is brought into
cultivation only when farm profitability rises. As this occurs,
previously developed more productive land will increase in
value relative to newly developed less productive land. This
means that in a future where less productive land is brought
into production, investors who had the foresight to acquire
more productive land in the past will benefit more than new
investors.

1,250, 000

20
07

20
01

19
96

19
91

19
86

19
81

19
76

19
71

19
66

1,200, 000

19
61

The land use pattern observed in a given region like Canada

also applies on a global scale. In recent years the planet
as a whole has experienced a slower rate of expansion in
cropland area compared to periods in the past when higher
quality land was more abundantly available. Throughout
early human history the aggregate amount of agricultural
land increased at the same rate as the population.

Source: Food and Agriculture Organisation of the United Nations, 2009

Despite this apparently simple relationship between farm

profits (or rents), farmland availability and farmland values,
predicting the future is a lot more complex than it seems
because agricultural commodity prices are also set by
supply and demand. Therefore, assessing the future outlook
for farmland values relies on a clear understanding of
trends in agricultural commodity prices. This presents its
own challenges.
Agricultural commodities are renowned for their cyclical
behaviour. During a good harvest year, global grain stocks
are high, creating a supply surplus relative to demand, and
commodity prices fall. This reduces the financial incentive
to farmers to invest in planting more of that particular crop
during the next planting season. This in turn results in lower

12

CHAPTER 1

harvests in the next phase of the cycle thus reducing global

grain stocks and causing commodity prices to rise once
more. These higher prices incentivise further investment in
production and the cycle begins again.
For this reason, predicting land values in the short-term is
challenging, but as farmland investment is a mid to longterm strategy, longer term trends in supply and demand for
commodities are of more interest to the farmland investor.
Returns, particularly the capital growth component,
are linked to long-term agricultural commodity trends
rather than short-term price volatility. It is the long-term
fundamentals of food demand growth and food supply
constraints which are likely to result in a continuation, and
perhaps an acceleration of, the historical upward trend in
farmland asset values.
On a very basic level, the mere fact that global population
continues to increase whilst the carrying capacity of the
planet remains intrinsically finite, gives an instinctive sense
that prices must rise over time. Although this simple
generalised view appears logical, answering more specific
questions about the implications for future capital values
and rental yields on farmland is more challenging. In order
to properly assess how quickly farmland values may rise in
the future and to what levels, answers would be required to
a number of questions such as:

1. What factors might act to change supply of agricultural

commodities and to what extent will this affect prices?
2. What levels of global economic growth will occur in
the future and to what extent will this affect demand?
3. To what extent will climate change, in particular severe
weather events, affect yields in the future?
4. To what extent might oil supply shortages increase
demand for biofuels or raise input costs?
5. How much land is currently being used for agriculture
and how much more productive land is available for
future cropland expansion?
6. At what rate is productive farmland being lost to
urbanisation, land degradation, water shortages and
other effects?
7. What constraints might there be to the utilisation of
any remaining land appropriate for agriculture?
8. What affect would constraints on further cropland
expansion or losses of existing cropland have on
farmland values?

This document seeks to answer these

questions. Once all of the facts have
been laid out, it is hard not to accept the
conclusion that the outlook for farmland
values, at least for the foreseeable
future, is strongly bullish.

13

CHAPTER 2

Agricultural Productivity and Commodity

Prices in a Historical Context

The best sector in the world that I know right now is probably agriculture.
Everybody should become a farmer. Farming is going to be one of the greatest
industries of our time for the next 20 to 30 years. Im convinced that farmland
is going to be one of the best investments of our time
Jim Rogers, 2009 (Jim Rogers cofounded the Quantum Fund with George Soros which gained more than
4,000% in 10 years, while the S&P rose less than 50%.)

Agriculture in a Historical Context

As things stand today, humanity is using roughly half
of the planets usable surface for agriculture. In other
words, half of the entire surface which is not water, desert,
tundra, rock, ice or inhabited space (towns, cities, roads,
industry etc).22
At first sight that doesnt seem too bad. If we are only
using half the usable land, surely we should be able to
support a further expansion of population and demand. As
this section will demonstrate, things are not that simple,
the reason being that the majority of the remaining usable
land is not nearly as usable. It is either occupied by crucial
natural ecosystems, located in areas of conflict, or simply
unable to provide financially viable crop yields at prevailing
commodity prices.
Prior to the arrival of modern agriculture, the planet
supported a population of roughly 4 million humans who
lived as hunter-gatherers.23 This is about half the population

of present day London.24 Then, some 10,000 years ago,

we began the process of domesticating various plants and
animals and so civilisation was born.25
This momentous turning point in our history, which
allowed the development of the first complex societies,
has culminated in the industrial civilisation we have today.
Whereas in the past growth in global agricultural production
resulted mainly from increases in the area of cropland under
cultivation, most of the growth over the last half century is
the result of increasing yields.26, 27
Given that the worlds population has more than doubled
during this period28, it can safely be said that the majority
of the worlds population is currently being fed in large
part by relatively recently developed agricultural practices.
This package of processes and technologies, known as the
Green Revolution, is typified by substantial yield increases
from new crop strains and greater inputs of fertilizers,
pesticides and water.

Figure 2.1: Share of crop production increases by region of the world

0%

25%

50%

75%

100%

All developing countries

South Asia
East Asia
Near East/North Africa
Latin America and the Cabean
Sub-Saharan Africa
World
Yield increases

Arable land expansion

Increased cropping intensity

Source: Food and Agriculture Organisation of the United Nations, 2006

15

CHAPTER 2

The doubling of global cereal production between 1961

and 1991 was due primarily to the Green Revolution.29
Expanding cropland played a comparatively minor role.
According to the Food and Agriculture Organisation of the
United Nations, the roughly 100% increase in world crop
production between 1961 and 1991 was achieved mainly
through a combination of increased yield per unit area
(78% contribution) and greater cropping intensity (7%
percent contribution) with a relatively minor contribution
from increased cropland and rangeland area (15%
contribution).30, 31

The Recent Commodity Boom A Cyclical

Normality or a Fundamental Shift?

Figure 2.2: Share of crop production increases by

crop type

Soybeans

Area increase
Yield growth
4%

3%
Maize

In 2008, the world saw record prices for agricultural

commodities preceded by consecutive year on year price
rises from 2000 onwards. However, this is not the first time
this has happened. As Figure 2.3 which shows the real price
of food (i.e. adjusted for inflation) indicates, agricultural
commodities have experienced similar price spikes before,
most notably in the recent past, during the oil crisis of the
early 70s.
Another thing that Figure 2.3 reveals is a long-term decline
in the real price of food, beginning around the 50s and
continuing till roughly the year 2000. This trend seems
counterintuitive; after all, the global population has more
than doubled during that period, increasing from 2.5 billion
in 1950 to roughly 6.1 billion in the year 2000. Figure 2.3
shows the average price of food fell by roughly 50% during
the same period.32

2%

Cotton

Wheat

Rice

1%

0%

Source: World Bank, 2009

Figure 2.3: Changes in the real prices of major agricultural commodities from 1900 to 2008
240
330

1917 Just before World War I

220

280

200
1951 Rebuilding after World War II

1974 Oil crisis

180

230
160
180

140
120

130
Index reference: 1977-1979=199

100
80

80
1900

1910

1920

1930

1940

1950

1960

1970

1980

1990

2000

2008

Source: World Bank, 2009

16

CHAPTER 2

It is only when you scratch beneath the surface, however,

and look at the relationship between supply and demand
that this trend starts to makes more sense. Whilst
population has exploded and with it demand, production
and thus the supply of food has increased at a greater rate.
The combination of yield improvements brought about
by the Green Revolution (with the full package of related
technologies including improved crops strains and the
increasing use of irrigation and petrochemical inputs) and to
a lesser extent the expansion of croplands, has resulted in a
near tripling of production over the same period.33

75%

Rise in maize prices in the 12

months preceding June 2008.

121%

Rise in wheat prices in the 12

months preceding March 2008.

In other words, supply expansion kept up with, and even

exceeded, demand expansion until the mid 80s. This can
be seen clearly in long-term per capita grain production,
which rose from just over 280 kg per person per year in
the early 60s and peaked at roughly 380 kg per person per
year in the mid 80s (see Figure 2.4; note that much of the
additional cereal production was actually used as animal
feed to support the growing per capita production of meat).
The big question is, were the soft commodity price spikes of
2008 a flash in the pan or the first act in a longer trend of
higher, or even much higher, commodity prices?

215%

Rise in rice prices in the 12

months preceding April 2008.

The recent agricultural commodity price boom had a

number of unique features. The magnitude of the mid-2008
price rise was the most extreme seen in the last hundred
years. Lasting over 5 years, it was the longest and strongest
upward trend in prices on record, even exceeding the price
spikes seen during the First and Second World Wars.
Furthermore, the price rises seen in the 12 months prior to
the 2008 peaks were completely unprecedented. As Figure
2.5 indicates, for the three major grain commodities, maize
rose by 75% in the 12 months prior to its June 2008 peak,
wheat by 121% in the 12 months prior to its March 2008
peak and rice by 215% in the 12 months prior to its April
2008 peak.

Figure 2.4: Global trends in cereal and meat production from 1950 to 2009
1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

380

40
Production per capita (kg)

340

300

Meat (right axis)

30

Cereal (left axis)

20

Source: Food and Agriculture Organisation of the United Nations, 2009

17

US Dollars per Metric Ton

500

Wheat
375

250

125

08
R

A
M

FE

08

08

08

N
JA

07

EC
D

O
N

CT

07

07

07

P
SE

JU

07

07

07

N
JU

PR

AY

07

Trading volumes in derivative markets for agricultural

commodities certainly boomed in recent years. Between
February 2005 and February 2008 open interest in maize
increased from 0.66 million contracts to 1.45 million.
During this period trading volumes increased by 85% and
the non-commercial traders share in opening interest in
long positions increased from 17% to 43% (i.e. speculation
from investors more than doubled). For wheat, contracts
increased from 0.22 million to 0.45 million, trading volumes
increased by 125% and the non-commercial traders share
of opening long interest rose from 28% to 42%.34

Figure 2.5 : Grain prices 12 months prior to 2008 peaks

Whilst remarkable, are these price rises in themselves

sufficient to suggest that things are different now and that
this is the beginning of a new era of higher commodity
prices? It has been pointed out by some commentators
that many commodity and asset prices behaved in a similar
fashion leading up to 2008 and that perhaps this was a
feature more of speculation in the financial markets than
any change in underlying fundamentals.

US Dollars per Metric Ton

1100

68 Days

Number of days worth of grain

remaining in global stocks at the
lowest point in 2008.

Rice
825

550

275

08

PR

08
R

A
M

08

08
N

FE

08
JA

07

EC

07
O
N

SE

U
A

CT

07

07
G

07

07

JU

JU

Clearly commodity speculation has increased in recent

years, but despite all the greed underwritten by cheap
capital and the new-found appetite of major institutional
investors to gamble on commodity prices, there were
some very persuasive fundamentals fuelling the frenzy.
The most important indicators of the relationship between
supply and demand in grain commodities markets are the
levels of global grain stocks. It is primarily this data which
sets short-term prices in the global commodity markets.
When grain stores are low, this indicates supply is low
relative to demand and when grain stocks are high this
indicates that grain is being produced at a faster rate than
the rate of consumption.

AY

07

US Dollars per Metric Ton

300

Corn
225

150

75

08

08
JU

08

AY
M

08
R

PR
A

A
M

08

08

FE

08

JA
N

07

EC
D

07

V
N
O

07

CT
O

SE
P

U
A

07

07

JU

As Figure 2.6 shows, average global grain stocks reached

historic lows in 2008. At the most extreme point (when
commodity prices were at their highest) average global
grain stocks reached 18.7% of annual global utilization,
equivalent to 68 days worth of global supply, well below the
long-term average.35 In other words, there was just over 2
months worth of food in the worlds pantry.

Source: International Monetary Fund, 2009

18

Figure 2.6: Ratio of global grain stocks to usage rates

50%
Wheat

Rice

Coarse grains

Total, wheat equivalent

40%

30%

20%

10%

0%
62

64

66

68

70

72

74

76

78

80

82

84

86

88

90

92

94

96

98

00

02

04

06

08

Source: US Department of Agriculture Foreign Agricultural Service, 2008

These historic lows signalled to speculators that the

relationship between supply and demand had become
extremely tight. In this they were right. What many of the
investment professionals making the trading decisions
appear not to have allowed for is the cyclical nature
of agriculture. These unprecedented commodity highs
stimulated global investment in production and the reality
of the agricultural commodity cycle once again made itself
felt. As a result, many speculators who got into the market
during the highs experienced painful losses.
Notwithstanding these normal cyclical fluctuations, unlike
many of the asset bubbles of recent years, the agricultural
commodities frenzy was driven by fundamentals. Supplies
were limited and demand was booming due to population
growth, changing eating habits in emerging market
economies and new demand creation from biofuels.
Extensive media coverage of these indisputable trends of
greater competition for limited resources further stoked the
speculative flames.
In the words of the World Bank Global Economic Prospects
2009 report:
The recent commodity boom was the largest and longest

of any boom since 1900. The current boom in agricultural

prices is different in this regard, because it reflects a
demand shock rather than a supply shock, meaning that
prices have risen even as overall production (including that
destined for biofuels) has increased.
The magnitude of commodity price increases during the
current boom is without precedent. The real U.S. dollar
price of commodities has increased by some 109 percent
since 2003, or 130 percent since the earlier cyclical low in
1999. By contrast, the increase in earlier major booms never
exceeded 60 percent. The current price boom is unusually
long. The U.S. dollar price of internationally traded
commodities has been rising for more than five years, much
longer than the price booms of the 1950s and 1970s. Only
the 1917 boom saw a sustained increase in commodity
prices over a similarly long period (four years).36
Whilst there is support in the fundamentals for the price
peaks of 2008, we come back to the same question:
was all the talk of commodity super cycles that became
so prevalent in recent years merely a greed-fuelled
misinterpretation of normal cyclical behaviour in agricultural
commodity prices, or were the Wall Street and City
speculators on to something?

19

CHAPTER 3

The Resource Scarcity Debate Is the

Planets Carrying Capacity at or Near a
Tipping Point?

 No room, no room they cried. Theres plenty of room! said Alice.

Lewis Carroll, Alices Adventures in Wonderland

The Malthusian Debate

Is the planets capacity to feed its growing population
through increases in agricultural output approaching a
tipping point? The history of calling the market on resource
scarcity goes back a long way and the road is littered more
with the corpses of pessimists than of optimists. In 200 AD,
Roman theologian and thinker, Quintus Tertullianus called
things slightly too early when he wrote:
We are burdensome to the world. The resources are
scarcely adequate to us.... Truly, pestilence and hunger and
war and flood must be considered as a remedy for some
nations, like a pruning back of the human race. 37
In contrast, a more resource optimistic perspective is given
in an even earlier text, the Old Testament:
And God said unto them. Be fruitful, and multiply, and
replenish the earth, and subdue it: and have dominion over
the fish of the sea, and over the foul of the air, and over
every living thing that moveth upon the earth. (Genesis
1:26:28) I will make thee exceedingly fruitful, and I will
make nations of thee. (Genesis 17:6) I will multiply thy
seed as the stars of the heaven, and as the sand which is
upon the sea shore. (Genesis 22:17)
Whilst both of these texts are prescient in their own way,
they are certainly contradictory. One suggests that there are
theoretical and practical limits to the carrying capacity of
the planet, the other suggests that the earths resources are
limitless.

0.22 hectares

Per capita availability of arable

land in 2006

Around the same time, in 1776, Adam Smith, the father

of modern economics stated: Every species of animals
naturally multiplies to the means of their subsistence, and
no species can ever multiply beyond it.40
So, if so many great thinkers have been discussing the limits
to growth for so long, is there anything different about
todays circumstances? Malthus has been criticised for
raising these concerns prematurely during the 18th century
and it has been said by some of his critics that mankinds
population, which has grown from less than 1 billion people
during Malthus time to over 6 billion at the present41,
is proof positive that he did not take proper account of
mankinds ability to innovate and develop new technologies
which reset the boundaries to growth.
This debate will likely go on for the rest of human history.
Fortunately, all the farmland investor needs to assess is the
current state of the debate, particularly with respect to land
availability and the supply / demand scenario for food over,
say, the next 20 years.

The Current State of the Debate

The debate has continued as the centuries have worn on.
One of the most notable participants was the British cleric
and economist Thomas Malthus, credited by Darwin with
providing the fundamental insight motivating his theory of
evolution which is, put simply, that the scarcity of resources
leads to the survival of the fittest.38 In 1798, in An Essay on
the Principle of Population Malthus advanced the theory that
population tends to increase geometrically, while food
production can only be expected to grow arithmetically. As he
put it: The power of population is indefinitely greater than
the power in the earth to produce subsistence for man.39

0.42 hectares

Per capita availability of arable

land in 1960

More has changed since Malthus time than the population.

In 1798, when Malthus published his paper, the total
area of land being cultivated and grazed worldwide was
estimated to be around 672 million hectares. This would
expand to 4,919 million hectares by the year 2000.42 In
other words, there was still a lot of room for expansion of
cropland at the time Malthus wrote his seminal paper.
During that era nations were exploring the globe and
colonising other regions. From the early 18th century
onwards, settlers were colonising large new territories
such as North America, South America, South Africa and
Australia. As the barriers to expansion, such as hostile
indigenous populations and lack of infrastructure were
steadily broken down, land used for crops and ranching
expanded rapidly, predominantly at the cost of forests and
natural grasslands.43

21

08
20

75

50

19

25

19

00

19

75

19

50

18

18

00

75

18

50

17

17

17

17

20

19

19

19

19

18

18

18

18

17

17

17

17

25

00

1000

07

200,000

75

2000

50

400,000

25

3000

00

4000

600, 000

75

800, 000

50

5000

25

6000

1,000, 000

00

1,200, 000

75

7000

50

1,400, 000

25

Global population (Millions)

8000

00

Arable land (1,000 ha)

1,600,000

25

Figure 3.2: Global population between 1700 and 2008

18

Figure 3.1: Total global arable between 1700 and 2007

Source: Arable land figures between 1961 and 2007 - Food and Agriculture Organisation of the United Nations, 2009; Arable land figures between 1700
and 1960 - Integrated Model to Assess the Global Environment (IMAGE), Netherlands Environmental Assessment Agency, 2006; Population figures United Nation Population Division, 1999, 2007

Inevitably, however, the rate of expansion of agricultural lands

began to decline as the availability of the most accessible and
productive lands diminished. As Figure 3.1 shows, the growth
in arable land has tailed off in recent years. As Figure 3.2
shows, the rate of population growth has not.
In 1961 the world population was 3.081 billion. In 2006
it was 6.593 billion, an increase of 114.0% in just under
50 years. Over the same period the total amount of arable
land (i.e. the land upon which cereals are grown; excludes
lower quality grazing land) globally increased from 1.281
billion hectares to 1.411 billion hectares, an increase of only
10.1% in the same period. As Figure 3.3 shows, this has
resulted in half the amount of arable land being available
to each human on the planet in 2006 (0.22 per person)
compared to 1961 (0.42 ha per person).

Figure 3.3: Trends in per capita availability of arable

land between 1961 and 2006
Arable land per capita (Ha)
0.50

This implies that whilst in the more distant past there may
have been enough space to expand cropland, this will be
less the case in the future. Indeed, looking at Figure 3.4
which plots the rate of change in the global population
against the rate of increase in the area of agricultural
land, this is glaringly apparent. In the earlier portion of the
graph, human population and farmland increased roughly
in step with each other. During the 50s the two trend
lines diverge very markedly. This is the point at which the
Green Revolution took over from cropland expansion as
the dominant means by which the human carrying capacity
of the planet has increased. However, as later sections
will show, the productivity gains delivered by the Green
Revolution are now also in decline.

Figure 3.4: Percentage change (50 year average) in

agricultural land and population between 1700
and 2000
200%

0.45

175%

0.40

150%

0.35
0.30

125%

0.25

100%

0.20

Population in millions
Agricultural Land Mha

75%

0.15

50%

0.10

25%

0.05

0%

0
1960

1970

1980

1990

2000

2006

1700

1750

1800

1850

1900

1950

2000

Source: Food and Agriculture Organisation of the United Nations,

Source: Integrated Model to Assess the Global Environment (IMAGE),

2009; United Nations Population Division, 2006

Netherlands Environmental Assessment Agency, 2006; United Nations

Population Division, 2007

22

The second thing that was very different during Malthus

time was the level of CO2 and other greenhouse gasses
which had barely begun to be altered by human activity.
It would be another 63 years before the first oil well was
drilled in the United States in Titusville, Pennsylvania, on
August 28, 1859.44 Much of the currently unused land
remaining on the planet is forestland which provides vital
carbon sequestration services. In other words, global
warming was not a known constraint to further expansion
of agricultural land during Malthus time as it is today
(see Chapter 7, Constraints to Current Supply and the
Limitations to Further Increases in Agricultural Productivity).
There have also been a number of relatively recent
developments which make the global commodity price
spikes of 2008 somewhat different to those of the early
70s. In accordance with the law of diminishing returns, the
rate of production gain due to rising yields has dropped off
in recent years whilst population has continued to increase
(see Chapter 5, The Limiting Effects of Diminishing Returns
and the Implications for Global Food Production). This has
had the consequence that since the mid 80s per capita
cereal production has been on a prolonged downward trend
(see Figure 3.5) as has the per capita area of arable land
under cultivation.45

Figure 3.5: Long-term trends in average per capita

cereal production

Per capita cereal production (kg)

380
360
340
320
300
280
1960

1970

1980

1990

2000

Source: Food and Agriculture Organisation of the United Nations,

2009; United Nations Population Division, 2007

In other words, with regard to land supply, and agricultural

productivity, the world turned a corner sometime in the
early part of the last century and the 80s respectively, from
a state of increasing supply of food and farmland availability
relative to the population to a state of decreasing supply
relative to the population. This is extremely significant.
We are now living in an era, where for the second time in
recent human history, per capita food supply is in decline
(the first time being prior to the Green Revolution when
there was widespread starvation in Asia and Africa), and this
is all taking place at a time when climate change threatens
to constrain both further expansion of agricultural land as
well as yields on existing lands.
This relationship between demand growth and constraints
to supply growth are key components to an understanding
of the prospects for future farmland values and agricultural
enterprise profits. These are discussed further in the
following chapters of this document.

Technological Innovation and its Implications

with Respect to Farmland Values in the
Foreseeable Future
Assuming that population will continue to increase and
that growth in the area of global cropland is unlikely, any
letup in the trend of declining per capita food production
will have to be achieved by increasing yields. As mentioned
above, the evidence is that production gains from yield
increases are now entering the realms of diminishing
returns. Achieving yield increases on the scale delivered by
the Green Revolution will depend on the development and
large scale adoption of new technologies.
Humanitys tendency to innovate in times of need is one
of the primary reasons that past assessments of the limits
to growth have proven unreliable. If new technological
breakthroughs as fundamental as those of the Green

23

Revolution were to come along and deliver the same kind

of productivity gains, each unit of farmland would become
much more productive and agricultural land values would,
in turn, rise steadily.
This is an entirely possible outcome if the precedent set
by human history is anything to go by. However, if such
technologies were to be developed they would need to
represent a fairly fundamental change in current practices
given that the Green Revolution in its current form relies
so heavily on petrochemical inputs which are in short,
and potentially declining, supply (see Chapter 9, Fossil
Fuel Shortages and the Potential Consequences for the
Agricultural Economy).
What is most certainly true is that the shift in production
practices that such a sea change would represent will be
costly to roll out on a global scale and thus an economic
incentive will be required in order for this to take place.
That economic incentive will only be powerful enough to
bring about such wholesale change if food produced under
the old paradigm becomes sufficiently profitable for the
agricultural industry to take the required action.
The alternative is that we do not get another get out
of jail free card from science and technology, and the 9
billion plus people that will be on the planet by 2050 will
have to make do with the agricultural production capacity
possible using current technology and diminished resources.
The result will be increasing competition for the limited
resources the planet has to offer, including the farmland
upon which food production depends.

It is beyond the scope of this document to explore in

depth the resource scarcity / limits to growth / human
innovation debate. However, what is clear is that
agricultural commodity prices and farmland values are
likely to rise in at least the mid-term as competition for
grains intensifies, both from more mouths to feed globally
and from a shift to higher protein (more grain costly) diets
in developing countries.
The market will either respond to the resultant economic
incentive of higher food prices by creating new
technologies to increase production, or it wont. Either way
the farmland investor is in a strong position. If production
increases are made possible by new technologies, the
value of farmland will go up due to the increased earning
potential from rising yields. Regardless of the fact that
new technologies might increase supply to the point that
eventually commodity prices may fall, this outcome would
still be good news for farmland investors in mid-term
because it would take the market some time to adopt these
new technologies on a large enough scale to bring supply
in line with rising demand.
Conversely, if substantial production increases (at least
proportionate to demand increases) are not achieved,
then agricultural land prices will also rise as commodity
prices continue to increase along with the profitability of
farming, and in turn, farmland rental rates. Either way, this
suggests that the mid-term, and quite possibly the longterm, outlook for agricultural land values remains bullish
regardless of technological developments.

24

CHAPTER 4

Commodity Price Forecasts and the

Implications for Farmland Values

The use of foodstuffs to make energy substitutes corn and sugar for
ethanol and palm oil and soy oil for biodiesel has created a fresh layer of
demand. Supply is inelastic. Its not easy to increase the acreage to produce
crops. Effectively your supply curve is fixed and your demand curve is moving
to the right.
Edward Hands, Portfolio Manager at Commerzbank

The Challenge of Predicting Future

Commodity Prices
If someone somewhere has a mathematical model which
accurately predicts commodity prices based on all of the
complex interactions between supply and demand, they are
probably making large amounts of money speculating on
commodities. Of course, the existence of such a model is
highly improbable. Besides assessing numerous economic
variables, it would also need to include a highly accurate
global meteorological forecasting model on both macro
and local levels. As we all know from listening to weather
forecasts on the television, even a reliable model to
accurately predict weather conditions over 48 hours pushes
the boundaries of modern computing technology.
Agricultural commodity traders in the city of London
spend much of their time looking at news feeds from the
Met Office and continuously flashing numbers on screens
regarding everything from planting rates to harvesting rates.
Fortunately the farmland investor need not listen obsessively
to short-term market noise in order to earn a return.
Predicting short-term price fluctuations is challenging,
speculative and is prone to human modelling errors. This is
why long-term investment strategies have been proven time
and time again to produce competitive returns.
Being in this category, the farmland investor need only
assess longer term trends based on deeper fundamentals
of supply and demand, an endeavour less subject to
unpredictable seasonal changes in market conditions.
Nevertheless, understanding commodity prices provides
land investors with useful insights into both supply and
demand relationships and investment timing (i.e. identifying
the most opportune moments and markets in which to
make acquisitions).

110 million

Number of additional people driven

into poverty by high food prices in
2008

Recent events have clearly demonstrated the sensitivity of

populations across the globe to high commodity prices.
During the 2008 price surges, 110 million additional people
were driven into poverty and 44 million additional people
were classified as undernourished. This triggered riots from
Egypt to Haiti and Cameroon to Bangladesh and Mexico.46
Although prices have fallen since the peak in July 2008,
they are still at or above the historical 10 year average for
many key commodities. The fact is the underlying supply
and demand tensions are little changed from those that
existed just a few months ago when these prices reached
all-time highs.47

45 million

Number of additional people

classified as malnourished in 2008
Commodity Price Forecasts According to the
United Nations, OECD and World Bank
So, what does the future hold for agricultural commodity
prices? There are numerous forecasts of commodity prices.
However, this document will restrict itself to some of the
more credible and conservative examples. One such set
of forecasts was produced jointly by the Organisation for
Economic Co-operation and Development (OECD) and
United Nations Food and Agriculture Organisation (FAO).
According to their Agricultural (FAO-OECD) Outlook Report
for 2008 to 2017:
On the demand side, changing diets, urbanisation,
economic growth and expanding populations are driving
food and feed demand in developing countries. Globally, and
in absolute terms, food and feed remain the largest sources
of demand growth in agriculture. But stacked on top of
this is now the fast growing demand for feedstock to fuel a
growing bioenergy sector. While smaller than the increase in
food and feed use, biofuel demand is the largest source of
new demand in decades and a strong factor underpinning
the upward shift in agricultural commodity prices.

26

The report goes on to say:

As a result of these dynamics in supply and demand, the
Outlook suggests that commodity prices in nominal terms
over the medium-term will average substantially above the
levels that prevailed in the past ten years. There is strong
reason to believe that there are now also permanent factors
underpinning prices that will work to keep them both
at higher average levels than in the past and reduce the
long-term decline in real terms. Prices will remain at higher
average levels over the medium-term than witnessed in the
past decade.
Figure 4.1 shows the OECD-FAO forecasts for world
agricultural commodity prices in the period 2008 to 2017
compared with prices for the period 1998-2007. These price
rises may seem impressive. However, as Figure 4.2 shows,
given that the price peaks seen in 2008 were well above
the OECD-FAO forecasts for the next 10 years, the evidence
from actual prices suggests that their forecasts are at the
conservative end of the scale.

Figure 4.1: Forecasted nominal world commodity

prices, percentage growth between average 1998-2007
prices and average 2008-2017 prices
100%

80%

60%

40%

20%

0%
Wheat

Coarse
grains

Rice

Oilseeds

Veg.
oils

Source: OECD and FAO Secretariats, 2008

Figure 4.2: Comparison of OECD-FAO commodity price forecasts for the period 2008-2017 with actual 2008 price peaks
(Price units: US$ / metric ton)
Commodity

Average Price
1998 - 2007

Actual Price Rise in 2008

OECD-FAO Forecasts

2008 Price
Peak

% Increase Over
1998-2007 Average

OECD-FAO Forecast
Average Price 2008 - 2017

% Increase Over
1998-2007 Average

Wheat

153

440

187%

234

53%

Rice

249

1015

307%

343

38%

Corn

107

287

169%

177

66%

Source: OECD and FAO Secretariats, 2008; International Monetary Fund, 2009

Furthermore, as Figure 4.3 indicates, even when comparing average April 2009 prices, the OECD-FAO forecasts look conservative.
This is especially pertinent given the fact that the current price levels are already touching or exceeding the OECD-FAO forecasted
10 year average despite the world being in the throes of the worst contraction in global GDP growth since the Second World War.

Figure 4.3: Comparison of OECD-FAO commodity price forecasts for the period 2008-2017 with actual prices in 2009
(Price units: US$ / metric ton)
Commodity

Average Price 1998 - 2007

Actual April 2009 Average Price

% Increase Over 1998-2007

Average

Wheat

153

233

53%

Rice

249

577

132%

Corn

107

169

58%

Source: OECD and FAO Secretariats, 2008; International Monetary Fund, 2009

27

The discrepancy between OECD-FAO forecasts and actual

prices might be explained by the fact that the forecasts are
based on a number of assumptions regarding future supply
and demand which are extrapolated from past data. As is
noted in various parts of this document, data from recent
years suggests shifts in a number of fundamental trends,
so predicting future prices based on long-term averages
of historical data may produce forecasting inaccuracies.
For example, the OECD-FAO model assumes production
increases across all commodity categories with yield
increases being the primary source of productivity gains,
and the remainder coming from cropland expansion.
With respect to yield growth the OECD-FAO model bases
its forecasts on: historical trends in technology growth
[being] assumed to continue into the medium-term future.
Although it does acknowledge that: A key question is
the long-run capacity of supply. One argument which
reiterates messages of climate change and water overuse,
suggests that yields are peaking, and sees little scope for
further supply increases. Another argument emphasizes the
potential of human innovation to continue or even quicken
yield trends, particularly when motivated by a high price,
and the unrealized potential of countries that are still in [the
early] stages of development.
Data from the last couple of decades, however, suggests a
tailing off of productivity gains. As the following sections
of this document will explain, even in a best case scenario
there are numerous constraints to cropland expansion. At
worst there is the potential for the contraction of croplands

due to land degradation, urban expansion and climate

change effects. Extreme weather events and permanent
changes in rainfall patterns can be expected to lead to
desertification and loss of croplands and the ecosystem
services upon which agriculture depends.
Further forecasts of demand come from simulations run
on the World Banks ENVISAGE forecasting model, which
predict a 1.5% annual rise in demand for agricultural
commodities during the 30 years between 2000 and 2030,
resulting in a 56% increase in demand during the period.
In their Global Economic Prospects 2009 report, the World
Bank ran a number of simulations to quantify possible
outcomes. The variance in the ENVISAGE model forecasts
demonstrate the sensitivity of commodity price forecasts to
rates of supply growth.48
Figure 4.4 shows the average annual growth rate in yield for
agricultural commodities from 1965 to 2006. For the world
as a whole, wheat yields rose by an average of 2.0% during
that period, rice by 1.7%, maize by 1.8% and soy by 1.5%.
Against a background of rising demand of 1.5% (assuming
this estimate is correct), the ENVISAGE Model predicts
that: should global agricultural productivity rise by only
1.2 percent a year on average instead of the 2.1 percent
projected in the baseline, then prices, rather than declining,
can be expected to rise by as much as 0.3 percent a year
relative to manufactures [thus] reversing the trend decline
of the past 100 years.49

Figure 4.4: Average annual percentage increase in yield growth in key agricultural commodities between
1965 and 2006
Category

Wheat

Rice

Maize

Soybeans

World

2.0%

1.7%

1.8%

1.5%

High income

1.6%

0.9%

1.6%

1.3%

Middle income

2.0%

1.9%

2.6%

2.8%

Low income

2.6%

2.0%

1.1%

1.4%

East Asia and the Pacific

3.8%

1.8%

2.9%

1.9%

Europe and Central Asia

0.1%

0.0%

0.8%

-0.1%

Latin America and the Caribbean

2.0%

2.5%

2.6%

1.3%

Middle East and North Africa

2.5%

1.2%

2.7%

3.0%

South Asia

2.6%

2.1%

1.6%

1.5%

Sub-Saharan Africa

2.2%

0.7%

0.7%

3.2%

Income level

Region

Source: World Bank, 2009; US Department of Agriculture, 2009

28

There are a number of factors, dealt with

separately in the following sections, which could
compromise the various assumptions upon which
forecasts such as those from the OECD, FAO and
World Bank are based. Any one of these factors
individually has the potential to place the price
increases these forecasts foresee firmly at the
conservative end of the scale. In combination,
the effect could be even more substantial.

29

CHAPTER 5

The Limiting Effects of Diminishing

Returns and the Implications for Global
Food Production

Is the current food crisis just another market vagary? Evidence suggests
not; we are undergoing a transition to a new equilibrium, reflecting a new
economic, climatic, demographic and ecological reality.
Japanese Prime Minister, Taro Aso, 2009

Going forward, the big questions are: how much further

expansion in agricultural production can be achieved (both
in terms of yield and total cropland area), at what rate
can this expansion take place and for how long can that
expansion continue? If the expansion can take place as
easily, cheaply and rapidly for the next half century as it has
done for the last half century, perhaps the prospects for
agricultural investment arent as bullish as the demand side
fundamentals suggest. Alternatively, it may be that, as far as
expansion is concerned, the low hanging fruit has already
been plucked from the productivity tree.

3.5%

Average annual gain in cereal

production in the 60s

0.5%

Average annual gain in the 90s

In fact, the numbers suggest just that. The evidence

indicates that the law of diminishing returns is asserting
its inevitable effect on world food production. Indeed, this
has become increasing apparent in recent years. The law of
diminishing returns refers to how the marginal contribution
of a factor of production usually decreases as more of
that factor is used. Wikipedia conveniently provides an
explanatory example routed in agriculture:
Suppose that one kilogram of seed applied to a plot
of land of a fixed size produces one ton of crop. You
might expect that an additional kilogram of seed would
produce an additional ton of output. However, if there
are diminishing marginal returns, that additional kilogram
will produce less than one additional ton of crop (on the
same land, during the same growing season, and with
nothing else but the amount of seeds planted changing).
For example, the second kilogram of seed may only produce
a half ton of extra output. Diminishing marginal returns
also implies that a third kilogram of seed will produce an
additional crop that is even less than a half ton of additional
output. Assume that it is one quarter of a ton.
A consequence of diminishing marginal returns is
that as total investment increases, the total return on
investment as a proportion of the total investment also
decreases. For example, if the return from investing the
first kilogram of seed is 1 t/kg, the total return when 2
kg of seed are invested might be 1.5/2 = 0.75 t/kg, while
the total return when 3 kg are invested would reduce to
1.75/3 = 0.58 t/kg.
The same logic applies to finite resources such as land,
fertilizers, pesticides and any other variable external input,
such that each additional unit of the variable input yields
smaller and smaller increases in output. The return curve

is first linear and then begins to decline towards zero. For

example, for each additional kg of fertiliser applied (above 0
kg) yield increases linearly up to the point where diminishing
returns begin. After that point the line curves towards the
horizontal, and may even become negative if applications
reach toxic levels, the result being that both unit and total
returns decrease.

31

3%

2%

1%

0%
1960-1970

1970-1980

1980-1990

1990-2000

Source: Food and Agriculture Organisation of the United Nations, 2009

Figure 5.2: Total global nitrogen fertiliser use between

1960 and 2000
80

0.28
N

H2O

60

0.24

40

0.20

20

0.16

Global irrigation (109 ha)

What throws the situation into starkest contrast, however,

are trends in the nitrogen-fertilization efficiency of crop
production. This is a measure of the yield per unit of
fertiliser applied. Figure 5.4 shows that the amount of
nitrogen fertilizer application per unit of cereal production
has increased approximately fourfold between 1960 and
2000, and that production gains due to the use of fertiliser
bottomed out from roughly 1980 onwards.

4%

0.12
1960

1970

1980

1990

2000

Source: Food and Agriculture Organisation of the United Nations,

2002; Tilman et al, 2002

Figure 5.3: Total global pesticide production and

imports between 1940 and 2000
12
Pesticide production
Pesticide imports

10
8

6
4

2
0

Global pesticide imports

(1996 US$ billion)

This is despite the fact that, as shown in Figure 5.2, the

global use of nitrogen fertilizers during the period increased
by approximately 700% and water use doubled. Import
data for pesticides suggests similar increases (see Figure
5.3). Whereas, in the four decades between 1960 and
2000, the actual increase in cereal production was 167%.50
In other words, to achieve each unit of production gain it
took a much higher increase in the use of variable inputs,
roughly fourfold in the case of Nitrogen fertiliser.

Average annual production increase

Nitrogen & phosphorus fertilizer

(106 tonnes; World-USSR)

The reality is that data supporting the increasing emergence

of diminishing returns is already being observed. The rate of
gain in global cereal production has decreased over recent
years as Figure 5.1 indicates, having averaged a 3.5%
increase per year during the 60s and decreasing to just over
0.5% during the 90s. This is all the more notable given that
the worlds population was increasing rapidly, rather than
decreasing, during this period.

Figure 5.1: Average annual production increases

during the four decades between 1960 and 2000

Global pesticide production

(106 tonnes)

Whilst humans can control the level of variable inputs (to

the extent that the resources to manufacture agrochemicals,
primarily oil and gas remain in abundant supply), we are less
able to control the level of fixed inputs such as the space
required to grow crops. In the production system known as
planet earth, the most fundamental of fixed inputs is the
availability of agricultural land.

0
1940

1950

1960

1970

1980

1990

2000

Source: Food and Agriculture Organisation of the United Nations,

2002; World Health Organisation, 2002; Tilman et al, 2002

32

Figure 5.4: Trends in the nitrogen-fertilisation

efficiency of crop production between 1960 and 2000
Nitrogen efficiency of cereal production
(megatonnes cereal/megatonnes fertilizer)

This data implies that future gains in productivity due

to increased application of fertilisers will be lower than
the rates of increase seen in the past.51 This is true not
only of the developed world but also in the developing
world. As Figure 5.5 shows total fertiliser application has
approximately doubled in the developing world over the
last 20 years, taking them to levels close to the developed
world.52 Aside from Sub-Saharan Africa where there are
a number of other factors limiting production growth,
these statistics cast some doubt on the notion that a large
component of future productivity increase will result from
increases in fertiliser use in the developing world.
These trends have taken place in the presence of another
greater trend, that of population increase. This explains
the fact that the per capita production of grain has been
in decline since the early 80s (Chapter 3, The Resource
Scarcity Debate Is the Planets Carrying Capacity at
or Near a Tipping Point), roughly the same point in time
as productivity gains due to nitrogen fertiliser bottomed out.

80

60

40

20

0
1960

1970

1980

1990

2000

Source: Food and Agriculture Organisation of the United Nations,

2002; Tilman et al, 2002

Figure 5.5: Fertiliser use by region of the world

1962

1982

2002

Developing countries
Sub-Saharan Africa
Latin America
East and Southeast Asia
South Asia
0

10

20

30

40

50

60

70

80

90

100

Fertilizer applied (kilograms per cultivated hectare)

Source: Food and Agriculture Organisation of the United Nations, 2008; M. World Bank, 2007

One of the primary reasons for this is the fixed input

component of the agricultural productivity equation:
farmland. Humans have historically exploited the most
productive areas of the planet first. In other words, as noted
in a recent research report by Dr. David Tilman, a leading
expert on global resource competition: Most of the best
quality farmland is already used for agriculture, which
means that further area expansion would occur on marginal
land that is unlikely to sustain high yields and is vulnerable
to degradation.53, 54, 55
According to the United Nations, water related issues
alone may account for an estimated 1.5% reduction in
world food production by 2030 and at least 5% by 2050.56
Under a business-as-usual scenario water withdrawals are

700%

Rise in the use of nitrogen

fertilisers between 1960
and 2000

167%

Increase in cereal production

during the same period

33

This begs the question, what potential is there to expand

irrigated land? As Figure 5.6 indicates, the trend for the
expansion of irrigated land has flattened off in recent years
despite the rise in demand for food and the accompanying
financial incentive. During the last decade (1998 to 2007),
the average annual rate of expansion in the area of
agricultural land equipped for irrigation was 0.6%, whereas
during the 60s the average annual rate of increase was
2.1%; over three times higher. This is due in part to the fact
that the areas most suitable for irrigation have already been
brought into cultivation.58
Like the best rainfed lands, the best irrigated lands are
developed first. There is a development cost associated
with putting in place irrigation infrastructure. The law of
diminishing returns has been making itself felt here as well,
meaning that the average cost per unit of production of
developing irrigation infrastructure has increased over time
(as has the unit cost per hectare).59 Due to higher irrigation
development costs and already stretched water supplies in
many regions, it is assumed that the downward trend in the
new development of irrigated cropland will continue in the
future.60
The broad trend is for the most developed nations and
those with the highest population densities to be at a
more advanced stage in the exploitation of available lands.
This is not only true of Europe and the United States,
but also of Asia where, according to UN estimates, 95%
of the potential cropland is already being utilized.61, 62
Notwithstanding the fundamental limits to growth imposed
by water supplies, higher commodity prices will be required
in order to provide the economic incentive to develop new
greenfield irrigation projects in the future.

Figure 5.6: Trends in global area of land equipped for

irrigation
Annual rate of change (millions)

expected to increase in 59% of the worlds river basin areas

by 2025. Furthermore, studies indicate that the increase in
water demand will outweigh the improvements in wateruse efficiency assumed in many forecasting models.57

5000
4837
4675
4512
4350
1961

1970

1980

1990

2000

2007

Source: Food and Agriculture Organisation of the United Nations, 2009

2.1%

Average annual increase in

global irrigated land area
during the 60s

0.6%

Average annual increase over

the last decade

In the words of the World Bank report Global Economic

Prospects 2009:
Yield gains associated with the green revolution are
waning in many countries. Productivity levels in much of
Africa and Europe and Central Asia are also declining;
they are only one half those of best-practice developing
countries, even after having controlled for differences in
climate and soil. Unless large-scale agricultural investment
and knowledge creation and dissemination are stepped up,
food production in many of these countries will not keep
pace with demand.
Simulations suggest that if productivity growth in
developing countries disappoints, global food prices will be
higher, and many developing countriesespecially those
with rapidly growing populationswill be forced to import
more-expensive food from high income countries

1.1%

Average annual decline in global

per capita cereal production
between 1990 and 2007

34

Indeed, developing countries have moved from a state of

production surpluses pre the 80s to an increasing state of
production deficits and import reliance. In China it would
appear that the revolution is over (the Green Revolution
that is). Despite the fact that China now uses three times
the global average amount of fertiliser per unit of cropland,
and 75% of its cropland is under irrigation, their national
average yields are below world average yields.63
As Figure 5.7 indicates, average annual yield growth
for wheat, rice and soybeans in the developing world
during the period 2000 to 2008 was roughly half that for
the period 1965 to 1999, providing further evidence of
diminishing returns. Furthermore, despite the moderate
increases in yield, this hides the fact that global per capita
productivity actually declined by an average of 1.1 % a year
between 1990 and 2007.64
The reality of diminishing returns has implications for many of
the medium-term agricultural commodity price forecasts (see
Chapter 4, Commodity Price Forecasts and the Implications
for Farmland Values) which are based on historical productivity
increases. The implication is that using more recent data
would produce lower future productivity estimates.

Figure 5.7: A comparison of recent and historic average annual yield growth in the developing world
Annual % change in yields, 1965-99, 2000-08
3.5
3.0
1965-1999

2000-2008

2.5
2.0
1.5
1.0
0.5
0.0
Wheat

Rice

Maize

Soybeans

Source: World Bank calculations based on US Department of

Agriculture Data, 2009

35

CHAPTER 6

Population, Economic Growth and Other

Demand Drivers

The fundamentals remain in place for a long-term boom in the prices of

everything ag-related. The simplest metric to consider is the amount of
farmland per person worldwide: In 1960 there were 1.1 acres of arable
farmland per capita globally, according to data from the United Nations. By
2000 that had fallen to 0.6 acre. And over the next 40 years the population
of the world is projected to grow from 6 billion to 9 billion. The farmland
phenomenon is almost certainly still in the early stages and is playing itself out
in many ways around the globe.
Fortune Magazine, 2009

Increases in Food Demand Due to Population and

Economic Growth
The total number of people living on the planet today
(approximately 6.8 billion) represents a little more than 5%
of all the people who have ever lived.65 1 billion people
were added to the worlds population in the last 12 years.66
The rate of population increase is forecast to remain at
high levels for the foreseeable future and the worlds
population is projected to be roughly 40% higher than
todays level by 2050.67
Estimates for growth in grain demand and the resulting
impact on agricultural commodity prices vary, but the
consensus is for a projected doubling of global grain
demand during that period.68 This is due not only to
population increase but also to the shift towards higher
protein diet. This shift is driven primarily by rising incomes
in the developing world. Global average annual income is
projected to increase by just under 300% from US$ 5,300
to US$ 16,000 by 2050 (a 2.4-fold increase in global per
capita real income). 69, 70, 71, 72

1 billion

Increase in the worlds

population in the last 12 years

225,000

Number of people added to

the world population every day
over the last decade
Projections from the Food and Agriculture Organisation
of the United Nations suggest that an additional 120
million ha, an area twice the size of France, will be needed
to support growth in food production under a business
as usual scenario up to the year 2030. This represents a
demand increase for irrigated land of 56% in Sub-Saharan
Africa alone (from 4.5 to 7 million ha) and rainfed land by
40% (from 150 to 210 million ha).73
These figures assumes above average levels of agricultural
productivity (i.e. the upper yield percentiles on a historic
basis). Furthermore, they do not compensate for lower
productivity rates due to diminishing returns, climate change
driven severe weather events, the need to replace cropland
loss due to land degradation, urbanisation and other
factors, let alone the actual availability of new cropland with
the same productivity of existing cropland.74, 75
Given that the combined effect of population increase
and economic growth is expected to result in a more than
fourfold increase in global GDP in the next half century,
the forecast doubling of grain demand during that period

37

might be considered conservative.76 Even so, sustaining food

production at current levels, let alone doubling global food
production again in the next 50 years as mankind has done
over the last 50, will certainly be a major challenge. Aside
from the limiting effects of the law of diminishing returns,
this will be particularly difficult to achieve in a sustainable
manner without compromising human health and the
environment. 77, 78, 79, 80, 81, 82

Figure 6.2: Difference between 2002 and 2006 United

Nations population estimates for developing countries

60

53

1999-2001

2003-2005

44
40

Figure 6.1: Actual and projected human population

growth in developed and developing countries from
1750

53

35

20

0
1990-92

1994-96

Source: United Nations Population Division, 2007

0
1750

1800

1850

Developed countries

1900

1950

2000

2050

Developing countries

Under the United Nations latest revision, the worlds

population, and hence demand for food and the land
to produce it on, is forecast to increase to 9.2 billion by
2050, an addition of roughly 2.5 billion people from
todays level. The worlds human population has increased
nearly fourfold in the past 100 years with a net increase of
225,000 new people per day during the last decade.84 To
put this in perspective, this is the equivalent of adding the
total population of Greater London (7,556,900 people85)
to the worlds headcount every month, an entire Singapore
(4,839,400 people86) every 22 days or an entire Emirate of
Dubai (2,262,000 people87) every 10 days.

Source: United Nations Population Division, 2007

If the statistics of population growth arent astounding

enough it should be noted that in the past population
forecasters have tended to underestimate future population
growth. As Figure 6.2 shows, the revised population
estimates produced by the United Nations Population
Division in 2006 included higher estimates for most
countries, with the result that population estimates for
developing countries have increased by some 35 million
people for the 199092 benchmark period, while the
revised population estimates are some 53 million higher
than previous estimates for 200305. Given that estimated
dietary energy requirements remain broadly constant, any
upward revision of population forecasts has a proportionate
effect on assumptions regarding food demand.83

17%

Percentage of people in the

world malnourished

The greatest impact of the recent food crisis has been on

the more impoverished households spending 5090% of
their income on food. According to the World Bank, the
emerging world food crisis could lead to an increase in the
mortality rate of infants and children under five years by as
much as 525% in several countries.88

900 million
Number of malnourished
people in the world

38

Figures 6.3 and 6.4 clearly demonstrate the recent increase

in both the total number of undernourished people in the
developing world and the proportion of undernourished
people. The total number of undernourished now stands at
over 900 million whilst the proportion of undernourished
turned a corner in 2003, ending a declining trend and
returning to levels not seen since the late 90s.
Figure 6.3: Number of undernourished people in the
developing world, 1990-92 to 2007
Millions
1000

900

800

700

600
1990-92

1995-97

2003-05 2007

Source: Food and Agriculture Organisation of the United Nations

Figure 6.4: Proportion of undernourished people in the

developing world, 1990-92 to 2007
Percentage
20
18
16
14
12
10
8
1990-92

1995-97

2003-05

2007

Source: Food and Agriculture Organisation of the United Nations

Population forecasting models are based on observations

from historical data which show that as countries develop
population growth rates typically decline and life expectancy
increases. It is the discrepancies between actual trends
in developing nations compared with historical trends in
developed nations (upon which forecasts are based) which
explain the recent upward revisions in the United Nations
population forecasts.

39

Another trend of population dynamics relates to longterm trends for ageing. A consequence of trends in age
demographics is that as the proportion of adults relative
to children increases, food needs rise. As the population
pyramids for China in Figure 6.5 illustrate, adult population
increased relative to the number of children between
199002 and 200305. This trend is most pronounced in
countries with already large populations and/or countries
with high population growth rates.

Figure 6.5: Chinas changing population structure

1990

Males

Females
Age
80+
75-79
70-74
65-69
60-64
55-59
50-54

Figure 6.6 clearly illustrates the challenge of maintaining

supply growth at the same level as demand growth
in a world of changing age demographics. During the
period 1995-97 to 2003-05, whilst the per capita dietary
energy requirement has increased due to changing age
demographics, the per capita dietary energy supply has
decreased. This is in contrast to 1990-92 to 1995-97 when
the relationship between age demographics and food
supply was more favourable.

45-49
40-44
35-39
30-34
25-29
20-24
15-19
10-14
5-9
0-4
80

60

40

20

Figure 6.6: Trends in per capita dietary energy

requirements and supply in India
Change (%)

Millions

20

40

60

80

Millions

Population growth rate = 1.54%

Proportion under 15 years = 28%

2005

Males

0.6

Females
Age
80+

0.5

75-79
70-74

0.4

65-69
60-64

0.3

55-59
50-54
45-49

0.2

40-44
35-39

0.1

30-34
25-29

0.0

20-24
15-19

-0.1

10-14
5-9

-0.2
1990-92 to 1995-97

1995-97 to 2003-05

Change in per capita dietary energy supply

Change in per capita minimum dietary energy requirements

Source: Food and Agriculture Organisation of the United Nations, 2006

0-4
80

60

40

20

Millions

20

40

60

80

Millions

Population growth rate = 0.68%

Proportion under 15 years = 22%

Source: United Nations Population Division, 2006

40

The China Factor

$5 billion

From the perspective of demand growth, China is by far

the most important player on the world stage. Under Deng
Xiaopings market-oriented economic development policies,
economic output quadrupled in China between 1978 and
2000. With a population of 1.338 billion (July 2009 est.),
roughly one in five people on the planet is Chinese. This
huge and growing population (still rising at an annual rate
of 0.655%) of increasingly affluent consumers lives in a
country smaller than the United States which supports less
than a quarter of Chinas population at 307 million (July
2009 est.). Measured on a purchasing power parity (PPP)
basis that adjusts for price differences, China in 2008 had
the second-largest economy in the world after the US.89
As a nation, China is a growing net importer of food,
placing an increasing strain on global food supply. China
is now formally included by the Food and Agriculture
Organisation of the United Nations in the list of countries
suffering from sever localised food insecurity.90
Exacerbating Chinas food security picture is the continued
loss of domestic arable land because of erosion and
economic development and the increasing impact of the use
of arable land for biofuels. Food security is now high on the
Chinese governments agenda and in 2008 they announced
a $5 billion plan to develop agricultural assets in Africa.91
Figure 6.7: Total Chinese cereal production between
1960 and 2007
Metric tons of grain (millions)
500

Amount of money China is

investing in agriculture in Africa

Demand growth in China is being driven primarily by

economic growth, changing eating habits and increasing
urbanisation of the population. It has been a common
misperception during the global credit crunch that the
countrys historical GDP growth, which averaged 10.8%
from 2004 to 200893, was based almost entirely on export
growth. Whilst this may have been true in the past, it is less
true now.
In fact, despite a precipitous drop in global demand
dropping off a cliff and exports tumbling by 17% in the
year to March, the Chinese economy has surprised many
observers by shrugging this off. During the same period
the March to March year-on-year increase in industrial
production is 8.3% up from an average of 3.8% in the
previous two months. Retail sales were 16% higher in real
terms than the previous year and fixed investment has
soared by 30%.94
As Figure 6.8 shows, investment bank forecasts for 2009
GDP growth have been revised upwards from around the
6% mark to well above 8%, with Goldman Sachs revising
their real, inflation-adjusted GDP growth to 8.3% (versus
6.0%) and to 10.9% for 2010.95 In June (2009) the OECD
upped its estimate to 7.7% for 2009 and 9.3% for 2010.96

400

300

200

Figure 6.8: Changes in Chinese GDP growth forecasts

16

100
1961

1970

1980

1990

2000

Forecast

2007

12
Source: Food and Agriculture Organisation of the United Nations, 2009

This has had the effect of ending Chinas long-term upward

trend in cereal production. Indeed, as Figure 6.7 illustrates,
the recent trend actually shows a decrease in annual
production. With 43% of the labour force employed in
agriculture, the demographic trend produced by the one
child policy which has resulted in one of the most rapidly
aging populations in the world, is all the more alarming.92 It
is interesting to note that the one child policy has now been
revoked, due in large part to its demographic repercussions.
The effect this is likely to have on actual population growth
in the coming years is unknown.

0
2007
Year on year

2008

2009

Quarter-on-quarter annualised

Source: JP Morgan, 2009

41

Figure 6.9: Estimated changes in land use from 1700 to

1995
100
Percentage of total land area

These forecasts are supported by the fact that China is

one of the only major economies where bank lending has
actually increased during the credit crunch, soaring by
30% in the year March to March. Additionally, housing
sales rose by 36% in value. China was also in less of a
credit bubble than most developed nations prior to the
credit crunch, being in a much better position from the
perspective of consumer debt to GDP ratios. It is one of
the few countries in the world where bank credit has fallen
relative to GDP over the past five years. Banks have an
average loan-to-deposit ratio of only 67%, which is low by
international standards, and less than 5% of banks loans
are non-performing.97

75

50

25

0
1700

13.9 million tons

Record amount of soybeans
imported into China in the
first four months of 2009

Earlier in 2009, most economists thought a return to

historical levels of Chinese GDP growth was impossible
at a time of deep global recession, but many are now
acknowledging that a fairly quick return to robust demand
for food commodities is a very real possibility. This view
is supported by the facts on the ground. In the first four
months of 2009, China imported a record 13.9 million tons
of soybeans.98

The Importance of Livestock, Meat and Other

Animal Products
Livestock and the protein products derived from the
various animals humans farm, including 1.5 billion
cattle and 1.9 billion sheep and goats, is one of the
most significant components of the planets agricultural
economy in assessing future resource use and demand for
agricultural land.99

1800

Other

1900

Forest

1980

Pasture

Cropland

Source: Goldewijk and Battjes, 1997

Demand increases rapidly as the number of mouths to feed

rises with population growth. But more importantly, rising
incomes, especially in emerging economies means millions
of new meat eaters come to the table annually. The recent
decades of unparalleled global economic expansion, most
pronounced in developing and emerging economies, has
resulted in the proliferation of a new middle class that
has purchasing power beyond their basic needs. This has
resulted in a shift in these populations towards a higher
protein diet. As Figure 6.10 shows, there has been a
doubling of per capita meat consumption in developing
countries since the early 80s.

Figure 6.10: Trends in domestic per capita consumption

of meat and other food types in developing countries
between 1980 and 2003
Index, 1980 = 100
350
300
250
200

The total area occupied by grazing land is equivalent to

26% of the ice-free terrestrial surface of the planet.100
As Figure 6.9 shows, pastureland area has grown to an
even greater extent than cropland area in the last 100
years. In addition, the cropland area dedicated to feedcrop
production amounts to 33% of total arable land. In all,
livestock production accounts for 70% of all agricultural
land and 30% of the usable land surface of the planet.101
This makes the livestock component of the demand
equation rather important in assessing the worlds growing
requirement for agricultural land.

150
100
50
0
1980

1985

Meat

1990

1995

Horticulture

2000

2005

Cereals

Source: Food and Agriculture Organisation of the United Nations, 2007

42

Traditionally livestock production was supported by locally

available feed resources such as free roaming grazing lands,
crop and food waste. As demand for meat, dairy produce,
eggs and other animal products has increasingly exceeded
their supply, so the livestock industry has come to rely to an
increasing extent on grain-based feedcrops.102

7 kilograms

Weight of grain required to

produce 1 kg of beef

According to the United States Department of Agriculture,

in modern intensive livestock farming where the majority
of feed is grain based, 7kg of grain are required to produce
one kilogramme of beef.103 On a global average basis, given
that part of the production is based on other sources of
feed, such as rangeland and organic waste, 3 kg of grain
is required to produce 1 kg of meat.104 It also requires
about 16,000 litres of water to produce 1 kg of meat if all
components of the value chain (including feed) are taken
into account.105 As Figure 6.11 indicates, this has resulted in
a more than twofold rise in the use of animal feed even in
developing countries since the early 80s.

16,000 litres

Volume of water required to

produce 1 kg of beef

35-40%

Due to the crucial requirement for feedcrops in modern

livestock farming, any increased demand for meat results
in an acceleration of demand for crop and rangeland area
(as well as water). At least 3540% of all cereal produced
in 2008 was used as feed for livestock.106 This leaves an
estimated 43% of cereal production available for human
consumption after losses from harvest, post-harvest and
distribution are taken into account.107

Proportion of global grain

production used as animal feed

Figure 6.11: Comparative growth rates for production of selected animal products and feed grain use in developing
countries between 1961 and 2001
1700
1500

Index: 1961=100

1300
1100
900
700
500
300
100
1961

1966

1971

1976

1981

Cereals used as feed

Total meat production

Total ruminant meat production

Total milk production

1986

1991

1996

2001

Total pig and poultry meat production

Source: Food and Agriculture Organisation of the United Nations, 2006

43

As Figure 6.12 illustrates the amount of meat being

consumed is increasing rapidly, especially in the
developing world where per capita meat consumption
has doubled between 1980 and 2002 and total meat
consumption has nearly tripled. Even the developed world
has shown increases on both with a roughly 20% increase
in total consumption.

Shifts in Dietary Preference and the Effect on

Food Demand

84%
Forecasted increase in the

Given that nearly half of the worlds grain supply is utilised

as animal feed, meat consumption has a major influence
on global demand for land capable of producing the
cereal crops on which livestock production has become
increasingly dependent.

consumption of meat in the

developing world between 2002
and 2030

The link between increased wealth, measured as per

capita income, and the increase in the proportion of
animal products in diets is a well documented trend. In
percentage terms, the effect of increased income on diets
is greatest among lower and middle-income populations
which currently consume the lowest percentage of
animal products. Figure 6.13 shows that this is true at the
individual as well as at the national level.108

191%

Increase in the consumption of

meat in the developing world
between 1990 and 2002

Figure 6.12: Past and projected trends in consumption of meat and milk in developing and developed countries
Food demand

Developing countries

Developed countries

1980

1990

2002

2015

2030

1980

1990

2002

2015

2030

Annual per capita meat consumption (kg)

14

18

28

32

37

73

80

78

83

89

Annual per capita milk consumption (kg)

34

38

46

55

66

195

200

202

203

209

Total meat consumption (million tonnes)

47

73

137

184

252

86

100

102

112

121

Total milk consumption (million tonnes)

114

152

222

323

452

228

251

265

273

284

Source: Food and Agriculture Organisation of the United Nations, 2006

44

Figure 6.13: The relationship between meat consumption and per capita income in 2002
140
USA

Per capita meat consumption (kg)

120

Russian
Federation

100
Brazil
80
China
60
Japan
40
Thailand
20

India

0
0

5000

10000

15000

20000

25000

30000

35000

40000

Per capita income (US$ PPP)

Source: Food and Agriculture Organisation of the United Nations, 2006; World Bank, 2006

On a global basis meat production increased from an

average of 27 kg meat per capita in the period 1974 to
1976 to 36 kg per capita in 1997 to 1999.109 Meat now
accounts for around 8% of the world calorie intake.110
The average American consumer currently eats over twice
as much meat as a Chinese consumer yet the Chinese
population is more than 4 times the size of Americas, so
demand growth in China could be enormous.

As Figure 6.14 illustrates, there also remains great potential

for increased meat demand on a global basis given that
low-income countries which account for 5.1 billion of the
worlds population consume less than half as much meat
(as a percentage of dietary energy intake) as high-income
countries which account for only 1.3 billion of the worlds
population.111

Figure 6.14: Dietary diversity by source of dietary energy in 2007

High-income countries

Low-income countries

Roots and tubers 1

Pulses, nuts and oil seeds 3
Cereals 45

Roots and tubers 11

Meat and offal 8

Cereals 55

Pulses, nuts and oil seeds 6

Sugar and products 11

Meat and offal 3

Sugar and products 5

Olis and fats 9

Olis and fats 13

Others 11
Others 19

Source: Food and Agriculture Organisation of the United Nations, 2008

45

Some have argued that one solution to rising demand for

grains might be to attempt to encourage consumers to eat
less meat in order to alleviate some of the effects on an
increasingly strained system. Quite aside from the fact that
statistical data shows the opposite is happening, politically,
this would be very difficult to achieve as the livestock
industry is very socially significant. It accounts for 40% of
agricultural GDP, employs 1.3 billion people globally, creates
livelihoods for one billion of the worlds poor and provides
roughly one-third of humanitys protein intake.112
Attempts to curb the booming demand for animal products
have generally proved ineffective, especially given the trend
towards urbanisation discussed below.113 With fast food
chains such as McDonalds, Kentucky Fried Chicken and
Burger King using meat products at the core of their menus,
this looks unlikely to change. Indeed, the consumption of
mass produced fast foods is actually increasing rapidly in
urbanised areas.114, 115, 116

Given that changing eating habits are primarily driven by

rising incomes and changes in social circumstances, such as
the global trend towards urbanisation, there is great further
potential for demand increase. As Figure 6.16 indicates
there is still a relatively small proportion of the worlds
population in the high income bracket. On average, China
and India which have the two fastest growing middle class
populations in the world, arent yet in the middle upper
income band, but instead still remain in the middle lower
income band.

50%

Forecasted proportion global

cereal production used to
feed livestock by 2050

Forecasts of Future Demand for Meat and Animal

Products
As Figure 6.15 indicates, a modest increase in the
consumption of animal products in industrialised nations
from roughly 825 kilocalories per person per day today, to
just under 900 kilocalories per person per day is forecast by
2050. Whilst the increase in meat consumption is expected
across all groups, the change in eating habits in developing
economies is much more pronounced and it is primarily
these economies which will dictate future demand for meat.
Figure 6.15: Past and projected food consumption of
livestock products
1000

Projections

900

Kcalories/person/day

800
700
600
500
400
300
200
100
0
1962

1970

1980

1990

2000

2015

2030

2050

Industrialized

Near East/North Africa

Transition

South Asia

Latin America and the Caribbean

Sub-Saharan Africa

East Asia
For past,
three-year
averagesOrganisation
centered onof
the
Source:
Food
and Agriculture
the United Nations, 2006
indicated year. Livestock products include meats,
eggs, milk and dairy products (excluding butter).

46

Figure 6.16: Global demographic spread of income groups on a country by country basis in 2008

High income

$11,500 or more

Middle, upper

$3,700 - $11,500

Middle, lower

$900 - $3,700

Low income

$900 or less

Gross National Income (GNI) per

capita in 2007 (current USD)
Source: World Bank, 2008

Many in India and China are still living either in poverty or in

the low-income category so there is great scope for demand
increase from changing eating habits in the future. In this
sense developing countries are currently engaged in a catchup process as their diets come to resemble more closely
those of the developed world. This nutrition transition,
already being observed in the developing world, is
characterised by a shift from widespread undernourishment
to higher calorie, more varied diets involving a higher level
of animal products.117

1. Pingali 2004, Food and Agriculture Organisation of

the United Nations Working Paper
Net imports [to Asia] of [vegetables, milk and dairy
products] increased by a factor of 13 over the last 40
years, rising from a deficit of US$1.7 billion in 1961/1963
to US$24 billion in 1997/1999. Between 1997/1999 and
2030, the cumulative increase in imports of these products
is expected to be 154% and 17% for vegetable oils and
oilseeds, while meat imports are expected to increase by
389%.120

389%

2. Food and Agriculture Organisation of the United

Nations 2006\
As nearly half of the worlds cereal production is used
to produce animal feed, the dietary proportion of meat
has a major influence on global food demand. With meat
consumption projected to increase from 37.4 kg/person/
year in 2000 to over 52 kg/person/year by 2050, cereal
requirements for more intensive meat production may
increase substantially to more than 50% of total cereal
production. 121

Forecasted increase in meat

imports to Asia between 1999
and 2030
The nutrition transition often culminates in over-nutrition
and a growth in the level of obesity. Surprisingly, this is
particularly true in the developing world where public health
education is less prevalent. The World Health Organization
(WHO) estimates that there are 300 million obese adults
and 115 million suffering from obesity-related conditions
in the developing world.118 The effect of changing diets is
further exacerbated by a trend towards reduced physical
activity in urban compared to rural populations.119
As can be expected, estimates of the future demand
increases for animal products are wide ranging as there
are many interrelated factors to take into account in any
forecasting model. Some of the more conservative estimates
from a number of credible sources are detailed below:

3. Food and Agriculture Organisation of the United

Nations 2003; 2006
Cereal products are increasingly used as feed for livestock,
estimated to be at least 3540% of all cereal produced in
2008 and projected to reach nearly 4550% by 2050 if
meat consumption increases. 122
4. Food and Agriculture Organisation of the United
Nations 2006a
The growth in demand for animal products over the
coming decades will be significant. Although the annual
growth rate will be somewhat slower than in recent
decades, the growth in absolute volume will be vast. Global
production of meat is projected to more than double from

47

229 million tonnes in 1999/2001 to 465 million tonnes

in 2050, and that of milk to increase from 580 to 1,043
million tonnes. The bulk of the growth in meat and in milk
production will occur in developing countries. 12
5. Joint OECD and Food and Agriculture Organisation
of the United Nations Agricultural Outlook 2008-2017
(2008)
Increasing world livestock production will continue to be
the driving force behind the consumption of oilseed-derived
protein meal, with most of the growth taking place in nonOECD countries. Comparing 2017 with the 2005-07 base
period, oilseed meal consumption in the developing region
will rise by almost 50%, with China accounting for roughly
half the growth alone, to satisfy its burgeoning livestock
sector. 124
The overall mid-term trend that is emerging is for the
homogenization of food tastes across the globe as poorer
nations eating habits come more closely to resemble those
of richer nations. Time and again, it has been demonstrated
that there is a high income elasticity of demand for meat
and other animal products.125 In other words, rises in
average incomes translate into rapid increases in demand
for livestock products with the result that the difference
in average consumption figures for meat, milk and eggs
that currently exists between developed and developing
countries will reduce over time.

Figure 6.17: Changes in historical and projected composition of human diet and the nutritional value
Kilocalories per
capita/day

Other
Pulses
2500

Roots and
tubers
Meat

Sugar

2000

Vegetable
oils
1500
Other
cereals

1000
Wheat

500

Trends in Urbanisation and the Effect on Food

Demand
Another important factor determining demand for food
is urbanization. Urbanization has an impact on patterns
of food consumption due to the fact that in cities
people typically consume more food away from home,
and consume higher amounts of precooked, fast and
convenience foods, and snacks. 126, 127, 128 This has the effect
of increasing the consumption of animal products as rural
populations move into urban areas.

Rice

0
1964-66

1997-99

2030

Source: Food and Agriculture Organisation of the United Nations,

2008 and 2009

6.18: Urbanization rates and urbanization growth rates

Region

Urban population as percent of

total population in 2005

Urbanization growth rate

(Percentage per annum 19912005)

South Asia

29

2.8

East Asia and the Pacific

57

2.4

Sub-Saharan Africa

37

4.4

West Asia and North Africa

59

2.8

Latin America and the Caribbean

78

2.1

Developing countries

57

3.1

Developed countries

73

0.6

World

49

2.2

Source: Food and Agriculture Organisation of the United Nations, 2006

48

As Figure 6.19 shows, world urban population is forecast to

almost double by 2030. By then the number of people living
in urban areas is forecast to increase from todays figure of
just over 3 billion people to roughly 5 billion people.131, 132
Historically there is a clear link between urbanisation and
increased consumption of animal products (see Figure
6.20). Studies for China clearly show that an increase
in urbanization has a positive effect on per capita
consumption levels of animal products.133 Between 1981
and 2001 human consumption of grains dropped by 7% in
rural areas of China and dropped by 45% in urban areas,
whilst meat and egg consumption increased by 85% and
278% respectively in urban areas and 29% and 113% in
rural areas.134

Food Wastage Trends and the Implications for

Food Demand

Figure 6.19: Past and projected global rural and urban

populations from 1950 to 2030
6

Projections

Billion people

5
4
3
Rural
2
Urban

1
0
1950

1960

1970

1980

1990

2000

2010

2020

2030

Source: Food and Agriculture Organisation of the United Nations, 2006

Figure 6.20: Consumption function of animal products

at different levels of urbanization in China
Consumption (kcalories/person/day)

In 2005 (the latest year for which statistics are available)

49% of the world population were living in cities, however
urbanization rates are 73% in developed countries and
78% in Latin America, whereas they average 57% in
developing countries (see Figure 6.18). This means there is
still great latitude for growth of urban populations along
with the resultant growth in food demand. This is especially
true of South East Asia and Sub-Saharan Africa where much
of the worlds population growth is taking place. These
regions currently have below average urbanisation rates
with 37 and 29 percent urbanization respectively. Virtually
all population growth forecast for these regions between
2000 and 2030 will be in urban areas. 129, 130

500
450
U=20%

400
350

U=25%

300
250

U=30%
200
150
100

Another hugely important factor to take into account

regarding growing incomes and increasing urbanisation is
the fact that these trends are accompanied by an increase in
the quantity of wasted or discarded food.135 This is not due
only to general wastage at the household or retailer level
but also right through the supply chain down to the level
of production. Rural subsistence farmers produce their own
food which they eat themselves and therefore, given that
there are fewer steps in the value chain between production
and consumption, the level of wastage is lower.

400

600

800

1000

1200

Real PCE/person (1980 US$ppp)

Source: Rae et al., 2008; Food and Agriculture Organisation of the
United Nations, 2006

Figure 6.21: Food losses for different commodities

Fresh fruits and
vegetables
Fluid milk

278%

Processed fruits and veg

Meat, poultry and fish

Increase in the consumption of eggs

in urban areas of China between
1981 and 2001

85%

Increase in the consumption of

meat in urban areas of China
between 1981 and 2001

Grain products
Caloric sweeteners
Fats and oils
Other foods (including
eggs and other dairy products)
0

10

15

20

25

Food eaten/lost (million tons)

Food eaten

Food lost

Source: Kantor et al., 1999; Food and Agriculture Organisation of the

United Nations, 2009

49

Statistics from the late 1990s show that farmers globally

were producing on average 4,600 kcal/capita/day at the
farm gate prior to conversion into food or use as animal
feed.136 After removing all losses at the various stages of
the food economy, approximately 2,800 kcal/capita/day
of a combination of animal and vegetable based foods
are available for supply. This figure is further reduced to
approximately 2,000 kcal/capita/day at the consumption
level due to further losses in the supply chain prior to food
actually arriving on the plate of the consumer. This equates
to only 43% of the potential edible crop harvest available at
the beginning of the supply chain.137
These figures are global averages. Generally, the more
developed the society, the more extreme the losses.
Wastage and losses begin at the bottom of the supply
chain and follow through all the way to the top in more
developed nations. In the US, losses at the farm level are
roughly 15-35% depending on the industry, while losses
in the retail sector are roughly 26%. In addition to the
losses that occur lower down the supply chain, the more
opulent and urbanised the society becomes, the greater
the wastage at the higher end of the supply chain closer to
the consumer. In the United States for example, 30% of all
food, worth US$48.3 billion, is thrown away annually by
the consumer. Overall annual losses in the US are therefore
estimated at US$90 billion to US$100 billion.
Figure 6.22: Gross estimated global losses through
conversion and wastage at different stages of the food
supply chain

4000

3000

These figures are global averages. Generally, the more

developed the society, the more extreme the losses.
Wastage and losses begin at the bottom of the supply
chain and follow through all the way to the top in more
developed nations. In the US, losses at the farm level are
roughly 15-35% depending on the industry, while losses
in the retail sector are roughly 26%. In addition to the
losses that occur lower down the supply chain, the more
opulent and urbanised the society becomes, the greater
the wastage at the higher end of the supply chain closer to
the consumer. In the United States for example, 30% of all
food, worth US$48.3 billion, is thrown away annually by
the consumer. Overall annual losses in the US are therefore
estimated at US$90 billion to US$100 billion.138
This characteristic has been observed in other affluent
societies. In the United Kingdom the figures are roughly
the same as those for the US with households wasting an
estimated 6.7 million tonnes of food every year, around one
third of the 21.7 million tonnes of food purchased annually.
This consumer level food wastage figure of 32% compares
closely with the 30% statistic in the US.139, 140 Another study
conducted in Australia surveyed over 1,600 households and
found that on a country-wide basis, $10.5 billion was spent
on items that were never used or thrown away, equivalent
to more than $5,000/capita/year.141
In terms of food wastage from animal products, this of
course has an amplifying effect, given the feed-crops
involved in the production of the produce in the first place.
A number of organisations internationally are pushing for
increased efficiency and lobbying governments, industry
and the public to reduce wastage at the various levels of
the value chain. Many of these organisations recognise the
huge implications for climate change both in terms of the
carbon cost of producing wasted food and the production
of the particularly potent greenhouse gas, methane (23
times more potent than CO2 in terms of its warming
effect142) from rotting food in landfill sites.

43%

2000

Proportion of edible crop produce

available for consumption after supplychain losses, wastage and non-food uses

1000

0
Field

Household

Edible crop harvest 4600 kcal

After harvest 4000 kcal

Harvest losses

Animal feed

Meat and Dairy 2800 kcal

Available for household

consumption 2000 kcal

Distribution losses and waste

Source: Lundqvist et al., 2008; Food and Agriculture Organisation of

26%

Proportion of food wasted by

US retailers

30%

Proportion of food wasted by

US consumers

the United Nations, 2009

50

For example a UK based group, WRAP (Waste and Resource

Action Program), estimates that if food were not discarded
in the way it is in the UK, the level of greenhouse gas
abatement would be equivalent to removing 1 in 5 cars
from the road.143 Whilst these types of campaign messages
are well intentioned, one has to question their effectiveness
in changing behaviour in UK kitchens and at the dinner
table, let alone in the developing world where the new
urban masses are less aware of the plight of polar bears and
far more concerned with upping their intake of hamburgers
and fried chicken.
Unsurprisingly, this type of activism is most prevalent in
the more wasteful affluent societies where food wastage
has remained fairly constant at the higher levels for years
and the effect of this wastage is already factored into the
global food economy. Given the increasing trends towards
urbanisation and affluence in the developing world and
the resultant changes in eating habits and behaviour, food
wastage has the potential to play a significant role in future
food demand. Indeed, trends in developing countries
suggest precisely that.

Increased Market Volatility and Low Food Stocks

and the Implications for Commodity Prices
In spite of a strong recovery in grain production in 2008,
prevailing low stock levels suggest continued market
tightness, especially when demand prospects for food, feed
and fuels show no sign of abating. As long as stocks remain
tight, this will apply upward pressure on prices. As the
OECD-FAO Agricultural Outlook 2008-2017 puts it:

Figure 6.23: Volatility of production around trend between 1960 and 2007 for various food commodities
Bananas
Sugar
Tea
Rice
Wheat
Palm oil
Maize
Soybeans
Cocoa
Coffee
3%

5%

7%

9%

11%

13%

15%

Source: World Bank, 2009

30%

Proportion of food wasted by British

consumers

Cereal markets are expected to remain closely balanced

[over the period 2008-2017] as stock to use ratios are
expected to remain low in the years to come despite
growth in cereal production. This implies high grain prices
throughout most of the [period 2008-2017] as global stocks
have declined to record-low levels over the last decade, such
that any variations in quantities produced and demanded
cannot be buffered and hence have a proportionally much
greater effect on market prices. 144
The supply volatility shown in Figure 6.23 is caused by wide
variations in yield in primary producing regions which are
increasing along with the rise in extreme weather events.
Annual fluctuations in world cereal production between
1960 and 2007 varied between 9.8% and 3.9% of the
previous years production. This implies that supplies to the
world market (the sum of the surplus in the supply of each
region) can reduce by one-third or increase two-fold.145
The increased yield volatility due to climate change related
extreme weather events (note the yield drops in Australia
due to the droughts of 2002 and 2006 shown in Figure
6.24) in combination with low grain stocks, are creating the
conditions for a future of higher agricultural commodity
prices which may persist for some time to come. As a 2009
United Nations report on the food crisis of 2008 put it:

Stocks of cereals and vegetable oil have fallen to low

levels relative to use, reducing the buffer against shocks
in supply and demand. Stocks are not expected to be fully
replenished over the coming 10 years, implying that tight
markets may be a permanent factor in the next decade.
Climate change could increase the variability in annual
production, leading also to greater future price volatility.

51

Figure 6.24: Deviations from trend in wheat and coarse grain yields between 1995 and 2007
Tonnes per hectares
0.8
0.6
0.4
0.2
0
-0.2
-0.4
-0.6
-0.8
-1.0
1995

1996

1997

1998

1999

Australia

2000

2001

Canada

2002

2003

EU27

2004

2005

2006

2007

United States

Note: Yield trends are estimated over these years to be 0.7% for the EU (27), 1.0% for Canada, and 2.6% for the US, and assumed to be 0% for Australia.
Source: OECD Secretariat, 2009; Food and Agriculture Organisation of the United Nations, 2009

The Effects of Rising Demand on Policy Decisions

and the Implications for Agricultural
Commodity Prices

Figure 6.25 shows a survey of policy responses conducted

by the World Bank and the United Nations from 77
countries between 2007 and early 2008. About half of the
countries reduced cereal import taxes and more than half
applied price controls or consumer subsidies in an attempt
to keep domestic food prices below world average prices,
whilst one-quarter of the governments reviewed actually
imposed some form of export restriction. Only 16% of the
countries surveyed did not employ any policy response to
mitigate soaring food prices.

The sudden rise in global food prices during 2008 triggered

a wide variety of policy responses from governments. These
included easing of import taxes on food, imposing export
restrictions to maintain domestic food availability, applying
price controls and subsidies to keep food affordable and
drawing down of domestic grain stocks to stabilize prices.

Figure 6.25: Policy actions to address high food prices, by region

Countries carrying out policy action (%)

100
80
60
40
20
0
Africa

East Asia

Reduce taxes on foodgrains

Europe and
central Asia

Latin America and

the Caribbean

Increase supply using foodgrain stocks

Apply price controls / provide consumer subsidies

Near East and

North Africa

South Asia

Impose export restrictions

None

Source: World Bank, 2008; Food and Agriculture Organisation of the United Nations, 2008

52

Such policy responses from government disrupt the free

market mechanisms required to produce the very incentives
necessary to alleviate supply shortages. This can have the
unintended consequence of exacerbating the issues which
create the environment for high prices in the first place. In
the words of a recent United Nations report, The State of
Food Insecurity in the World 2008:
Firstly, by maintaining farmgate prices at artificially
low levels, policies may be discouraging the muchneeded supply response and potential productivity
increases. Second, export restrictions lower food supplies
in international markets, pushing prices higher and
aggravating the global situation. Third, higher subsidies
and/or lower taxes and tariffs increase the pressure on
national budgets and reduce the fiscal resources available
for much-needed public investment [in agriculture] and
other development expenditure.
In summary, some of the policy measures employed tend to
hurt producers and trade partners and actually contribute
to volatility of world prices. Experience has shown that
price controls rarely succeed in controlling prices for long.
Moreover, they place a heavy fiscal burden on governments
and create disincentives for supply responses by farmers.146

53

CHAPTER 7

Constraints to Current Supply and

Limitations to Further Increases in
Agricultural Productivity

If there is climate change taking place, the best way to participate is through
agriculture. Jim Rogers, 2009
Feeding the majority of the poor and vulnerable populations in Africa,
while preserving the natural resource base and the environment, is one of
the most pressing development challenges of the twenty-first century.
Dr. Akin Adesina, Vice President of the Alliance for a Green Revolution in Africa and Associate Director of
the Rockefeller Foundation, 2009

Impacts of Climate Change

A comprehensive review of climate change is beyond the
scope of this document. However, prior to discussing the
scientific communitys consensus view of the implications
of climate change to agriculture, it is worth providing the
reader with important background information.
There is a growing body of historical data from actual
observations of changes in weather conditions, in particular
with respect to severe weather events, which highlight the
most immediate climate related threats to global agricultural
productivity.
Statistical data shows the undeniable trend towards a
greater frequency of weather and temperature related
anomalies. Figure 7.1 illustrates the increase in global
average surface temperatures, which has been particularly
pronounced since the 80s. This has had the effect of
distorting normal rainfall patterns and creating a greater
frequency of extreme weather events.

Figure 7.1: Trends in global average surface

temperatures between 1880 and 2008
Differences in temperature
from 1961-199 0
Mean value, C

Estimated actual
global mean
temperature, C

0.6

14.6

0.4

14.4

0.2

14.2

0.0

14.0

- 0.2

13.8

- 0.4

13.6

- 0.6
1880

13.4
1900

1920

1940

1960

1980

2000

Source: US National Oceanic and Atmospheric Administration, 2008

55

Figure 7.2: Trends in rainfall variability in the Sahel region of Sub-Saharan Africa
Index
100

75

50

25

1950

1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

Source: World Meteorological Association Commission for Agricultural Meteorology, 2006

As Figure 7.2 shows, the trend in rainfall variability has

created a greater frequency of dryer years, roughly doubling
the number of dry areas in the world, as illustrated in
Figure 7.3.
Despite this, as seen in Figure 7.4, the number of floods
has roughly quadrupled since 1980, due to factors such as
heavier rainfall and damage to ecosystems which normally
regulate the release of ground water.

Figure 7.3: Increase in dry areas globally between 1950

and 2005

Figure 7.4: Trends in climate disasters since 1980 versus

earthquakes

Dry areas in % of total area

250

Spatial coverage: 75N-60S

40%

Cyclones

Floods

35%

200

30%

150

Earthquakes

25%
100
20%
50

15%

10%
1950

0
1960

1970

1980

1990

2000

Source: Intergovernmental Panel on Climate Change, 2007

2005

1980

1985

1990

1995

2000

2005

2010

Source: Intergovernmental Panel on Climate Change, 2007

56

As Figure 7.5 shows, the total number of natural disasters

(excluding earthquakes) has increased approximately 10
times between 1960 and the present time, with the number
of food emergencies roughly doubling since 1980 (see
Figure 7.6). These effects are also becoming more sudden
and unpredictable, making mitigation and management
ever more challenging and amplifying the negative effects
on agricultural productivity (see Figure 7.7).

26

Figure 7.5: A comparison of all natural disasters

against earthquakes between 1900 and 2006
Number of disasters per year
450

400

350

Number of food emergencies

in 1981

300

250

Figure 7.7: Changing nature of natural and humaninduced disasters

Natural

All disasters include:

drought, earthquake,
extreme temperatures,
famine, flood, insect
infestation, slides,
volcanic eruption, wave
and surge, wild fires,
wind storm.

Human-induced

200

150

2%

14%

100

1980s

50

0
1900
86%

1920

1940

1960

1980

2000

2010

98%

Earthquakes

All disasters
11%

20%

1990s

Source: CRED Annual Disaster Statistical Review, 2006, 2007;

Intergovernmental Panel on Climate Change, 2007

Figure 7.6: Causes of food emergencies between 1981

and 2007

80%

89%

Number of emergencies
70
60

27%
2000s

50
40
30
20

73%

73%

10
0

Sudden onset

Socio-economic

Slow onset

War and conflict

Source: Food and Agriculture Organisation of the United Nations, 2008

1981

1985

1989

Human-induced disasters

1993

1997

2001

Natural disasters

2005
Total

Source: Food and Agriculture Organisation of the United Nations, 2008

57

This interaction between climate change induced severe

weather events and the socio-economic fabric of societies
thus exerts further indirect pressure on food production by
stimulating conflicts related to food insecurity. A societys
food producing capabilities are reduced during times of
conflict. The level of socio-economic induced disasters has
increased significantly as a proportion of total humaninduced disasters in recent years, as shown in Figure 7.7.
There is a strong link between the state of the environment
and food production. The natural environment is the
platform upon which all life, and most importantly from a
human perspective, food production, is based. Yields are
affected by the complex between numerous environmental
factors from the length of the growing season (as dictated
by weather and water availability) to the availability of
insects for pollination, and the natural control of weeds,
diseases and insect pests.
All of these factors in combination, known as ecosystem
services, help to sustain agricultural productivity. Figure
7.8 summarises the interactions between climate driven
phenomena and their capacity to either increase or
decrease agricultural yields. The negative impacts of climate
change on productivity have already been observed in
many regions of the world and are particularly severe in
Africa where drought and disease have had devastating
effects on yields.147
According to one World Bank forecast extreme whether
events caused by climate change and water scarcity could

have significant impacts on yield. Agricultural productivity could actually decrease during the next 30 years, rather
than increase as more optimistic forecasts are predicting.148
Against a background of rising demand this could have
significant implications for commodity prices in the coming
years. In their words:
Global temperatures are expected to rise by 0.4 degrees
Celsius between now and 2030. This could lead to an
overall decline in agricultural productivity of between 1 and
10 percent by 2030 (compared with a counterfactual where
average global temperatures remained stable), with India,
Sub-Saharan Africa, and parts of Latin America being most
affected.149

10%

Potential overall decline in global

agricultural productivity by 2030
due to further temperature
increase of 0.4 oC
It should be noted that a 0.4 degree Celsius temperature
rise actually lies at the conservative end of the scale in terms
of the spectrum of forecasts from climate models. It stems
from the 2001 report by the Intergovernmental Panel on
Climate Change (IPCC) which predicted that temperatures
would increase by 1.4C to 5.8C between 2000 and 2100.

Figure 7.8: Impacts of climate driven phenomena on agricultural productivity

Climate driven phenomena

Agriculture, forestry and ecosystems

TEMPERATURE CHANGE
Over most land areas, warmer and fewer cold days and nights,
warmer and more frequent hot days and nights

Increased yields in colder environments

Decreased yields in warmer environments
Increased insect outbreaks

HEAT WAVES/ WARM SPELLS

Frequency increases over most land areas

Reduced yields in warmer regions due to heat stress

Wildfire danger increases

HEAVY PRECIPITATION EVENTS

Frequency increases over most land areas

Damage to crops
Soil erosion
Inability to cultivate land due to waterlogging of soils

DROUGHT
Affected areas increase

Land degradation
Crop damage and failure
Increased livestock deaths
Increased risk of wildfire

CYCLONES AND STORM SURGES

Frequency increases

Damage to crops
Windthrow (uprooting) of trees
Damage to coral reefs

SEA LEVEL RISE

Increased incidence of extreme high sea-level (excluding tsunamis)

Salinisation of irrigation water, estuaries and

freshwater systems

Source: Intergovernmental Panel on Climate Change, 2008

58

There are a number of credible studies which view these

estimates as being on the low side as they do not take full
account of tipping points caused by feedback loops in
various earth systems. For example, a study published by
Oxford University in 2005, based on the average results of
2,578 computer simulations, forecast a temperature rise
of between 1.9C and 11.5C, with the majority of model
results ranging from 2C to 8C.150

15%

However, as Figure 7.9 shows, even at the lower end of the

scale the consequences for global agricultural productivity
would still be severe. It is no surprise therefore that an
enormous amount of research is being conducted into
the likely effects of climate change on food production.
Whilst there are a number of models from credible sources
predicting differing effects, especially in the mid-term
(20302050), the general consensus is that on a global
scale, the effects will be negative, with an increasing
number of models agreeing on rising negative impacts
over the longer term. In other words, the effects of climate
change on agriculture and yields will become increasingly
more noticeable as time goes on. 151, 152

Decline in production of wheat

in Southern Africa by 2030

27%

Decline in production of maize

in Southern Africa by 2030

Figure 7.9: Projected impacts of climate change

Global temperature increase (relative to pre-industrial)
0C

+1C

+2C

+3C

+4C

+5C

+6C

Food
Falling crop yields in many areas, particulary developing regions

Possible rising yields in some high latitude regions

Falling yields in many developed regions

Water

Small mountain glaciers disappear,

impacts on water supplies

Significant decreases in water availability in many

Sea level rise threatens major cities
areas, including Mediterranean and Southern Africa

Ecosystems

Extensive damage to coral reefs

Rising number of species face extinction

Extreme weather events

Rising intensity of storms, forest fires, droughts, flooding and heat waves
Risk of abrupt and major irreversible changes

Increasing risk of dangerous feedbacks and abrupt, large-scale shifts in the climate system
0C

+1C

+2C

+3C

+4C

+5C

+6C

Source: Stern Review, 2008

59

For example, by 2050 climate change may cause large

portions of the Himalayan glaciers to melt, disturb monsoon
patterns and result in increased floods and seasonal drought
on irrigated croplands in Asia which account for 25% of
the world cereal production. On average, yields of the
dominant regional crops may fall by 1535% in Africa and
Western Asia once temperatures rise by 3 or 4 OC.153 Even
without including the effects of extreme weather events in
forecasting models, a study for Southern Africa forecasts
declines in production of 15% for wheat and 27% for
maize by 2030 at a time when the more extreme effects of
climate change would only just be emerging.154

moisture which would otherwise act to reduce global crop

yields by 2050.156 The forecasts presented in Figure 7.10
do not however take account of the effects of extreme
whether events such as flooding, droughts and storms.
These will likely combine to depress yields and increase
production risks in many world regions regardless of the
positive effects of increased CO2 concentrations.157 Indeed,
the Intergovernmental Panel on Climate Change projects
that changes in the frequency and severity of extreme
climate events will have more serious consequences for food
production and food security than changes in projected
mean temperatures and precipitation.158

As Figure 7.10 indicates, there are some regions of the

world whose agricultural productivity may increase over
time, mainly in the far North and South of the planet.155 It is
bitterly ironic that many of the countries whose agricultural
productivity is destined to benefit from rising temperatures,
such as the northern part of the US, Canada and much
of Northern Europe, are the very countries who are most
responsible for generating many of the greenhouse gasses
which are the root cause of climate change in the first
place.

This uncertainty regarding the future effects of climate

change severely increases uncertainty in forecasting global
food production. For example one scenario predicted by the
World Banks ENVISAGE forecasting model predicts annual
productivity gains of 1.2% per year on average by 2030
and an annual rise in commodity prices of only 0.3%.159
However, the Food and Agriculture Organisation of the
United Nations states:

The forecasts in Figure 7.10 take account of the direct

fertilization effect of rising carbon dioxide concentration
(CO2). Some studies have argued that this may offset
losses caused by increased temperature and decreased soil

The current scenarios of losses and constraints due to

climate change and environmental degradation with no
policy change - suggest that production increases could
fall to 0.87% towards 2030 and only 0.5% between
20302050.160

Figure 7.10: Projected losses in food production due to climate change by 2080

Projected changes in agricultural productivity to 2080 due to climate change,

incorporating the effects of carbon fertilization
-50%

-15%

0%

+15%

+35%

No data

Source: Cline et al., 2007; Food and Agriculture Organisation of the United Nations, 2009

60

The World Bank further acknowledges that:

A more-rapid-than-expected warming of the planet could
reduce agricultural productivity sharply, leading to rising
food prices.161
The data from Figure 7.10 is based on a consensus estimate
of 6 climate models and two crop modelling methods,
so it can be viewed as an average of various forecasts. By
2080, assuming a 4.4C increase in temperature and a
2.9% increase in precipitation, even without taking account
of extreme whether variables, global agricultural output
potential is forecast to decrease by about 6 to 16%.

Figure 7.11: Historical and projected changes in water

consumption for food production between 1960 and
2050
Water requirements
for food production
(km/year)
2050

2030
8000

70-80%

Proportion of human water

consumption used in Agriculture
It should be noted that these effects are additional to other
effects reducing productivity such as soil degradation from
erosion, salinization and nutrient depletion. The effects
beyond 2080 are even more extreme with agricultural
output being reduced by more than 60% for several African
countries or an average 1627%, depending on the effect
of carbon fertilization.162

Impacts of Water Scarcity

Water is essential to humanity, not simply in its raw form
as drinking water, but also by virtue of being one of the
most important limiting factors in food production.163 The
agricultural sector is responsible for between 70% and
85% of all human water consumption.164, 165 Irrigated
land currently produces roughly 40% of the worlds food
on 17% of its land, being on average 2 to 3 times more
productive than rainfed lands.166
As Figure 7.11 indicates current projections are for a
doubling in demand for water required for food production
by 2050 with an increase in demand of 2232% by
2025.167, 168 The World Health Organisation estimates that
water scarcity will affect over 1.8 billion people by 2025.169
Unsurprisingly irrigation water costs are rising globally.
Since 1990 in the Indo-Gangetic Basin of India for example,
recent studies have shown the cost of water has increased
by 400500%.170
Irrigation water supply is threatened by a number of
climate related trends, intensive agricultural practices and
unsustainable development. This includes depletion of
groundwater, particularly in poorer developing countries
with rapid population growth and the destruction of
watersheds and natural water reservoirs, such as forests
and wetlands which also serve as flood buffers.171 In areas
affected by these problems, water-deficit has obvious knock
on effects on food security.172, 173

2015

6000

2002
4000
1990
1980
2000

1970
1960

Increases, over
2002 water
requirements,
needed to eradicate
poverty by 2030 and
2050 respectively

Increase, over 2002

water requirements,
needed to meet the
2015 hunger target

Source: De Fraiture et al., 2003; Shen et al., 2008; United Nations

Environment Program, 2005

27%

Proportion of worlds food

produced on irrigated land

22-32%

Increase in water demand for food

production by 2025

61

From a climate change perspective, perhaps one of the

most crucial issues affecting future productivity is the fact
that much of the worlds irrigated land is downstream of
areas where snow and glacial mass are the primary sources
of irrigation water.174 The rapid thawing of terrestrial ice
has been one of the more publicised effects of global
warming, particularly in northern hemisphere see ice, the
rate of decline of which is shown in Figure 7.12. Of greater
importance for global food production is the data in Figure
7.13 which shows the increasing rate of global glacier loss
since 1960. The rate of loss has reached particularly high
levels in recent years.
The regions of highest loss include Central Asia, parts of
the Himalayan Hindu Kush, China, India, Pakistan and parts
of the Andes. Throughout these regions the trend which
is emerging indicates that glaciers and ice everywhere are
melting above the rates forecast in most climate models.
Whilst this may increase irrigation resources in the shortterm, it will eventually lead to dramatic declines in water
availability for irrigation with serious adverse consequences
for food production.175

Figure 7.12: Reduction in minimum sea ice extent in

the northern hemisphere between 1978 and 2008
Northern hemisphere ice cover anomalies
Million square kilometres
1.5
1.0
0.5
1966 to 1990 mean
0.0
-0.5
-1.0
-1.5
-2.0
-2.5
All time record low in September 2007

In areas heavily dependent on snow and glacial melt water,

such as Afghanistan, Bangladesh, Bhutan, China, India,
Myanmar, Nepal and Pakistan, collectively an area with an
approximate combined population of 2.5 billion people,
nearly 35% of crop production is based on irrigation. Given
that a large proportion of future population increase is
forecast to take place in these regions, water demand is
projected to increase by at least 7090% by 2050. Many of
these areas, in particular Central Asia, China and Pakistan
are already under direct water stress even at current
population levels.176 As Figure 7.14 shows, these are far
from the only areas of the planet already suffering from
very high levels of water stress.

-3.0
1980
1978

1985

1990

1995

2000

2005
2008

Source: US National Oceanic and Atmospheric Administration, 2008

Figure 7.13: Reduction in global glacial mass between

1960 and 2003
Annual deviation

Cumulative loss

Hundred thousand

Hundred thousand

million tonnes

million tonnes

1992
Increase

1.8 billion

Number of people affected by

water scarcity by 2025

-1

-20

-2

-40
Loss

-3

-60

-4

-80

-5
1960

1970

1980

1990

2000

2003

Source: Intergovernmental Panel on Climate Change, 2007

62

Figure 7.14: Global water stress levels in 2000

Water stress: ratio between withdrawl and availability (in 2000)

no stress

low

moderate

high

very high

0.1

0.2

0.4

0.8

Global regions where

climate change is projected
to decrease annual runoff
and water availability

Source: Intergovernmental Panel on Climate Change, 2007

Two key questions are important in assessing the future

affect on food production. Firstly, how much of the worlds
food production is dependent on glacial melt water, and
secondly, and secondly, how quickly might this resource
diminish? According to the United Nations, melt water
from the Himalayas supports the production of over 514
million tonnes of cereals annually, equivalent to 55.5% of
Asias cereal production and 25% of the worlds current
production. An estimated 857,830,000 ha of cropland in
these areas is dependent upon the mountains water flow
for irrigation.177, 178
Given that irrigated land is on average far more productive
than rainfed land, particularly in many of the areas in
question where monsoon seasons may result in sporadic
rains, any reduction in the proportion of irrigated land will
have a negative effect on yields. For instance, statistics show
that yield for rice grown on irrigated land is in the range
of 210 tonnes/ha, compared to 23 tonnes/ha for nonirrigated land.179, 180 A reduction of 10-30% in the yields
on lands irrigated by the mountains of the Himalayas and
Central Asia would translate into a 1.75.0% reduction in
world cereal production.181
On a global scale a 1030% irrigated yield loss would
equate to a 412% reduction in cereal production. Greater
losses than this have already been observed in a number of
regions due to over-extraction from aquifers and rivers. On

25%

Proportion of world cereal

production dependent on Himalayan
glacial melt water

a global scale almost half of all irrigation water comes from

non-renewable and non-local sources such as glacial melt
water.182
The importance of glacial melt water to world food
production is beyond doubt. What is less certain is the rate
of depletion in glaciers due to global warming. The United
Nations in a recent document discussing the issue puts it
thus:
The assumption that the melting glaciers would cause
reduced production by 2050, as indicated, and that
a similar estimate for the remaining irrigated lands is
considered an upper estimate, then the range of reduced
yields due to water scarcity is in the region of 1.712% of
the projected yield by 2050. Given the high dependence on
many of the worlds rivers for irrigation, this estimate could
be quite optimistic.

63

The document goes on to say, The combined effects of

melting of glaciers, seasonal floods and overuse of ground
and surface water for industry, settlements and irrigation,
combined with poor water-use efficiency are difficult to
estimate. However, given that 40% of the worlds crop
yields are based on irrigation, and almost half of this from
the basins of rivers originating in the Himalayas alone, the
effect of water scarcity can be substantial.
According to climate models, rising temperatures combined
with changes in the monsoon could result in the loss of up
to 80% of the glaciated area by the end of the century.184,
185
A disturbing trend is for glacial melt to exceed the rates
forecast by current climate models. The reasons for this
are the subject of ongoing debate and research. What
is not under dispute are the factual observations of the
phenomenon. For example, actual measurements taken in
Nepal indicate that warming at high altitudes is occurring
at up to 0.03 OC per year, much faster than the global
average. Warming has been observed to occur at faster
rates the higher the altitude, reaching 0.06 OC per year in
some cases.186, 187 If current trends continue, annual river
flows dependent on glaciers will inevitably decline.188

1.7-12%

Possible decline in global cereal

production by 2050 due to reduction
in glacial melt water

Figure 7.15: River basins and their hydrological significance

Source: United Nation Environment Program, 2007; Viviroli, D., Weingartner, R. et al., 2003

64

Impacts of Drought
In the case of rainfed crops a key inhibitor of productivity
is drought. Having risen steeply in recent years, droughts
are forecast to increase in many regions of the world as a
result of climate change. Apart from their effect on arable
crops, droughts have also been particularly devastating on
livestock production. In Africa for example, data from nine
major droughts in the study countries between 1981 and
2000 resulted in an average livestock loss of 40% with the
lowest recorded loss being 22% of animals and the highest
loss being 90%, as seen in Figure 7.16.189

Impacts of Species Infestations

Worldwide, there are estimated to be 67,000 species
which attack crops, including 9,000 insects and mites,
50,000 pathogens and 8,000 weeds. It is further estimated
that up to 70% of these pests are introduced.190 Of a
total crop value of US$267 billion covered in a number
of studies, losses in yield due to alien invasive weeds and
pathogens are estimated to be responsible for 8.5% and
7.5% in yield reduction, equivalent to US$24 billion and
US$21 billion of crop value of respectively. 191, 192, 193 Other
estimates for annual losses range from US$1.1 to US$55
billion, equivalent to 17% crop loss at the upper end. 194,
195, 196
These figures only take account of crop loss and do
not include the additional costs associated with control of
species infestations.

40%

Average loss of livestock recorded

over 9 severe droughts in Africa
between 1981 and 2000

US$1.1-55 billion
Annual cost of crop losses due
to alien invasive species

A large number of studies have concluded that increased

climate extremes could worsen the impact of weeds,
diseases and pests and enhance the spread of invasive
species. 197, 198, 199, 200, 201 This clearly has the potential for
devastating impacts on global food production. Indeed
a number of studies have demonstrated that IAS are
now the second gravest threat to global biodiversity and
ecosystems, after habitat destruction and degradation.202,
203, 204
Whilst these studies were conducted primarily with
reference to natural ecosystems, the implications for
agriculture are clear and the number of IAS is predicted to
continue to rise. 205, 206, 207

Figure 7.16: Impacts of drought on livestock numbers in selected African countries

Greater Horn of Africa

1995-1997
20% of cattle
20% of sheep and goats

Southern Ethiopia
1983-1984
45-90% of cattle
18% of sheep and goats
1991-1993
42% of cattle
1995-1997
46% of cattle
41% of sheep and goats
1998-1999
62% of cattle

Niger
1982-1984
62% of national cattle herd

Namibia
1993
22% of cattle, 41% of goats and sheep

Northern Kenya
Botswana

1991
28% of cattle, 18% of sheep and goats

1981-1984
20% of national herd
Source: Intergovernmental Panel on Climate Change, 2007

65

Loss of Cropland and Reductions in Agricultural

Productivity Due to Land Degradation
To date, due to deforestation and inappropriate agricultural
practices, roughly 2 billion ha of the worlds agricultural
land has become degraded.208 This includes an absolute
decline, measured by satellite imagery between 1981 and
2003, of 12% of the global productive land area. This is
an area inhabited by 1.5 billion people, some 1520%
of the global population.209 Some estimates suggest that
at current rates up to 30% of all agricultural land will be
unusable by 2020.210

NEW YORK CITY

Equivalent area lost to land

degradation every week

1 FOOTBALL PITCH

Area lost to land degradation

every 7 seconds

Annually, the global rate of land degradation, which is

due chiefly to soil erosion, is estimated to be between
20,000 and 50,000 km2. To put this in perspective, taking
an average annual loss rate of 35,000 km2 equates to 95
km2 per day or 1,109 m2 per second. This means an area
roughly the size of Tokyo, Singapore or New York City is
lost every week or one International Football Association
standard size football pitch every 7 seconds.211, 212

2 to 6 times lower.213 It is estimated that 950,000 km2 of

land in Sub-Saharan Africa is threatened with irreversible
degradation if nutrient depletion continues at current
rates.214 Due to overgrazing, compaction and erosion from
livestock, some 70% of all grazing land in dry areas is
considered degraded.215

Losses are greatest in the developing world in Africa, Latin

America and Asia where population increases are highest
and land management and husbandry practices are less
well established. Losses in North America and Europe are

As a February 2009 report by the United Nations on

the worsening global food crisis puts it: Environmental
degradation and loss of ecosystem services will directly
affect pests (weeds, insects and pathogens), soil erosion and

Figure 7.17: Map of global soil degradation in the year 2000

Source: United Nations Environment Program, 2000; International Soil Reference Centre, 2000; World Atlas of Desertification, 1997

66

nutrient depletion, growing conditions through climate and

weather, as well as available water for irrigation through
impacts on rainfall and ground and surface water. These are
factors that individually could account for over 50% in loss
of the yield in a given bad year.216
Much of the negative impact on yield due to bad land
management arises from unsustainable irrigation practices
leading to increased salinization of soil (the process by
which the level of salt in soils is increased to levels where
agricultural productivity is reduced or eliminated), nutrient
depletion and erosion. On a global scale, roughly 20%
of irrigated land (450,000 km2) is salt-affected, with the
potential for lost production as a result of salinity. It is
estimated that there are already 950 million ha of saltaffected lands. These regions account for roughly 33% of
the potential arable land area of the world.217
Nutrient depletion is particularly severe in regions of
the world such as Sub-Saharan Africa where poor land
management practices are the norm.218
In Zimbabwe alone, loss of Nitrogen and Potassium through
soil erosion costs an estimated US$1.5 billion annually and
in South Asia the annual economic cost from a combination
of nutrient loss by erosion and soil fertility depletion totals
US$1.8 billion.219, 220
Besides the loss of nutrients which occurs with soil erosion
there is also a devastating effect due to the actual loss of
soil, a resource built up over hundreds of thousands of
years. The annual loss globally is 75 billion tonnes of soil
which is estimated to cost the world about US$400 billion/
year (at US$5/tonne of soil and nutrients). The cost of
erosion of agricultural land in the US alone is about US$44
billion/year.221
Many of these negative effects are most severe in areas
of the developing world where population growth, and
hence growth in food demand, is highest. This is caused by
a combination of poor arable land management practices
and overgrazing of vegetation by livestock as rapidly
growing populations place an ever greater strain on limited
land resources.

Agricultural productivity has declined in over 40% of the

cropland area over the last two decades some regions of
Sub-Saharan Africa. During this time population in some of
these regions has doubled. Estimates for total resultant yield
reduction in Africa range between 240% depending on
the region with a mean loss across the continent as a whole
of 8.2%. This is in contrast with a global average yield loss
due to lands affected by soil erosion of 18%.222, 223
In the words of a recent United Nations report, The
Environmental Food Crisis: With increasing pressures of
climate change, water scarcity, population growth and
increasing livestock densities, these ranges will be probably
conservative by 2050.224

Loss of Cropland Area Due to Urban

Development
As already highlighted in this document urban
development is increasing rapidly along with
accompanying transport, industrial and other
infrastructure. In 2007 the planet reached an urbanisation
milestone with more than 50% of the global population
living in urban as opposed to rural areas. Exacerbating
matters further is the fact that settlements primarily occur
at the cost of cropland as they tend to develop around the
most agriculturally productive locations.226, 227, 228, 229
In the year 2000 the global extent of built-up areas was
estimated to be in the range of 0.2% 2.7% of the total
land area.230 The United Nations medium population
growth variant forecasts an increase of the global urban
population from 2.9 billion people in 2000 to 5 billion in
2030 and 6.4 billion in 2050. Based on these figures, the
HYDE methodology, one of the most respected land use
forecasting models, predicts that the size of built-up areas is
likely to increase by roughly 80% between 2000 and 2030,
and 134% by 2050.231, 232
This corresponds to roughly 500,000 km2, 900,000 km2
and 1.17 million km2 respectively, a ratio of built-up area/
cropland of 3.5% in 2000, 5.1% in 2030 and 7% in 2050.
In other words, if all of the forecast expansion in built-up

US$400 billion

Global annual cost of nutrient

and topsoil loss due to erosion

US$44

Annual cost of erosion in the US

67

80%

Increase in urban area by 2030

area were to be at the expense of cropland, a total of 40
million hectares of cropland would be lost by 2030, and
another 27 million by 2050.233 This is a total of 670,000
km2, an area of land 849 times the size of New York City,
424 times the size of Greater London, 1.2 times the size
of France and just under 3 times the size of the United
Kingdom.234, 235 China alone lost more than 14.5 million ha
of arable land to urbanisation between 1979 and 1995.236

Limitations to Future Cropland Expansion

and the Implications for Future Increases in
Production Capacity
It is commonly assumed that much of the hoped for
expansion in cropland area will be achieved in the less
developed regions of the world such as South America
and Sub-Saharan Africa. These regions are generally
less saturated in terms of their agricultural development
potential. According to some of the more optimistic
assessments of land availability, the 228 million ha of arable
land currently under cultivation in Sub-Saharan Africa
has the potential to be increased to over 1 billion ha of
primarily rainfed crops by 2030 (much of the irrigated land
has already been developed as discussed earlier). Similar
estimates have been touted for the other areas such as
South America, where expansion potential has been claimed
to be 1 billion ha from the present figure of 208 million ha,
although the majority of this would be on land currently
occupied by forest.237
The fundamental problem with these assessments is that
they do not take account of the environmental and climate
change effects of land use change and the conservation
and water supply issues that such an expansion might
come up against.238 Besides the obvious constraints of
political instability in the case of Sub-Saharan Africa and the
ecological cost in the case of South America (both of which
are discussed separately below), these figures have also
been disputed on a purely practical and technical basis.
In a paper on the subject entitled Is there really spare
land? A critique of estimates of available cultivable land in
developing countries, the author states:
The supposed existence of this spare land is widely quoted
in forecasts of capacity to meet the food requirements
for future population increase. It is argued here that
these estimates greatly exaggerate the land available, by
over-estimating cultivable land, under-estimating present
cultivation, and failing to take sufficient account of other
essential uses for land. Personal observation suggests

that the true remaining balance of cultivable land is very

much smaller, in some regions virtually zero. An orderof-magnitude estimate reaches the conclusion that in a
representative area with an estimated land balance of
50%, the realistic area is some 325% of the cultivable
land. The impression given by current estimates, that a
reserve of spare land exists, is misleading to world leaders
and policy-makers.
Thus, as the United Nations stated in a 2009 report: There
is a general consensus that agriculture has the capability
to meet the food needs of 810 billion people while
substantially decreasing the proportion of the population
who go hungry239,240,241 but there is little consensus on how
this can be achieved by sustainable means.
One of the worlds foremost scenario modelling systems,
called IMAGE (Integrated Model to Assess the Global
Environment), incorporates critical data on population
growth, earth systems, climate change, economics and
social factors. Run by a team of scientists, mathematicians,
economists and other academics on a computer array
at the Netherlands Environmental Assessment Agency
(MNP) in Bilthoven in the Netherlands IMAGE has been
operational since the late 80s.The mathematical models
and assumptions which lie at its core are constantly updated
with the latest theoretical research and observational data
from around the world.

3 United Kingdoms
Potential equivalent area of cropland
lost to urbanisation by 2050
Accounting for the effects of climate change and the need
to increase agricultural output, the system is viewed by
many as the pre-eminent forecasting tool for agricultural
land use trends. Its results will play a major role for policy
planning purposes at the at the next United Nations
Framework Convention on Climate Change to be held in
Copenhagen in December 2009, where world leaders from
192 countries will meet to discuss and agree upon climate
change mitigation policy. In Europe, IMAGE has already
been used in the Euralis study on future prospects for
agriculture in the rural areas of the EU-25 countries and in
the IPCC Agricultural Assessment (IAASTD).
The IMAGE model includes data dating back hundreds of
years and has been tested retrospectively. . Figure 7.18
shows a map of global land use at the beginning of the
18th century. The red and yellow component indicates
the relatively minor use of the worlds land resources for
agricultural at that time.
Jumping forward to the present, Figure 7.19 shows that
the 21st century planet is a very different place with

68

7.18: Estimated global agricultural land use in 1700

1700

Figure 7.19: Actual global agricultural land use in 2000

based on satellite imagery

2000

Landuse and agriculture

Agricultural land

Extensive grasslands (inc pasture)

Regrowth after use

Forests

Grasslands

Non-productive land

Source: Integrated Model to Assess the Global Environment, 2009

hugely increased agricultural land coverage. It is glaringly

apparent that there is little room for expansion into areas
outside of the forest regions of the planet, areas which play
a significant role in climate change by providing carbon
capture and other ecosystem services.

and mammals on the endangered species list are further

threatened by unsustainable land use and agricultural
expansion.244 While it could be argued that human survival
may be possible without many of the species with which we
currently share the planet,, a more inconvenient outcome
resulting from bad land management, which will affect
humans directly, is the issue of climate change.

Ecological Constraints to Cropland Expansion

What does sustainable agriculture mean with respect to

agricultural land? It: implies both high yields that can be
maintained, even in the face of major shocks, and agricultural
practices that have acceptable environmental impacts.243

According to official figures, roughly 70% of land in the

Amazon regions used as pasture is previously forested
land.245 Destroying one of the worlds most important
carbon sinks in order to feed the masses would be self
defeating. If the act of meeting increased food demand
to ensure human survival becomes the very thing that
exacerbates and accelerates climate change, then that
act of expansion will itself reduce the planets agricultural
capacity. As Figure 7.20 shows, the combined effects of
agriculture and land use change (deforestation) account for
over a quarter of the worlds greenhouse gasses.

However, over the past three decades there has been a

50% decline in farmland birds and over 80% of the birds

As the United Nations so aptly put it in a recent report, The

Environmental Food Crisis:

The United Nations acknowledged in early 2009 that any

major expansion of croplands in Sub-Saharan Africa and
South America in particular would take place: at the
expense of natural ecosystems, and that these expansions
will have huge costs to biodiversity.242

69

Figure 7.20: The greenhouse gas effects of agriculture and deforestation compared to other sectors in 2008

63%
60

40

15%

20

11%

7%

4%

0
Energy

Agriculture
(excluding land
use change)

Deforestation

Developed countries

Industrial
processes

Waste

Developing countries

Source: United Nations Framework Convention on Climate Change, 2008

Efforts to boost food production, for example, through

direct expansion of cropland and pastures, will negatively
affect the capacity of ecosystems to support food
production and to provide other essential services. The
natural environment comprises the entire basis for food
production through water, nutrients, soils, climate, weather
and insects for pollination and controlling infestations.
Ecosystems have been described as the life support system
of the Earth for humans as well as all life on this planet.246
Ecosystem services, the benefits that humans derive from
ecosystems, are considered free, often invisible, and are
therefore not usually factored into decision-making.247
As human induced desertification has so clearly
demonstrated, vegetation, in particular forests, is crucial
for the provision of a dependable water supply to crop
areas through its influence on the precipitation cycle, flow
regulation and the buffering of droughts and floods.248, 249
Additionally, 75% of the worlds usable freshwater supplies
come from forested catchments.250 Forests are thus critically
linked not just with provision of optimum conditions for
agricultural productivity but also directly with human
survival at a very basic level. Finally, forest ecosystems also
play a crucial role in buffering global climate change.251
Those expecting to expand croplands into the remaining
forestlands may find these to be inconvenient truths but the
fact is, without the essential services these forests provide,
even current production rates may not be sustainable.252 In
other words, evidence and theory overwhelmingly support
the view that increasing croplands substantially in forested
areas will reduce our ability to survive on this planet in large
numbers in the future. It is this reality which will be driving
policy at the United Nations Framework Convention on

Climate Change to be held in Copenhagen on December

2009 (COP15).
Prior to IMAGE 2.4, one of the more commonly used global
agricultural forecasting tools was the Global Trade Analysis
Project (GTAP) model. Being primarily an economical
modelling tool, GTAP did not take into account regional
differences in land quality and changes in land quality due
to land degradation, water stress and climate change. These
shortcomings were rectified by IMAGE 2.4.253
The inclusion of environmental considerations into the
model unsurprisingly results in some rather different
conclusions on land availability for cropland expansion. As
the IMAGE 2.4 overview document states, the system can
be used to assess both the economic and environmental
consequences of different scenarios:
The model coupling of the economic model GTAP with
the IMAGE model for the global environment allows
analysis of the consequences of specific trade policies
both on the economic and the environmental side. We
use the strengths of both models: the economic model
determines the amount of goods traded between regions
and the total change in food supply and demand; the
environmental model allocates the desired land using
detailed information on soil quality and atmospheric
conditions, resulting in spatially explicit environmental
consequences which are communicated to the economic
model on an aggregated level.254
This approach envisages a cropland expansion strategy
which has at its heart the explicit assumption that remaining
forestland must be preserved to ensure that any production
gains from cropland expansion are not a Pyrrhic victory.

70

Figure 7.21 shows how future cropland expansion leading

up to 2050 will need to take place primarily in regions
not currently occupied by forests, in order for global
temperatures not to rise 2oC above pre-industrial levels.

Figure 7.21: Sustainable global agricultural land use in

2050

Two degrees above pre-industrial levels is seen by many

scientists as the threshold beyond which climate change
would become far more dangerous, with the risk of
irreversible and potentially catastrophic environmental
changes.255 For the cropland expansion scenario in Figure
7.21, the IMAGE system forecasts a 1.8oC rise in global
temperatures by 2050 (from pre-industrial levels).256
These data sets will be amongst the most influential in
guiding policy for the 192 participating countries at COP15
in December 2009. Indeed, the wheels are already in
motion in terms of the enactment of binding international
laws on the protection of forest ecosystems. The EU has
stated in its position paper submitted on 28 January 2009
which establishes the official European negotiating position
in advance of COP15:

2005
Landuse and agriculture
Agricultural land
Forests

Extensive grasslands (inc pasture)

Grasslands

Non-productive land

Regrowth after use

Source: Integrated Model to Assess the Global Environment, 2009

Appropriate actions should include a rapid decrease

in emissions from tropical deforestation. By 2020, gross
tropical deforestation should be reduced by at least 50%
compared to current levels and by 2030 global forest cover
loss should be halted.257
Politicians and the public are now being forced to
recognise that climate change, which is taking place
at a time of increasing demand for food, feed, fibre
and fuel, has the potential to irreversibly damage the
natural resource base on which agriculture depends. The
relationship between climate change and agriculture is a
two-way street: agriculture contributes to climate change
in several major ways and climate change in general
adversely affects agriculture.

natural capital worth between US$2 trillion and US$5

trillion every year as a result of deforestation. 259

The importance of protecting forestland is also being

recognised in proposed incentive based legislation due
to be discussed at the Copenhagen conference. Since
the proportion of greenhouse gas emissions due to
deforestation has been rising and the protection of forests
is so crucial as a carbon sink, the new treaty which is due
to come into force in 2012, is likely to include incentives for
Reducing Emissions from Deforestation and Degradation
(REDD).

Why pay BP $100 a tonne to take carbon dioxide out of

the atmosphere and bury it when you can do the same with
a rainforest for a fraction of a dollar? The science of forest
carbon sequestration is definitive and that standing forests
are responding to higher carbon dioxide levels by bulking
up, and are sequestering between one and four tonnes of
the gas per hectare per year. Even taking the lower figure,
with one billion hectares of forest in the world, if the rights
to the sequestration of carbon dioxide are sold for just $10
a tonne would generate $10 billion a year.260

As reported by the Economist: The basic outlines of REDD

are clear. Rich countries will pay poor ones to keep their
forests intact. In return, the rich will get credits that they
can put towards their emissions-reduction targets under the
new climate treaty.258
Aside from the policy constraints to cropland expansion into
forested areas which are likely to result from Copenhagen,
REDD would introduce a serious financial incentive for
countries controlling forest resources. A Deutsche Bank
economist recently reported that the world was losing

If even a small proportion of this were monetized as a result

of initiatives such as REDD, this would result in a serious
incentive for stakeholders to preserve the integrity of forest
ecosystems. As Murray-Philipson of Canopy Capital, an
investment company specialising in the emerging market for
ecosystem services, puts it:

It is worth noting that one of the areas earmarked for

substantial expansion under the IMAGE forecasting model
is Sub-Saharan Africa. Quite aside from the socio-political
hurdles (discussed separately in this chapter), cropland
expansion in this region may be constrained by the fact that
over the longer term the impacts of climate change could
be much more serious in Sub-Saharan Africa than many
other regions, with agricultural productivity declining much
more quickly than the global average.261

71

Global Carrying Capacity and the Implications for

Cropland Expansion
How many people can our planet support? This is a
fundamental question of relevance not just to all of
mankind but particularly to the farmland investor. The
answer will guide global policy on cropland expansion and
its study has, in recent years, been formalized through the
use of a measure known as the ecological footprint.
The ecological footprint is a measure of human demand
on the Earths ecosystems. It compares human demand
on nature with the biospheres ability to regenerate
resources and provide services. It does this by assessing
the biologically productive land and marine area required
to produce the resources a population consumes using
prevailing technology. It also measures the earths capacity
to absorb and render harmless the waste products of
human consumption such as CO2. By assessing how much
land resource is required to support a given population
it is possible to estimate how much of the Earth (or how
many planet Earths) it would take to support humanity if
everybody lived a given lifestyle characterised by a given
level of consumption.
The units of measurement of ecological footprint are
global hectares per person (gha/p). In other words, gha/p
quantifies the number of hectares of land needed to
support all types of consumption of an individual including
the land required for waste mitigation. The organisation at
the forefront of assessing global ecological footprint is the
Global Footprint Network, which is a multinational private
and public sector funded body employing the skills of
hundreds of individuals, including business leaders, scientists
and academics, in over 200 cities and 23 nations.

30%

Decline in global biodiversity in

the last 35 years

Their findings paint a bleak picture and provide a clear

insight into the constraints on further conversion of
undeveloped land to cropland. In their words:
Just like any company, nature has a budget -- it can only
produce so many resources and absorb so much waste
every year. The problem is, our demand for natures services
is exceeding what it can provide. In 2008, humanity used
about 40% more in one year than nature can regenerate
that same year. That means it takes over a year and three
months for the Earth to regenerate what humanity is using
in one year. This problem -- using resources faster than they
can regenerate and creating waste faster than it can be
absorbed -- is called ecological overshoot.
We currently maintain this overshoot by liquidating the
planets natural resources. For example we can cut trees
faster than they re-grow, and catch fish at a rate faster than
they repopulate. While this can be done for a short while,
overshoot ultimately leads to the depletion of resources
on which our economy depends. In fact, overshoot is at
the root of the most pressing environmental problems
we face today: climate change, declining biodiversity,
shrinking forests, fisheries collapse and several of the factors
contributing to soaring world food prices.
As Figure 7.22 indicates, the planet exceeded its carrying
capacity in 1986. From that date onwards the planet
entered a state of ecological overshoot. The result is a
growing ecological debt manifested in various ways, for
example in the fact that CO2 is being produced at a faster
rate than the planets ability to absorb it.

Figure 7.22: Humanitys ecological footprint between

1961 and 2005
Number of planet Earths
1.8
1.6
1.4
1.2

50%

Rise in global resource use if

one third of population of low
and middle income countries
increase consumption to the
level of high income countries

1.0
0.8
0.6
0.4
0.2
0

1960

1970

1980

World biocapacity

1990

2000 2005

Human ecological footprint

Source: Global Footprint Network, 2009

72

As a result of this reality mankind now requires the

equivalent of 1.4 planets to support its current lifestyle.
Regardless of ones opinion with respect to future effects
of climate change, this is already having undeniable and
highly noticeable effects on many earth systems. The Living
Planet Index measures global biodiversity by recording the
populations of a sample set of 1,686 vertebrate species
across the world. As indicated in Figure 7.23, global
biodiversity has declined by nearly 30% over just the past
35 years. This observational data is historical and factual.
Unlike theoretical forecasts which are open to debate,
this type of real observational data places strong pressure
on policy makers to legislate against further large scale
expansion of croplands.

Figure 7.23: Global biodiversity (Living Planet Index)

between 1970 and 2005
Index (1970=1.0)
1.8
1.6
1.4
1.2
1.0
0.8
0.6
0.4
0.2
0

1980

1990

2000 2005

proportion of world population in

high income bracket
Figure 7.24: Ecological footprint and population by
region 1970 and 2005
Ecological Footprint
(gha per person)

7
28

3
1,

62

14
0

22

20

0
39

High-income countries, which total 972 million people or

15% of the worlds population, are currently responsible
for 40% of world resource use. The remaining low and
middle-income countries account for 85% of the world
population but only 60% of resource use. If one third of
the low and middle income population were to live lifestyles
characterised by the consumption patterns of the highincome population, global resource use would rise by 50%.

1970

15%

As Figure 7.24 indicates, much of the worlds resource use

is dominated by the high-income countries which represent
a minority of the worlds population. The majority live in
low-income countries and currently use a far lower per
capita share of resources. Even a small rise in consumption
in lower and middle-income regions would have a huge
impact given their total population numbers.

1960

Source: Global Footprint Network, 2009

20

The importance of protecting remaining carbon sinks, such

as forestland, is dramatically evident when considered in the
context of the growing demands on the worlds resources
from lower income countries. Lower income countries
account for the bulk of the worlds population and many
are experiencing rapid economic growth.

Population (millions)
North America

Africa

Europe EU

Asia-Pacific

Europe Non-EU

Middle East
and Central Asia

Latin America and

the Caribbean
Source: Global Footprint Network, 2009

73

The contribution of agriculture, even at current production

rates, further reinforces pressure on policy makers. As
Figure 7.25 indicates cropland and grazing land already
accounts for 33% of the world ecological footprint. They
comprise the second largest component after land required
for carbon sequestration (see Carbon Footprint in Figure
7.25), which has a 52% share.
This conflict between the need to maintain the carbon
sequestration capacity of the earth whilst responding to
rising global food demand is fundamental to appreciating
the constraints on cropland expansion. With a limited
supply of land for cropland expansion and rising food
demand a future of higher agricultural commodity prices,
and in turn farmland values, is easy to visualise.

Figure 7.25: Ecological footprint by component between 1961 and 2005

Number of planet Earths
1.4
1.2
1.0
0.8
0.6
0.4
0.2
0

1960

Socio-political Constraints to Cropland Expansion

With respect to constraints on expansion of croplands
due to political risk, the United Nations put it as follows
in a 2009 report on the food crisis: The potential for
increases is more questionable in large parts of SubSaharan Africa due to political, socio-economic and
environmental constraints.262
Figure 7.26, which shows major international land leases,
illustrates this point well. In November 2008 the South
Korean firm Daewoo unveiled plans to lease 1.3 million
hectares of farmland in Madagascar with the aim of
cutting Koreas reliance on US imports. Daewoo reached
the agreement with the then government on a 99 year
lease over the huge tract of land half the size of Belgium.
It intended to produce 5 million tonnes of corn a year by

1970

1980

1990

2000 2005

World biocapacity

Grazing land

Built-up land

Cropland

Fishing ground

Carbon footprint

Forest
Source: Global Footprint Network, 2009

2023 on over 400,000 hectares, in addition to palm oil from

a 300,000 ha oil palm plantation.263
Despite the fact that Daewoo planned to commit to $2bn
worth of infrastructure investment and create 45,000 jobs
for Madagascans, the population reacted with months of
often violent protest. In March 2009, five months after
the agreement was signed, new president Andy Rajoelina

Figure 7.26: Major land leases by foreign countries and/or companies

Agricultural international land leases

South Korea

2000

China

1500

UAE

710

Saudia Arabia

620

Japan

320

Libya

250

Malaysia

40

India

10

thousand hectares
Each square represents 50 000 hectares.
Values under this value are represented with
one square

Source: Grain, 2008; Mongabay, 2008

74

who was sworn into office after a military coup, formerly

cancelled the agreement as one of his first acts in office.
This has halted the South Korean companys plans to
transform Madagascar into Koreas breadbasket. The deal
had become a source of popular resentment and was
instrumental in the fall of Marc Ravalomanana, the former
president who had agreed it.264
Koreas other major land deals, primarily in war- torn Sudan,
are barely fairing any better given the conflicts and security
environment in the region. The Korean example clearly
demonstrates the barriers to large scale farmland expansion
in Africa. Despite this, national and global food security
problems have prompted a surge in neo-colonial land grabs
by many governments and multinationals.
The Daewoo deal highlights the political risks associated
with such endeavours and suggests that for governments

or companies to take these risks on a meaningful scale,

large economic incentives will be required (such as higher
agricultural commodity prices). Figure 7.27, shows major
conflict zones around the globe since 1990. These zones
coincide with many of the regions in which cropland
expansion is expected to take place and it is clear that
political instability will be a serious impediment to
agricultural development in many of them.

The Limitations of Neo-colonialism and the

Implications for Future Increases in Production
Capacity
It is assumed that much of the forecast future increase in
food production will result from increasing yields in the
developing world. It is maintained that this will be made
possible by the introduction of modern farming practices
which produce higher yields in the developed world.

Figure 7.27: Major global conflicts between 1990 and 2004

Source: International Peace Research Institute, 2004

75

There is a legitimate argument for foreign investment in

agriculture in the developing world as long as it happens
according to reasonable ethical standards. The reality is that
there is no internationally accepted code of conduct for
foreign investment in agriculture.
Many of the larger proposed projects show more of
the characteristics of neo-colonialism than they do of
sustainable and equitable development. Therefore, a key
question, quite aside from the ethical debate, is whether
neo-colonialism actually has the ability to deliver the hoped
for gains in production.
Figure 7.28 shows the difference in agricultural yields
between developed and developing regions. It is this margin
of difference which future production optimists are banking
on. However, when you scratch beneath the surface, there
are limitations to these assumptions of growth potential.
Sub-Saharan Africa is one of the regions from which much
of the hoped for future production increase will come. As
Figure 7.29 shows, Sub-Saharan Africa has the lowest use
of fertilisers, irrigation and improved cereal varieties. This is
consistent with the fact that the region has shown almost
no improvement whatsoever in crop yields since the 60s
(see Figure 7.28).

Figure 7.28: Differences in cereal yield growth for different regions of the world between 1960 and 2005
Yields, tons per hectare
5

0
1960

1965

1970

1975

1980

1985

1990

1995

2000

East Asia & Pacific

Europe & Central Asia

South Asia

Sub-Saharan Africa

Latin America
& Caribbean

Middle East
& North Africa

2005

Source: Food and Agriculture Organisation of the United Nations, 2006

76

Figure 7.29: Modern agricultural inputs in different regions of the world

Irrigation
Sub-Saharan Africa

1962

1982

2002

South Asia

39
29

East Asia & Pacific

Middle East & North Africa

33
11

Europe & Central Asia

11

Latin America & Caribbean

0

10

20

30

40

Arable and permanent cropland, %

Improved varieties of cereals

Sub-Saharan Africa

1980

2000

24

South Asia

77

East Asia & Pacific

85

Middle East & North Africa

48

Latin America & Caribbean

59
0

20

40

60

80

Cereal area, %

Fertilizer use
Sub-Saharan Africa

1962

1982

2002

13

South Asia

98

East Asia & Pacific

190

Middle East & North Africa

73
34

Europe & Central Asia

81

Latin America & Caribbean

0

20

40

60

80

100

120

140

160

180

200

Kg of nutrients per hectare of arable and permanent cropland

Source: Food and Agriculture Organisation of the United Nations, 2006; Evenson et al., 2003

This leads academics and policy makers to believe that there

is great potential to easily increase yields. The problem
is that there are reasons for circumstances being as they
are and they may not be as easy to overcome as some
commentators hope. In Sub-Saharan Africa and many other
poorer nations of the world the agricultural economy is
highly fragmented, much more so than in the developed
world. This presents fundamental barriers to agribusinesses
enterprises (be they government or private) hoping to
develop large scale commercial farming operations to
exploit yield gaps.
In the developing world, rural economies are typified by
large numbers of very small farms occupied by subsistence
farmers. The average size of farms is generally smaller in

72.8 hectares

Average farm size in Brazil

more densely populated regions of the world. As Figure

7.30 shows, Sub-Saharan Africa has low availability of
cropland on a per capita basis compared to other regions.
As land gets divided through inheritance in a growing
population, farm sizes become smaller.

77

Figure 7.30: Arable and permanent cropland per capita in different regions of the world

Sub-Saharan Africa

0.48

South Asia

0.27

East Asia & Pacific

0.23

Middle East &

North Africa

0.74

Europe &
3.53

Central Asia
Latin America &
Caribbean

1.55
0

Cropland per capita of agricultural population in 2003, hectares

Source: Food and Agriculture Organisation of the United Nations, 2006

78

As Figure 7.31 shows, the average farm sizes in Africa are

all below 10 hectares, ranging from 8.3 hectares in Algeria
to less than a hectare in Malawi. The notion that there are
large swathes of unoccupied and potentially productive
farmland in densely populated developing countries idly
awaiting large scale development is not supported by
the facts. As Figure 7.31 shows, this holds true for most
developing countries. In countries like Brazil where bigger
farms are available for purchase, large scale commercial
farming is more practical, although as discussed earlier,
there are other constraints to further expansion in Brazil.
Fulfilling the dream of large scale agricultural development
therefore involves fulfilling the nightmare of the native rural
populations who currently inhabit cropland. Large scale
displacements of local populations from their land would
be required in order to unify large numbers of individual
properties under one secure ownership structure. Any
enterprise contemplating such a move would need to
cover the costs of providing housing and infrastructure for
all displaced peoples on top of the substantial investment
associated with Greenfield agricultural development. Many
of the proposed projects seem to completely ignore the fact

45,000

Number of jobs Daewoo agreed

to create in return for half
of Madagascars arable land,
currently supporting millions of
native inhabitants
that the great majority of these rural farmers live on, and
are completely sustained by, their land.
As Daewoo discovered with its Madagascar escapade the
risks of project failure due to large scale resistance by local
inhabitants are great. In the case of the Daewoo project, the
1.3 million hectares of land they hoped to lease represents
half of the arable land area of Madagascar. With a
population of over 20 million people, the majority of whom
live rurally, the number of Malagasy residing on this land
must be huge.265 Certainly, the number is significantly larger
than the 45,000 or so jobs Daewoo proposed to create.266

Figure 7.31: Changes in farm size and land distribution in a range of developing countries
Country

Period

Average farm size

(hectares)
Start

End

Change in total
number of farms %

Change in total
area %

Farm size
definition useda

Smaller farm size, more inequality

Bangladesh

197796

1.4

0.6

103

-13

Total

Pakistan

19902000

3.8

3.1

31

Total

Thailand

197893

3.8

3.4

42

27

Total

Ecuador

19742000

15.4

14.7

63

56

Total

Smaller farm size, less inequality

India

199095

1.6

1.4

-5

Total

Egypt

19902000

1.0

0.8

31

Total

Malawi

198193

1.2

0.8

37

-8

Cultivated

Tanzania

197196

1.3

1.0

64

26

Cultivated

Chile

197597

10.7

7.0

-31

Agricultural

Panama

19902001

13.8

11.7

11

-6

Total

Larger farm size, more inequality

Botswana

198293

3.3

4.8

-1

43

Cultivated

Brazil

198596

64.6

72.8

-16

-6

Total

Larger farm size, less inequality

Togo

198396

1.6

2.0

64

105

Cultivated

Algeria

19732001

5.8

8.3

14

63

Agricultural

a. Total land area, agricultural (arable) land area, or cultivated (planted) crop area.
Source: Anriquez et al., 2007; Food and Agriculture Organisation of the United Nations, 2006

79

150,000

A similar pattern is being observed in many other neocolonial projects. In Pakistan, farmers movements are
already raising the alarm about 25,000 villagers that are
bound to be displaced if the Qataris proposal to outsource
part of their food production to the Punjab province is
accepted.267 Another Qatari project in Kenya involves
40,000 hectares of land in the Tana River delta, home
to 150,000 pastoralist families who regard the land as
communal and utilise it to graze some 60,000 cattle.268

Number of native inhabitants

requiring eviction when 40,000 ha of
Kenyan grazing land are converted to
commercial agriculture

In Egypt, small farmers in the Qena district have been

fighting tooth and nail to get back 1,600 ha that were
recently granted to Kobebussan, a Japanese agribusiness
conglomerate, to produce food for export to Japan.269
In Indonesia, activists are protesting against the planned
1.6m ha Saudi rice estate in Merauke. The estate will be
handed over to a consortium of 15 firms to produce rice
for export to Riyadh bypassing local Papuans right to veto
the project.270

Forecasts of Future Expansion of Total Global

Agricultural Land

Quite aside from the ethical implications, it is clear, given

the enormous costs and risks associated with such an
endeavour, that the financial incentive would need to be
highly attractive for it to be contemplated on any large
scale.

In the case of the EU, the US and much of Asia

the expansion of croplands is constrained due to
overdevelopment and expanding urban areas whilst the
conversion of any remaining non-agricultural land to
agriculture is further restricted by wildlife conservation
policy. Assuming forested lands are also excluded from
cropland expansion, then it is clear that much of the
expansion will need to happen in fallow or marginal land or
in areas currently utilised as grazing land.271

Given these constraints and adding the legal and ethical

issues to the list of other socio-economic and environmental
constraints, it becomes obvious that agricultural commodity
prices would need to remain at significantly high levels for
a sustained period of time before the necessary investment
becomes a reality.

Figure 7.32: Grassland area in a business- as- usual scenario up to 2030

million km

South & East Asia

North America & Oceania
4

Sub-Saharan Africa
Former USSR
Latin America & Caribbean

Europe
North Africa & West Asia

0
2000

2000

2010

2010

2020

2020

2030

Source: Integrated Model to Assess the Global Environment, 2008

80

Figure 7.33: Arable land area in a business as usual scenario up to 2030

million km
10

Sub-Saharan Africa
North America & Oceania

Latin America & Caribbean

South & East Asia
Former USSR

North Africa & West Asia

Europe

0
2000

2000

2010

2010

2020

2020

2030

Source: Integrated Model to Assess the Global Environment, 2008

Figures 7.32 and 7.33, based on the IMAGE 2.4 model, take
into account climate change constraints to expansion into
forested areas and as a result, predict only modest increases
in cropland area. When considering the need to support a
doubling of global grain demand by 2050, it is clear that
only a small portion of the required production increase
could result from this level of cropland expansion. Despite
the fact that this expansion takes place primarily at the
expense of grassland and grazing lands, the model accepts

that there will still be a trade off between the environment

and economic growth.272
The potential for these expansion rates is further inhibited,
by the fact that a substantial proportion of the forecast
growth in cropland area is supposed to take place in SubSaharan Africa, where political instability and conflicts, lack
of transport and other infrastructure and ethical constraints
will all conspire to hamper growth.273

81

CHAPTER 8

Price Elasticity of Demand for Food and

the Implications for Future Agricultural
Commodity Prices and Farmland Values

You are going to have to get used to the fact that you are going to have
to spend a greater proportion of your income on food in the future - after
decades of spending less. The price of most commodities has jumped
significantly this year, as the global economy slowly stutters towards
recovery. Gains in oil and metals prices may not have much further to go but
many believe that the situation with food is different. If you are expecting
the price of your weekly shopping basket to fall soon, it may be best not to
hold your breath.
The Sunday Telegraph Newspaper, 2009

Standard economic theory suggests that high prices are

their own worst enemy. A high price spurs producers to find
new means of raising output. In other words, price increases
lead to supply and demand responses which result in due
course to lower prices. One such response is the propensity
of consumers to choose alternative products as prices rise.
Predicting actual prices for agricultural commodities and
farmland at any point in the future would only ever be
guesswork; however, predicting the direction of such
changes is somewhat more achievable. This is especially
true when we bear in mind the persuasive nature of the
fundamentals of supply and demand discussed in earlier
sections of this document.
As indicated in Figure 8.1, according to the theory of supply
and demand, the price of a product is determined by a
balance between production at each price (supply) and
the desires of those with purchasing power at each price
(demand), along with a consequent increase in price and
quantity sold of the product. In other words, it predicts
that in a competitive market, price will function to equalize
the quantity demanded by consumers, and the quantity
supplied by producers, resulting in an economic equilibrium
of price and quantity.274

Figure 8.1: The relationship between price (P), production quantity (Q), supply (S) and demand (D)
P

D1

D2

P2
P1

Q1 Q2

Source: Wikipedia, 2009

It is not only the need for food and the supply available
to meet that need, but just as importantly, the price those
demanding that food are prepared to pay. The preparedness
of consumers to pay for food at a given price is described by
the price elasticity of demand (PED), defined as the measure
of responsiveness in the quantity demanded of a commodity
as a result of change in price of that commodity.275 In other
words, the price elasticity of demand is a measure of the
sensitivity of demand to changes in price.
Inelastic demand means a producer can raise prices without
affecting demand for its product, whereas elastic demand

83

means that consumers are sensitive

to the price at which a product is
sold and will not buy it if the price
rises too much. An understanding
of the price elasticity of demand for
a commodity is therefore crucial to
assessing the extent to which price
levels may rise.
In general, the more crucial a
product, the less likely it is that
demand for it will be affected by a
change in price. Common sense tells
us food is one such product. This
was formalised in the theory of the
hierarchy of needs as proposed by
Abraham Maslow in his 1943 paper
A Theory of Human Motivation.
According to Maslows hierarchy of
needs, often depicted as a pyramid
consisting of five levels, the lowest
level is associated with physiological
needs, while the uppermost level
is associated with self-actualization
needs, particularly those related to
identity and purpose. Deficiency
needs must be met first. The higher
needs in this hierarchy only come
into focus when the lower needs in
the pyramid are met. If a lower set
of needs is no longer being met,
the individual will temporarily reprioritize those needs.276

Figure 8.2: Interpretation of Maslows hierarchy of needs, represented as a

pyramid with the more basic needs at the bottom

Self-actualization
Esteem
Love/Belonging
Safety
Physiological

morality,
creativity,
spontaneity,
problem solving,
lack of prejudice,
acceptance of facts
self-esteem, confidence,
achievement, respect of others,
respect by others
friendship, family, sexual intimacy
security of body, of employment, of resources, of
morality, of the family, of health, of property

breathing, food, water, sex, sleep, homeostasis, excretion

Source: Wikipedia, 2009

Food, being absolutely fundamental to survival, is likely to be prioritised over all

other expenditure. For example, modern western consumers might be more likely
to delay the purchase of a replacement mobile phone, or purchase a mobile with
fewer features, than reduce the number of meals they eat. In other words there is
more room for demand destruction in other products and services which compete
for consumer spending than there is in basic foodstuffs.

84

It is for this reason that the food sector of the economy has always been seen as
a defensive investment strategy, being more resistant to downturns in consumer
spending during times of recession. Indeed, the recent rises in agricultural
commodity prices are in themselves evidence of the capacity for consumers to
absorb higher prices (even in times of recession). In the words of the OECD-FAO
Agricultural Outlook 2008-2017:
Despite a doubling of some grain prices and broad increases overall, global
food and feed use per capita were sustained, implying that the generally strong
economic performance of the last two years has been manifested in outward shifts
of demand that in combination with relatively inelastic demand in the short-term
has offset the impact of higher prices on quantities demanded. The sensitivity of
demand to price changes appears to be falling for various reasons. Thus, a shock
to supply of a given size will require a greater price change to bring about the
demand adjustment required to balance the market.277
Or as the World Bank puts it in their 2009 Global Economic Prospects Report:
Crude oil price increases reduce the disposable incomes of consumers, which,
in turn, may slow industrial production. In principle, lower disposable income
should have a negative impact on the consumption of food commodities.
However, because the income elasticity for most food commodities is small, this
effect is limited.278

Figure 8.3: Actual and forecasted global GDP growth from 1980
Real GDP, percentage change

Asian crisis Dot-com crisis

Forecast

8
High-income countries
6

0
Developing countries, excluding China and India
Developing countries
-2

16%
Rise in global food

expenditures between
2004 and 2006

50%
Rise in the price of rice in

Bangladesh between 2007

and 2008

500%
This rise in agricultural

commodity prices would

only result in a doubling
of US food expenditures
because the commodity
component of the final
food bill is so low

1980

1984

1988

1992

1996

2000

2004

2008

Source: World Bank, 2009

In recent years, agricultural commodity prices have experienced marked increases,

so it is self evident that consumers have absorbed those higher prices. Between
2004 and 2006 total global food spending grew by 16% from US$5.5 trillion to
US$6.4 trillion.279 As Figure 8.3 indicates, this exceeded the growth in global gross
domestic product during the same period. This was the case for both high-income
OECD countries and developing countries. Indeed, the agricultural commodity
price boom from 2007 to 2008 (when grain commodities more than doubled in
price) was preceded by a comparatively modest increase in GDP in OECD countries
of 2.9% GDP in 2006 and 2.4% in 2007 and in the case of developing countries
7.7% in 2006 and 7.9% in 2007.280
In other words, on average, consumers globally were spending a larger share
of their income on food as prices rose. As Figure 8.4 indicates, the rate of price

85

inflation for food far exceeded the

background rate of inflation during
the period. Of course, the extent to
which consumers are able to absorb
increases in the price of food is
affected by per capita income levels
and the extent to which changes in
agricultural commodity prices feed
through into retail prices.

Figure 8.4: A comparison of rising food prices and overall inflation in

different countries between 2007 and 2008
Change from February 2007 to February 2008 (%)
25
20
15
10
5

Total consumer price index

ne

ga

ru
Se

Pe

an
ki

st

ny

Pa

In

Ke

ne

sia

a
do

In

ai
H

di

ti

yp
Eg

Ch

in

ile
Ch

a
an
w
ts

Bo

ng

la

de

sh

Ba

Food expenditure as a share of

total expenditure is lower in more
developed countries with a higher
per capita income. This is described
by Engels Law, which displays an
inverse relationship between the percentage share of food expenditure
and income (see Figure 8.5).281

Food consumer price index

Source : Food and Agriculture Organisation of the United Nations, 2009

Figure 8.5: Relationship between percentage share of food expenditure and per capita income in 2008
Percentage share of food expenditure in CPI
70

NGA LKA
60

TZA GHA
50

KEN

40

SEN PAK
BFA

30

JOR
HKG
JPN

ECU
ESP

UGA IDN

20

ITA

THA

10

KOR

DEU

AUT
GBR CHE

USA
NOR

IRL

0
0

5000

10 000

15 000

20 000

25 000

30 000

35 000

40 000

GDP per capita in constant PPP international dollars

Source: Food and Agriculture Organisation of the United Nations, 2008

This relationship has strong implications for agricultural commodity prices when considered in the light of changing dietary habits
in countries like China and India where per capita GDP is rising. In the words of the OECD-FAO Agricultural Outlook 2008-2017:
Economics of demand indicate that consumers tend to care less about prices of goods that represent a small share of their
budget. As incomes expand and the share of budgets spent on a necessity like food fall, consumers are expected to be somewhat
less sensitive to price changes, and a shock to supply of a given size will require a greater price signal to compel consumers to
adjust their purchases. Higher incomes that tend to reduce demand elasticity may lead to greater variability in world prices.
In the United States for example, only 10% of average consumer spending is on food. This means a 100% increase in food prices
would only result in an 11% decrease in the amount of money available to the US consumer for non-food expenditures. A similar

86

situation applies to the majority of OECD countries where food expenditure shares
range between 13% and 20%.282
The price inelasticity of food demand is most clearly demonstrated by recent data
from developing countries where incomes are much lower and the share of food
expenditure is much higher. For instance, it is 28% in China, 33% in India, and
absorbs more than half of total household expenditures in countries such as Kenya
at 51%, Haiti at 52%, Malawi at 58% and Bangladesh at 62%.283
Despite this, consumers in poorer countries continue to absorb steep increases
in food prices, although in many cases unwillingly, as evidenced by the recent
food riots in a number of the aforementioned countries. As Figure 8.6 indicates,
Bangladeshis paid just under 50% more for rice as a result of the 2007-2008
commodity price spikes whilst Thais paid more than double.

The effects of price inelasticity

of demand for food are further
amplified in more developed
countries because the commodity
component forms a smaller
proportion of the final food
bill. This is due to the fact that
developed economies have more
complex, costly and wasteful food
distribution, processing, packaging
and marketing systems. This means
that the extent to which changes in
agricultural commodity prices feed
through to food prices is lower than
in developing countries.

Figure 8.6: Trends in consumer spending on rice

Cumulative change (%)
250
April 2003 - April 2007
200

Furthermore, as Figure 8.7 shows,

the price spikes of 2007-2008 only
had a minor impact on the level of
dietary energy intake in even the
poorest countries of the world, with
only a marginal difference between
the richest and poorest sectors of
the population in terms of the extent
to which food purchases dropped as
a result of higher prices. This lends
further support to the notion that
even in lower income sectors of the
market price elasticity of demand for
food remains low.

April/May 2007 - April/May 2008

150

100

50

-50
World

India

Bangladesh

Philippines

Thailand

Viet nam

Source: Food and Agriculture Organisation of the United Nations, 2008

Figure 8.7: Change in dietary energy intake by income group between 2007
and 2008
0.0

Bangladesh Guatemala

Malawi

Nepal

Peru

Tajikistan

Viet Nam

-0.5
-1.0
-1.5
-2.0
-2.5
-3.0

Household income quintiles:

Poorest 20%

-3.5
Change in average calorie intake (%)
Source: Food and Agriculture Organisation of the United Nations, 2008

Richest 20%

In the United States for example,

the commodity cost component of
the total food bill has fallen from
one-third in the 60s to one-fifth
since the mid-90s.284 The lower
the commodity component in food
bills falls, the less consumers will
notice a rise in the price of those
commodities. Thus, as income
increases and market chains extend
(due to rising urbanisation), the
responsiveness of demand to farmlevel prices will decrease further.
A doubling of US farm-level
prices would only result in food
prices increasing by 20% for the
average US consumer (because the
commodity component of food bills
in the US is only 20%).285 Recalling
the statistic noted earlier that
food only represents 10% of US
consumer spending, a back-of-anenvelope calculation suggests that
agricultural commodity prices could
increase by a factor of 5 (500%)
and only result in a doubling of
food expenditures (to 20% of total
consumer spending).
87

Farm-level prices of agricultural commodities in other

developed countries account for 25% to 35% of the final
retail price, although staple commodities generally form a
smaller percentage of the food bill.286 For example, despite
cereal prices more than doubling between 2007 and 2008,
the increase in the price of bakery products was only 5.7%
in the US, 6.9% in the UK and 3% in France and Korea.
Even in China and India the rise was only about 6%.287

These figures illustrate the potential for consumers to

continue to absorb further rises in agricultural commodity
prices for the foreseeable future. Furthermore, in real terms,
current prices are actually quite low. This has been partly
due to the liberalisation of global trade which has been
accompanied by a steep rise in world food imports of over
400% since 1990 (see Figure 8.8).

Figure 8.8: Global food import expenditures between 1990 and 2008
Index (1990 = 100)
700
600

World
Developed countries
Developing countries
Least-developed countries
Low-income food-deficit counties

500
400
300
200
100
0
90

92

94

96

98

00

02

04

06

08

Source: Food and Agriculture Organisation of the United Nations, 2008

88

Figure 8.9: Trade in commodities as a share of total

global merchandise trade
Nominal Shares (%)
30
25
20

Historical data actually imply significant latitude for the

market to absorb higher prices in the future. The world
as a whole now spends less than a quarter (measured as
a proportion of total merchandise trade) of the money on
food that it did in the early 60s, as Figure 8.9 shows.

Oil

15
10

Ores & metals

Agriculture

In addition, despite recent price spikes, the actual price of

agricultural commodities in real terms actually remains low
by historical standards. As Figure 8.10 shows, many key
commodities were over twice as expensive in the early 70s
as they were in 2007.

0
1963

1968

1973

1978

1983

1988

1993

1998

2003

Source: World Bank, 2009

Figure 8.10: Trends in real and nominal prices for selected agricultural commodities between 1971 and 2007
US$/tonne

US$/tonne

800

500

Wheat

700

Coarse Grains

400

600
500

300

400
200

300
200

100

100

07
20

01
20

95
19

89
19

83
19

07
20

01
20

95
19

89
19

83
19

19

20

19

19

19

19

20
Real prices

77

71

07

200

01

300

95

400

89

600

83

600

77

900

Oilseeds

19

Rice

800

71

77

US$/tonne
1000

1200

19

19

19

07
20

01
20

95
19

89
19

83
19

77
19

71
19
US$/tonne
1500

71

Nominal prices

Source: OECD, 2008; Food and Agriculture Organisation of the United Nations, 2008

89

Commodity prices relative to

incomes illustrate this point even
more convincingly. As Figure 8.11
shows, consumers are now spending
a significantly lower proportion of
their income on food than they have
in the past.
The complex and dynamic
interrelationships between supply
and demand, the state of the
broader economy, environment,
geopolitics, energy prices and other
factors make predicting actual future
prices difficult. What is certainly clear
is that there is a lot of room for the
price of agricultural commodities
and the farmland upon which they
are produced to rise in the future.

Figure 8.11: Trends in commodity prices relative to income between 1971

and 2007
Index (2000=1)
10
9

Vegetable oil

Wheat

Maize

Rice

5
4
3
2
1
0
71

73

75

77

79

81

83

85

87

89

91

93

95

97

99

01

03

05

07

Source: OECD, 2008; Food and Agriculture Organisation of the United Nations, 2008;
International Monetary Fund, 2008

90

CHAPTER 9

Fossil Fuel Shortages and the Potential

Consequences for the Agricultural
Economy

91

The threat to the worlds energy security, especially on oil and natural gas,
will reach serious dimensions in the next ten years.
International Energy Agency, 2009

Combined with the difficulties of OPEC producers in controlling output- and

it was as recent as 2004 that any excess oil capacity disappeared globally - this
could force prices above the 2008 records of around US$140 a barrel and well
towards US$200 within five to 10 years but more likely nearer five
Professor PaulStevens, Senior Research Fellow for Energy, Chatham House (The Royal Institute of
International Affairs), 2009

Trends in Biofuel Consumption and the Increasing

Correlation between Energy and Food
Outside of climate change factors, the issue of oil
production deficiencies relative to demand and the resultant
rise in oil prices has the potential to be the most significant
source of uncertainty for agricultural commodity prices.
Agriculture both supplies and demands energy; hence,
markets in both sectors have historically shown themselves
to be linked. The nature and strength of these linkages
have changed over the years, but agricultural and energy
markets have always adjusted to each other, with output
and consumption rising or falling in response to changing
relative prices. Rapidly increasing demand for liquid biofuels
is now tying agriculture and energy more closely than ever.
The reasons for this are twofold. Firstly, higher oil prices
could change the composition of demand for food crops
as a result of new markets are created in the production
of biofuels. Secondly, oil and other fossil fuels (in particular
natural gas used in fertiliser production) are crucial
components in modern agriculture and as such, fluctuations
in price and availability of fossil fuels could have a major
impact on agricultural economics and productivity.
The expansion in the production and use of biofuels is
expected to have significant effects on feedstock prices
(such as grains like wheat and corn used to produce
biofuels) and consequently, the value of the land on which
they are produced.288 According to a 2009 report from the
United Nations: Biofuels could have a significant impact on
food prices if oil prices remain high or the cost of biofuels
production declines.289
As the 2009 joint OECD United Nations report, Agricultural
Outlook 2008-2017, puts it:

40%

Forecasted proportion of US corn crop

used in ethanol production by 2017

25%

Forecasted use of biofeuls as a

proportion of total global transport fuels
by 2050

The nature and composition of demand, on the other

hand, are factors that may increase the future variability
in world prices. As discussed, industrial demand for grains
and oilseeds such as for the production of biofuels
constitutes a growing share of total use. This demand
is generally considered less responsive to prices than
traditional food and feed demand.
Biofuel policies are also a source of uncertainty [such as] an
array of new US mandates and the potential consequences
of an EU Directive promoting larger quantities of biofuel
use. These or other policies to promote biofuel production
and use, whether through mandate or subsidy, will lead to
greater purchases of feedstocks for biofuel production.
The prolific demand for maize arising from the rapidly
expanding ethanol sector in the United States has
profoundly affected the coarse-grain market. By 2017,
approximately 40% of the countrys maize crop could be
destined for energy production. However, overall there
will be constraints in expanding new arable areas in many
countries and competition for land and resources among
grain and oilseed crops is set to intensify with those crops
offering the highest returns gaining the most ground.

92

The main forces driving further growth in biofuel

production are high crude oil prices and continued public
support, in particular in OECD countries. The second
scenario [of the OECD-FAO commodity price forecast]
shows that wheat, coarse grains and vegetable oil
price projections are all shown to be highly sensitive to
petroleum-price assumptions.290

242%

Forecast increase in area of cropland

dedicated to biofuels by 2030

Figure 9.1: Global production of biodiesel and ethanol

between 1975 and 2005
World biofuels annual production
(millions litres of fuel)
60,000

40,000

30,000

70%

Proportion of EU arable land

required to replace 10% of transport
fuels with biofuels

20,000

10,000

As Figure 9.1 shows, biofuel production (including

bioethanol and biodiesel) is expanding rapidly as a number
of countries attempt to deal with energy security concerns
in an era of high oil prices and diminishing reserves of crude
oil. One of the reasons for this is that the production of
fuels from edible feedstocks is very resource hungry. The
corn equivalent of the energy used to feed a person for a
day would power a car for mere minutes whilst a full tank
of ethanol in a large, 4-wheel drive, suburban utility vehicle
could feed one person for just under a year.291
The US is the largest producer and consumer of bioethanol,
followed by Brazil which now uses 2.7 million ha of land
for biofuels production, equivalent to 4.5% of its cropland
area, mainly planted to sugar cane. Globally, biofuels
including bioethanol (mainly from sugarcane and corn) and
biodiesel (mainly from soybean, palm oil and other oil seed
crops), accounted for roughly 1% of total fuel consumption
for road transport in 2005 and it may reach 25% by 2050.
The EU has set targets as high as 10% by 2020.292, 293, 294
To put this into perspective, a 2006 report from the UNs
Food and Agriculture Organisation of the United Nations
suggested that for the EU to meet its 10 per cent target
from home-grown biofuels would require a staggering
70% of arable land to be taken out of food production,
necessitating a huge increase in EU food imports.295
In the early days of the biofuels boom, it was thought
that biofuels would help to reduce CO2 emissions.
However, as oil prices increase, fuel security is displacing
the environment as the key policy driver. Despite recent
research which highlights the potential for negative
environmental impacts (e.g. Searchinger et als 2008
research suggesting the use of US croplands for biofuels
increases greenhouse gases through emissions from landuse change296), the world continues to increase production
and consumption of biofuels.

Ethanol
Biodiesel

0
1975

1980

1985

1990

1995

2000

2005

Source: Earth Policy Institute, 2006

Figure 9.2: Production of biodiesel and ethanol by

country in 2005
World biofuels production, 2005
(millions litres of fuel)

15,000

Ethanol
Biodiesel
10,000

5,000

0
USA

Brazil

Other China
countries

India

France

Russia

Source: Earth Policy Institute, 2006

93

Figure 9.3: Voluntary and mandatory bioenergy targets for transport fuels in G8+5 countries

Country/Country Grouping

Targets1

Brazil

Mandatory blend of 2025 percent anhydrous ethanol with petrol; minimum blending of
3 percent biodiesel to diesel by July 2008 and 5 percent (B5) by end of 2010

Canada

5 percent renewable content in petrol by 2010 and 2 percent renewable content in diesel
fuel by 2012

China

15 percent of transport energy needs through use of biofuels by 2020

France

5.75 percent by 2008, 7 percent by 2010, 10 percent by 2015 (V), 10 percent by 2020 (M
= EU target)

Germany

6.75 percent by 2010, set to rise to 8 percent by 2015, 10 percent by 2020 (M = EU

target)

India

Proposed blending mandates of 510 percent for ethanol and 20 percent for biodiesel

Italy

5.75 percent by 2010 (M), 10 percent by 2020 (M = EU target)

Japan

500 000 kilolitres, as converted to crude oil, by 2010 (V)

Mexico

Targets under consideration

Russian Federation

No targets

South Africa

Up to 8 percent by 2006 (V) (10 percent target under consideration)

United Kingdom

5 percent biofuels by 2010 (M), 10 percent by 2020 (M = EU target)

United States of America

9 billion gallons by 2008, rising to 36 billion by 2022 (M). Of the 36 billion gallons,
21 billion to be from advanced biofuels (of which 16 billion from cellulosic biofuels)

European Union

10 percent by 2020 (M proposed by EU Commission in January 2008)

M = mandatory; V = voluntary.

Source: GBEP, 2007, updated with information from the United States Department of Agriculture, USDA, 2008a; Renewable Fuels Association, RFA, 2008;
written communication from the EU Commission and Professor Ricardo Abramovay, University of So Paulo, Brazil, 2008

94

Whilst the environment debate rages on, government

support worldwide continues to back biofuels. Many
developing countries such as Indonesia and Malaysia see
biofuels as an opportunity to improve rural livelihoods and
produce export revenues.297, 298 Figure 9.3 shows legislative
support through mandatory blending targets already
passed by many of the worlds governments. In addition, as
Figure 9.4 shows, governments continue to provide growing
financial support to the sector with $5.8 billion of support
in the US alone in 2006 and pump subsidies in a growing
number of countries.

The OECD has forecast scenarios for future increases in

the allocation of land to growing biofuel feedcrops. Their
model predicts that the proportion of cropland dedicated
to biofuels will increase from 0.5% in 2008 to 2% by 2030
(range 13%) and 5% by 2050 (range 28%).302

Further exacerbating the situation is the fact that the

production of other non-food crops, waste components of
which can be used in biofuels production, is also projected
to increase, thus competing further with food crops.
For example cotton, the seeds of which can be used
for biodiesel production, is expected to increase by an
additional 2% of cropland area by 2030 and 3% by 2050
as the crops profitability is increased in line with rising
fuel prices.299

Peak Oil and the Implications for Agricultural

Commodity Prices and Farmland Values
The extent to which oil prices will affect demand for
biofuels is dictated by future price levels of crude oil
because the economic incentive to produce biofuels
increases in proportion with oil prices. This affects food
commodity prices in two ways. Firstly new market demand
for feedstock crops is created for first generation biofuels
(biofuels made from edible plants containing sugar, starch
or oil or from animal fats). Secondly, competition for arable
land for second generation biofuel feedstocks (e.g. the
use of non-edible plant matter such as wood and cellulose
as feedstocks) will reduce the availability of arable land for
food production.

According to the United Nations these figures suggest an

increase in cropland area designated for the production
of biofuels and cotton alone to be in the range of 513%
by 2050,300 although compared to estimates from other
credible sources these figures are conservative. According
to a recent OECD report, under current policies, areas for
biofuel crops are projected to increase by 242% between
2005 and 2030.301

Figure 9.4: Total support estimates for biofuels in selected OECD economies in 2006
Ethanol

OECD economy

Biodiesel

Total Liquid Biofuels

TSE

Variable share1

TSE

Variable share1

TSE

Variable share1

(Billion US$)

(Percentage)

(Billion US$)

(Percentage)

(Billion US$)

(Percentage)

United States of
America2

5.8

93

0.53

89

6.33

93

European Union3

1.6

98

3.1

90

4.7

93

Canada4

0.15

70

0.013

55

0.0163

69

Australia5

0.043

60

0.032

75

0.075

66

Switzerland

0.001

94

0.009

94

0.01

94

Total

7.6

93

3.7

90

11.3

92

The percentage of support that varies with increasing production or consumption, and includes market-price support,production payments or tax
credits, fuel-excise tax credits and subsidies to variable inputs.

Lower bound of the reported range.

Total for the 25 Member States of the European Union in 2006.

Provisional estimates.

Data refer to the fiscal year beginning 1 July 2006.

Source: Steenblik, 2007; Koplow, 2007; Quirke, Steenblik and Warner, 2008.

95

Figure 9.5: Breakeven prices, expressed as the crude oil price, for selected feedstocks based on 2005 production costs
Price of crude oil (US$/barrel)

Price of oil, May 2008

140
120
100

Price of oil, July 2009

80
60
40

Mixed feedstocks, Europe

Maize, USA
Sugar cane, Brazil

20
0

Source: Food and Agriculture Organisation of the United Nations, 2006

As Figure 9.5 shows, the higher the oil price, the more economically viable biofuel production becomes (even without subsidies
or climate change mitigation incentives) and the greater will be the competition for cropland. At oil prices above the $50 mark,
biofuel production becomes capable of producing significant profits thus creating stiff competition and forcing up the price of
maize, wheat and other feedstock crops.
Estimates from OECD-FAO forecasting models project global ethanol production increasing rapidly over the next 10 years and
reaching some 125 billion litres in 2017, twice the quantity produced in 2007. These estimates are based on the assumption that:
long run oil prices are expected to stabilize (in real terms) at around $75.303
This seems conservative for two reasons. Firstly, fuel ethanol production tripled between 2000 and 2007 alone.304 Secondly, the
long run oil price forecast of $75 per barrel is well below the forecasts of many leading industry experts. They forecast much
higher oil prices on the basis that once global demand returns to pre- recession levels, given that significant production expansion
is unlikely in the near future, a return to 2008 prices of well above $100 per barrel is likely.
Even so, the same OECD-FAO report forecasts that food prices will rise by between 20% and 50% by 2016, partly as a result of
biofuels.305 Figure 9.6, showing the correlation between feedstock and oil prices, demonstrates that agricultural commodity prices
rise with the price of oil.

96

Figure 9.6: Correlation between oil and food prices

Soybeans ($/ton)

Maize ($/ton)

700

350

600

300

500

250

400

200

300

150

200

100

100

50

20

40

60

80

100

120

140

Crude oil ($/bbl)

20

40

60

80

100

120

140

Crude oil ($/bbl)

Wheat ($/ton)
500

It is now the view of most commentators both in the

production and investment areas of the oil industry, that
due to the exhaustion of easily accessible oil resources,
prices well in excess of $50 per barrel are not merely a
possibility, but rather the new reality. If oil moves beyond
the $50 per barrel mark for a sustained period of time,
thus providing the economic conditions to incentivise the
further expansion of worldwide biofuel processing capacity,
competition for feedstocks will reach new heights.

400

300

200

100

20

40

60

80

100

120

140

Crude oil ($/bbl)

Source: World Bank, 2009-06-22

97

Figure 9.7: Notable recent statements relating to the end of the era of cheap oil
Commentator

Statement

Reference

David OReilly,
Chairman, Chevron

The time when we could count on cheap

oil... is clearly ending.

CERA Energy Conference. February 2005.

Samuel Bodman, U.S.

Secretary of Energy

The era of cheap and abundant petroleum

may now be over.

Christian Science Monitor. July 8, 2006

Jeroen van der Veer,

Shell Chief Executive.

Peak oil does exist for easy-to-drill oil

Cummins, C., Williams, M.

Shells Chief Pursues Simple Goals. WALL
STREET JOURNAL. January 17, 2006.

Alpha Oumar Konare,

African Union
Commission Chair.

The era of cheap oil is over.

Era of cheap oil is over. Reuters. 02/04/2006

Viktor Khristenko,
Russian Energy Minister

... the era of cheap hydrocarbons is over.

Hope, C. RUSSIA: ERA OF CHEAP FUEL IS

OVER. The Telegraph. 06/06/2006.

Guy Caruso,
Administrator. U.S.EIA

The era of low cost oil is probably over.

Holmes, J. Four Corners Broadband Edition.

Australian Television Program. 10 July 2006.

Source: See table

Figure 9.7 lists some notable statements from recent years

suggesting that the era of cheap oil is coming to an end.
Even British Petroleum (BP), who have famously always
refused to comment on questions from journalists regarding
likely future oil prices for commercial reasons have also
recently made statements to the effect that cheap oil may
be a thing of the past.

Figure 9.8: Breakeven prices, in terms of the crude oil

price, for maize (corn) with and without subsidies
140
120

Maize ethanol is profitable

100
80

Pr

60

In June 2009 at the launch of its annual Statistical Review

of World Energy, BPs chief executive, Tony Hayward, stated
that there is a rational argument to say that somewhere
between $60 to $90 a barrel is the right sort of level. He
argued that Opec members require something in the region
of $60 per barrel to pay for the cost of extraction and to
cover the running costs of their economies which depend
so much on oil revenues. He also pointed out that demand
data from 2007 and 2008 suggest that consumers only cut
back once the oil price hits $100 per barrel.306
Figure 9.8 provides an example of the breakeven levels
in the US for one feedcrop, maize used for ethanol
production, at various oil prices. Even without subsidies and
further increases in production efficiency, oil prices of above
$70 per barrel support corn prices above the pre- 2008 20
year average of $111 per tonne. With subsidies, this holds
true at just over $40 per barrel. A return to 2008 price
peaks of over $140 per barrel of oil would result in corn
prices of $300 per tonne, 153% higher than the 20 year
historical average of $118 per tonne.307
A growing number of industry experts now believe that
sustained prices above $100 per barrel are actually likely to
be at the lower end of the scale between now and 2030.

with
ble
ofita

40

subs

idie

Maize ethanol is not profitable

20
0
50

100

150

200

250

Price of maize (US$/tonne)

Parity prices without subsidies

Parity prices with subsidies

Source: Tyner and Taheripour, 2007; Food and Agriculture

Organisation of the United Nations, 2008

62

Number of oil producing countries

past peak production

3%

Number of barrels of oil consumed

for every barrel discovered

98

Underlying such forecasts is the growing body of evidence

that suggests the world may be entering a crucial stage in
the exploitation of its crude oil resources known as peak oil.
Peak oil is the point in time when the maximum rate of
global petroleum extraction is reached, after which the rate
of production enters terminal decline, otherwise known
as the geological limit of production. The concept of
peak oil is based on the historically observed production
rates of individual oil wells and the combined production
rate of a field or region of related oil wells. The aggregate
production rate from an oil field over time grows until the
rate peaks, after which it declines, sometimes rapidly, until
the field is depleted. This concept has been shown to be
applicable to the sum of a nations domestic production
rate. Peak oil theory maintains that the same sort of
behaviour can similarly be applied to the global rate of
petroleum production.308

Figure 9.9: US Oil Production and Imports

Million Barrels/Day

11
10
9
8
7
6
5
4
3
2

A detailed discussion of this wide ranging topic is beyond

the scope of this document, however, a short examination
of some of the key points and recent evidence is warranted
given the profound implications peak oil could have for
agricultural commodity prices.
If peak oil were to occur in the next couple of decades (or if
it is occurring now), it could potentially outweigh all other
factors, including climate change and food demand growth,
exerting upward pressure on agricultural commodity prices.

1
0
1920

1930

1940

1950

Production

1960

1970

1980

1990

2000

Imports

Source: US Energy Information Administration, 2007

Peak oil theory was first proposed by M. King Hubbert,

a geoscientist who worked at the Shell research lab
in Houston, Texas, and later became a senior research
geophysicist for the United States Geological Survey.
Hubberts logistics model was first used in 1956 to
accurately predict that United States oil production would
peak between 1965 and 1970. As Figure 9.9 indicates, US
oil production peaked in 1970 as the Hubbert peak theory
predicted and by 2005 oil imports to the US were twice US
production.
This distinct curve, known as Hubberts curve, is
characteristic of oil production profiles throughout history
and can be applied to individual oil fields, specific domains
or oil producing region (e.g. individual states of the US) and
to the sum of such regions (e.g. the US as a whole). Peak
theory mathematically models the pattern by which peak
oil production (or exploitation of reserves) for a given region
follows the peak of discovery (of those reserves).
Underlying this pattern is the fact that larger oil fields are
more likely to be discovered and exploited first. These
are also the cheapest fields to exploit as exploration and
production costs per unit of oil are higher the smaller the
field. The more mature an oil producing region, the smaller
the discovered fields and the higher the cost of production
becomes.

50%

Decline in US oil production since the

peak of production in 2008

6.7%

Annual rate of production decline in

large oil fields accounting for of
global production

99

The pattern of peak production following peak discovery has been observed in many oil producing regions of the world. Indeed,
peak oil has already been reached and surpassed in the 62 oil producing countries listed in Figure 9.10.
9.10: Oil producing countries at or past peak production as of 2008
1

United States

17

Poland

33

Peru

49

Serbia

United Kingdom

18

Myanmar

34

Morocco

50

Papua New Guinea

Russia

19

Tajikistan

35

France

51

Japan

Libya

20

Trinidad & Tobago

36

Senegal

52

Pakistan

Kuwait

21

Indonesia

37

Congo (Kinshasa)

53

Turkey

Iran

22

Romania

38

China Taiwan

54

Italy

Egypt

23

Belarus

39

Netherlands

55

Denmark

Ukraine

24

Turkmenistan

40

Benin

56

Mexico

Norway

25

Israel

41

Cameroon

57

South Africa

10

Australia

26

Spain

42

Barbados

58

Cuba

11

Venezuela

27

Tunisia

43

Greece

59

Yemen

12

Germany

28

Albania

44

Argentina

60

Bahrain

13

Bulgaria

29

Georgia

45

Uzbekistan

61

Oman

14

Kyrgyzstan

30

Hungary

46

Gabon

62

Colombia

15

Austria

31

Chile

47

Slovakia

16

Czech Republic

32

Croatia

48

Syria

Source: Energy Files, 2008

100

Figure 9.11 shows the discovery and production peaks for a number of these countries. These curves clearly demonstrate that the
peak of production characteristically occurs somewhere between 20 and 40 years after discovery. Figure 9.12 shows the discovery
and production curves for the regions of Asia-Pacific, Europe and the United Sates, all of which have peaked in a similar pattern,
thus demonstrating that peak theory holds not only for countries or sub-regions but also for collections of those countries or subregions.
Figure 9.11: Oil discovery and actual and forecast production curves for various countries
United Kingdom

Norway
3,000
million barrels of oil per year

3,500
3,000
2,500
2,000
1,500
production forecast

1,000
500
0

2,700
2,400
2,100
1,800
1,200
900
600
300

50

40

20

30

20

20

20

10

20

00

20

90

20

80

19

70

19

60

19

50

19

40

19

19

Indonesia

2,000

1,500

1,800

1,350

million barrels of oil per year

1,600
1,400
1,200
1,000
800
600

production forecast

400
200

1,050
900
750

production forecast

600
450
300
150

Cameroon

50

40

20

20

30

20

20

20

10

00

20

90

20

80

19

19

70

60

19

50

19

40

19

30

19

19

20

10

19

00
19

50

20

40

20

30

20

20

20

10

00

20

90

20

80

19

19

70

19

60

19

50

19

19

19

40

30

1,200

Austria
100

270

90

million barrels of oil per year

300
240
210
180
150
120
90
production forecast

60
30

70
60
50
40
30

production forecast

20
10

50

40

20

30

20

20

20

10

20

00

20

90

20

80

19

70

19

60

19

50

19

40

19

30
19

50

20

40

20

30

20

20

20

10

00

20

90

20

19

80

19

70

19

60

19

50

19

19

19

40

30

80

19

million barrels of oil per year

19

30

50
20

40
20

30

20

20

10

20

00

20

90

20

80

19

70

19

60

19

19

19

50

Egypt

million barrels of oil per year

production forecast

1,500

19

million barrels of oil per year

4,000

Energy Files, 2008

101

Figure 9.12: Oil discovery and actual and forecast production curves for regions of the world
United States of America

Europe
5,000

8,000
6,000
production forecast
4,000
2,000
0

million barrels of oil per year

4,500
4,000
3,500

production forecast

3,000
2,500
2,000
1,500
1,000
500

50

40

20

30

20

20

20

10

20

00

20

90

20

80

19

70

19

60

19

50

19

40

19

30

19

20

19

10

19

00

19

50

40

20

30

20

20

20

10

20

00

20

90

20

80

19

70

19

60

19

50

19

40

19

30

19

20

19

10

19

19

19

00

19

million barrels of oil per year

10,000

Asia-Pacific
6,750
6,000
5,250
4,500
3,750

production forecast

3,000
2,250
1,500
750

50

40

20

20

30

20

20

10

20

20

00

20

90

80

19

19

70

19

60

50

19

19

40

30

19

19

20

19

10

19

00

19

million barrels of oil per year

7,500

Source: Energy Files, 2008

102

Figure 9.13 shows global oil discoveries and production since1910. Global discoveries peaked in 1962 with the trend since then
being generally downwards. Onshore oil is generally exploited first in any region given that it is cheaper to extract (and therefore
more profitable) than offshore oil. This suggests, based on the timescale between peak discovery and peak production, that global
oil production could peak at some point in the near future.
Figure 9.13: Global oil discoveries and onshore and offshore production
80000
75000
70000
65000

45 Years

60000
55000

Millions of bbls oil per year

50000
45000
40000
35000
30000
25000
20000
15000
10000
5000
0
1910

1920

1930

1940

1950

1960

1970

1980

1990

2000

2008

Source: Energy Files, 2008

103

90

Million Barrels per Day

World

58% of World
Total in 2006

60
OECD
30
Non-OECD

05
20

00
20

95
19

90
19

85
19

80
19

75
19

70
19

19

65

60

Whilst the concept of peak oil is not questioned by the

majority of petroleum industry participants, the point in
time that peak is forecast to occur remains hotly debated. In
2005, the US Department of Energy commissioned a report
titled Peaking of World Oil Production: Impacts, Mitigation,
& Risk Management (the Hirsch Report). The reports
objective was to provide policy makers with an overview of
the various peak oil forecasts and the consequences of such
a peak, particularly with reference to mitigation actions.309
Figure 9.15 from the Hirsch Report lists a number of
credible sources and their views on the subject of oil.

Figure 9.14: World petroleum consumption

19

As Figure 9.14 indicates, the world currently consumes over

80 million barrels of oil per day, or about 30 billion barrels a
year. Annual discoveries since the year 2000 have, however,
been roughly 10 billion barrels or lower. This means that
the world currently consumes three times more oil than it
discovers. In other words, more than two out of every three
barrels consumed are supplied to the market by depleting
reserves from oil fields discovered prior to the year 2000.

Source: US Energy Information Administration, 2007

Figure 9.15: Recent statements regarding peak oil

Commentator

Statement

Reference

Royal Swedish
Academy of
Sciences

Already 54 of the 65 most important oil producing

countries have declining production and the rate of
discoveries of new reserves is less than a third of the
present rate of consumption.

Statements on Oil by the Energy

Committee at the Royal Swedish
Academy of Sciences.
October 14, 2005.

International Energy
Agency

By 2011 global growth will marginally exceed supplyside expansions.

International Energy Agency Medium-term Oil Market Report.

July 2006.

Raymond James
(Brokerage / Financial)

The peak in global oil production, which we believe is

approaching, will occur no matter what the economic
circumstance.

The Politics of Oil: Is History

Repeating Itself? Raymond James
Insight. June 26, 2006.

Schlesinger, J. R.
(Former Secretary of
Energy, Secretary of
Defense, CIA Director,
and
AEC Chairman)

In the decades ahead, we do not know precisely when,

we shall reach a point, a plateau or peak, beyond which
we shall be unable further to increase production of
conventional oil worldwide. We need to
understand that problem now and to begin to prepare for
that transition.

Statement of James Schlesinger

Before the Committee on
Foreign Relations United States
Senate. 16 November 2005

Greene, D.
(Oak Ridge National
Laboratory energy
analyst)

Peaking of conventional oil production is almost certain

to occur soon enough to deserve immediate and serious
attention.

Greene, D, et al. Have we run

out of oil yet? Oil peaking
analysis from an optimists
perspective. Energy Policy 34
(2006).

Source: Hirsch, 2007

104

An updated supplement to the Hirsch Report published in 2007, entitled Peaking of World Oil Production: Recent Forecasts,
provides a list of peak forecasts tabulated according to forecast date.310 These are shown in Figure 9.16.
Figure 9.16: Various peak oil forecasts by commentator and source
Commentator

Statement

Reference

Pickens, T. Boone (Oil & gas investor) 2005

Boone Pickens Warns of Petroleum Production Peak.

EV World. May 4, 2005.

Deffeyes, K. (Retired Princeton

professor & retired Shell geologist)

http://www.defenseandsociety.org/fcs/crisis_unfolding.
htm .February 11, 2006

Dec-05

Westervelt, E.T. et al. (US Army Corps At hand

of Engineers)

Energy Trends and Implications for US Army Installations.

ERDC/CERL TN051 Sept 2005.

Bakhtiari, S. (Iranian National Oil Co. Now

planner)

King, B.W. No more business as usual. Energy Bulletin.

August 11, 2006.

Herrera, R. (Retired BP geologist)

Close or past

Bailey, A. HAS OIL PRODUCTION PEAKED?

Petroleum News. May 4, 2006.

Groppe, H. (Oil / gas expert &

businessman)

Very soon

Henry Groppe. PEAK OIL: MYTH VS. REALITY. DENVER

WORLD OIL CONFERENCE. November 10, 2005.

Wrobel, S. (Investment fund

manager)

By 2010

Hotter, A. Global Oil Output to Peak in 2010 Diapason.

Schlumberger. May 16, 2006.

Bentley, R. (University energy

analyst)

Around 2010

Bentley, R. The Case for Peak Oil. DOE/EPA Modeling the

Oil Transition. April 21, 2006.

Campbell, C. (Retired oil company

geologist; Texaco & Amoco)

2010

An Updated Depletion Model. THE ASSOCIATION FOR

THE STUDY OF PEAK OIL AND GAS ASPONEWSLETTER
No. 64 APRIL 2006.

Skrebowski, C. (Editor of Petroleum

Review)

2010 +/- a year

Skrebowski, C. Peak Oil The emerging reality. ASPO5

Conference. Pisa Italy. July 18, 2006.

Meling, L.M. (Statoil oil company

geologist)

A challenge around
2011

Leif Magne Meling, Statoil ASA.. Oil Supply, Is the Peak

Near? Centre for Global Energy Studies.
September 2930, 2005.

Pang, X., et al. (China University of

Petroleum)

Around 2012

Pang, X, Meng, Q., Zhang, J., Natori, M. The Challenges

Brought By The Shortage of Oil And Gas In China And
Their Countermeasures. ASPO IV International Workshop
on Oil and Gas Depletion. 1920 May, 2005.

Koppelaar, R.H.E.M. (Dutch oil

analyst)

Around 2012

Koppelaar, R. World oil Production & Peaking Outlook.

Stichting PeakoilNederland. 2005.

Volvo Trucks (Swedish automotive

company)

Within a decade

Volvo web site. 2007.

de Margerie, C. (Oil company

executive)

Within a decade

ASPO NEWSLETTER No. 65 MAY 2006

al Husseini, S. (Retired Exec. VP of

Saudi Aramco)

2015

Motavalli, J. End of an Era. Cosmos. April 2006.

Merrill Lynch (Brokerage / Financial)

Around 2015

Mario Traviati, et al. Oil Supply Analysis: From Upstream

Incapacity to Spare Capacity: Its Now a Better Story
Downstream. Merrill Lynch. 12 October 2005.

West, J.R., PFC Energy (Consultants)

2015 - 2020

West, R. Energy Insecurity. Testimony before the Senate

Committee on Commerce, Science & Transportation.
September 21, 2005.

Maxwell, C.T., Weeden & Co.

(Brokerage / Financial)

Around 2020 or earlier

Maxwell, C.T. The Gathering Storm. Barrons. November

14, 2004.

Wood Mackenzie (Energy

consulting)

Tight balance by 2020

MacroEnergy Long-term Outlook March 2006. Wood

Mackenzie.

Total (French oil company)

Around 2020

Bergin, T. Total Sees 2020 Oil Output Peak, Urges Less

Demand. Reuters. June 7, 2006.

Source: Hirsch, 2007

105

A number of the more credible peak forecasts are plotted on the graph in Figure 9.17 providing a clear impression of a consensus
position in the 2000 to 2020 date range. Aside from these forecasts, more recent historical data suggest that oil production might
have already peaked and may never return to the production level seen in 2008.

Figure 9.17: Various peak oil forecasts

mbpd

100

90

80

70

60

50

40

30

20

10

0
1940

1950

1960

1970

1980

1990

2000

2010

2020

BP (2006)

Laherrere (All)

ASPO-58 (CO+NGL)

EIA (CO)

Logistic Med (CO+NGL)

Skrebowski (CO+NGL)

EIA (NGPL)

Logistic Low

Koppelaar (All)

EIA (Other Liquids)

Logistic High

Bakhtiari (CO+NGL)

Const. Barr./Cap. (CO+NGL)

Shock Model (CO+NGL)

EIA (All)

Loglets (CO+NGL)

GBM (CO+NGL)

CERA (CO)

Deffeyes (CO)

ASPO-71 (CO+NGL)

CERA (All)

2030

2040

Source: Various (see key)

106

One of the primary uncertainties in the debate over the

point in time at which oil production will peak centres
around OPEC reserves. During the 80s OPEC introduced a
quota system such that members with the highest reserves
would be granted a higher production quota by the cartel.
This had the effect of incentivising OPEC member nations to
exaggerate their reserves in order to increase their annual oil
revenues.
As Figure 9.18 demonstrates, all OPEC members increased
their stated reserves substantially between 1984 and 1990,
without any associated discovery or exploration activity,
in what has come to be known in the oil industry as the
scramble for quotas. These reserve figures, if they are
exaggerated, will result in faster depletion and therefore an
earlier peak than official OPEC figures imply. The credibility
of the figures is further called into question by virtue of the
fact that the stated reserve figures of most OPEC members
have not reduced over the years as oil has been supplied
to the world markets. Again, this is despite a general lack
of exploration and discovery activity since the scramble for
quotas occurred.
The fact that OPEC members keep their true reserve
confidential on the basis of national security creates
further uncertainty. Saudi Arabia for example has not
allowed a comprehensive survey of its reserves by

independent observers since pre-1980 when the Saudi

Government took full control of Saudi Aramco, the state
owned oil company. In the words of Sadad I. Al Husseini,
former Vice President of Saudi Aramco: World reserves are
confused and in fact inflated. Many of the so-called reserves
are in fact resources. Theyre not delineated, theyre not
accessible, theyre not available for production.311
The January 2006 issue of Petroleum Intelligence Weekly
reported on a leaked document purported to be from the
Kuwaiti Oil Company which stated the reserves of Kuwait
to be 48 billion barrels (less than half the official stated
reserves which now stand at 100 billion barrels) with only
24 billion barrels being fully proven (less than a quarter
of stated reserves).312 This report has been the subject of
numerous debates in the Kuwaiti parliament in which MPs
have questioned the reliability of official Kuwaiti reserve
figures.
These potential inaccuracies could prove to be crucial in
the years to come. As shown in Figure 9.19, non-OPEC
conventional oil production actually peaked in 2004 at
46.8 million barrels/day. As non-OPEC production has been
in decline since then, it appears that it will fall entirely on
OPEC to make up for the loss in non-OPEC production and
provide for any overall expansion in oil production.

Figure 9.18: Reserve revisions under the OPEC quota system

YEAR

Abu Dhabi

Dubai

Iran

Iraq

Kuwait

Saudi Arabia

Venezuela

1982

31

57

30

65

165

20

1983

31

55

41

64

162

21

1984

30

51

43

64

166

25

1985

31

48

44

90

169

26

1986

30

48

44

90

169

25

1987

31

49

47

92

167

56

1988

92

93

100

92

167

58

1989

92

93

100

92

170

59

1990

92

93

100

92

257

59

1991

92

93

100

94

257

63

1992

92

93

100

94

258

64

1993

92

93

100

94

258

64

1994

92

89

100

94

259

65

1995

92

88

100

94

259

65

1996

92

93

112

94

259

72

1997

92

93

112

94

259

72

Source: Energy Files, 2006

107

Figure 9.19: Peaking of non-OPEC oil production including unconventional sources

MBD

50
Forecast
48
46
Non OPEC-12 Peak
2004: 46.8 MBD

44
42
40

Non OPEC-12 Peak

2004: 42.1 MBD

38
36
34
32
30
1997

1998

1999

2000

2001

2002

2003

Natural Gas Plant Liquids

2004

2005

Canada Oil Sands

2006

2007

2008

2009

2010

2011

2012

Crude Oil and Lease Condensate

Source: International Energy Agency, 2008; The Oil Drum, 2009

It is also the case that global oil production has actually

been in decline since January 2008 when production
peaked at 81.73 million barrels/day, since which time it
has dropped to approximately 80 million barrels/day.313
Whilst this is a fact, those arguing that peak oil will not
occur in this decade maintain that these production figures
are a reflection of reduced demand during the global
downturn rather than reduced production capacity. These
commentators assert that when global demand resumes to
2008 levels, OPEC will respond accordingly by increasing
production from the spare capacity it claims to have.
Assuming this outcome, it might be reasonable to expect
that OPEC would need to increase production levels such
that global production exceeded 81.73 million barrels/day
in order to avoid a return to price levels upwards of $140
per barrel. However, OPEC has failed to materially increase
its capacity in the past few years, despite an unprecedented
seven years of rising oil prices. Given that extreme
price volatility is disruptive to the oil industry (upstream
investment in the oil industry has slumped by $100 billion,
or 21%, since the $147 price peak), it has been argued that
if OPEC countries were able to increase production they
already would have done so.314

108

Analysis of historical supply changes provides further

support for the view that the capacity of the oil industry to
increase production is becoming increasingly stretched. As
Figure 9.20 shows, average annual global oil production
increased by an average of 6.48% between 1945 and 1980,
whereas the average over the following 25 years (1980 to
2005) was only 1.74%.
GDP growth is a strong indicator of growth in demand for
oil. Figure 9.21 shows World Bank figures for historical
global GDP growth and forecast future GDP growth.
Global GDP growth averaged 2.7% during the 90s, 3.1%
in the 2000s (prior to the recent economic downturn) and
is forecast to average 2.5% from 2015 to 2030. Asias
GDP increased by 9%annually between 2004 and 2006,
with growth especially high in China and India, whilst
Sub-Saharan Africa experienced 6% annual growth in the
same period.315
These figures contrast starkly with the average oil
production increase of 1.74%. Assuming a direct link
between GDP growth and demand growth for oil, a backof-the-envelope calculation shows that supply the increase
needed to be roughly 55% higher to keep up with 1990s
demand increase and 78% higher to keep up with demand
increase in the 2000s. In the context of this fundamental
discrepancy between supply and demand, the increase
in the price of oil price during this period (from $20+ to
$140+) makes perfect sense.

Figure 9.20: Global historical petroleum supply changes

14

12

10

% supply change each year

6.48%
6

1.74%
0

-2

-4

-6
1945

1950

1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

Source: Energy Files, 2008

109

Figure 9.21: Actual and forecast average annual GDP growth

Average annual growth rate

Period
Per capita income

Population

GDP

World

1.2%

1.5%

2.7%

High income

1.8%

0.7%

2.5%

Low and middle income

2.0%

1.6%

3.6%

Low income

2.3%

2.2%

4.5%

Middle income

2.2%

1.2%

3.5%

World

1.8%

1.2%

3.1%

High income

1.7%

0.7%

2.5%

Low and middle income

4.2%

1.3%

5.6%

Low income

4.1%

1.9%

6.1%

Middle income

4.6%

0.9%

5.5%

World

1.7%

0.8%

2.5%

High income

1.2%

0.1%

1.3%

Low and middle income

3.9%

0.9%

4.9%

Low income

3.8%

1.5%

5.4%

Middle income

4.1%

0.7%

4.8%

World

-0.2%

-0.4%

-0.6%

High income

-0.5%

-0.7%

-1.2%

Low and middle income

-0.3%

-0.4%

-0.7%

Low income

-0.3%

-0.4%

-0.7%

Middle income

-0.5%

-0.2%

-0.7%

1990s

2000s

2015-30

Change (2015-30 vs. 2000s)

Source: World Bank, 2009

Figure 9.22: Relationship between per capita income and oil consumption
30000
Ave. yearly income per person ($)

As Figure 9.22 shows, there is

a strong correlation between
economic activity and oil
consumption. The higher the
per capita income of a country,
the greater the per capita oil
consumption will be. On average, oil
producing and exporting countries
consume more oil per unit of GDP
than oil importing countries as
oil is generally cheaper for local
consumers. This can be clearly seen
in Figure 9.22 which shows many
oil producing countries lie below
the trend line. This characteristic
of oil producing countries to
consume larger amounts of oil
further exacerbates global supply by
applying pressure on exports.

25000
UK

US

20000
15000
10000

China
Russia

5000
Saudi Arabia
India

0
0

10

15

20

25

30

Ave. yearly oil consumption per person (bbls)

Source: EnergyFiles, 2006

110

The fact is that cheap, easily accessible oil is simply getting

harder to find. According to the International Energy
Agency, the worlds preeminent authority on oil supplies,
the average depth of production from offshore wells has
tripled in the last ten years.319 In a recent interview with
UK newspaper, The Independent, Dr Fatih Birol, the chief
economist at the IEA, admitted that previous estimates of
decline rates in existing fields had been incorrect. As the
articles states:
The first detailed assessment of more than 800 oil fields
in the world, covering three quarters of global reserves,
has found that most of the biggest fields have already
peaked and that the rate of decline in oil production is now
running at nearly twice the pace as calculated just two years
ago. The IEA estimates that the decline in oil production
in existing fields is now running at 6.7 per cent a year
compared to the 3.7 per cent decline it had estimated in
2007, which it now acknowledges to be wrong.320

US$ 2006, billions

Real price per bbl, US$ 2000

70

100

60

80

50
60

40
30

40

20
20

10

05

03

20

01

20

99

20

97

19

95

Exploration (left axis)

19

93

19

91

19

89

19

87

19

85

19

83

19

81

19

The Merrill Lynch report blamed forecast production

declines of 30 million barrels (37.5% of current production)
by 2015 on a general lack of investment in developing new
production capacity and on producers emphasis in recent
years on developing small oil fields.317 As larger fields are
generally cheaper to exploit and produce revenue flows
for longer, this is a clear sign of the fact that the world
is running out of larger fields. Smaller fields deplete and
reach peak production more rapidly than larger fields.
According to the report: Interestingly the decline rates are
inversely proportional to the size of the field, with super
giants experiencing a 3.4 per cent yearly decline, giant
fields posing 6.5 per cent and large fields averaging 10.4
per cent.318

Figure 9.23: Real spending by major American multinational oil companies since 1980

19

A February 2009 report from Merrill Lynch supported the

view that production decline rates in OPEC and non-OPEC
countries could lead to higher oil prices as soon as 2010
or 2011. The report forecasts that cumulative decline in
global oil production from todays production levels could
amount to 30 million barrels per day by 2015. According to
Francisco Blanch, head of global commodities research at
Merrill Lynch: As a result of these steep decline rates, the
world now needs to replace an amount of oil production
equivalent to Saudi Arabias production every two years.316

Development (left axis)

Crude oil prices (right axis)

Source: Energy Information Agency, 2008; World Bank, 2009

Regardless of historical data and forecasts, it will only be

possible to state officially the point at which peak oil occurs
a number of years after it actually takes place. Until then
the issue will remain in debate. What is certainly true is that
for oil prices to remain at or near lower long-term historical
averages, production increases will need to continue at the
same rate as the demand increases dictated by economic
growth.
Figure 9.24 demonstrates the huge potential for demand
to increase in coming years. China and Indias combined
consumption remains lower than the United States, yet their
combined population is over five times greater and their
demand for oil will continue to grow with the rapid growth
of their economies.

As Figure 9.23 demonstrates, despite record oil price

increases investment in exploration has actually decreased
by over 50% since 1980s levels, indicating that viable
exploration opportunities are becoming increasingly
difficult to identify. Interestingly an increase of over 100%
in production investment between the late 1990s and
mid 2000s has done little to increase supply. This further
supports the hypothesis of diminishing returns blighting
an increasingly resource stretched oil industry. In 2005 the
worlds six largest oil companies invested US$54 billion in
new projectsbut gave back US$71 billion to shareholders in
the form of dividends, despite rising oil prices.321

111

There is no doubt that once global oil production

moves into a state of terminal decline there will be
severe consequences for the price of oil. This in turn will
substantially increase the financial incentive for biofuels
manufacturers which will pass through into feedstock
prices. In the words of the World Bank, Global Economic
Prospects 2009 report:
Biofuels could expand crop demand very rapidly. The
potential role of biofuel demand for food crops greatly
complicates the picture. Given todays technology, maize
can be profitably transformed into ethanol at oil prices in
excess of $50 a barrel. Above that price, every percentage
point increase in the barrel price of oil causes the maize
price to rise by 0.9 percent, which means the maize market
is effectively tied to the oil market (this relationship is not
statistically significant when oil is below $50 a barrel).
Moreover, because farmers have responded to high maize
prices by increasingly growing maize in fields where they
once grew wheat and soybeans, prices of these (and other)
commodities have also become increasingly sensitive to oil
prices.
Given that the energy market is much larger than the
market for maize (if all the worlds maize were used
to produce biofuels, it would only meet 8 percent of
energy demand), biofuel demand has the potential to
change permanently the nature (and price) of agricultural
commodities. The International Energy Agency (IEA), for
example, suggests that biofuel demand for grains could
increase by 7.8 percent a year over the next 20 years
(compared with 1.2 percent annual increases for food
demand). If this prognosis is borne out, 40 percent of global
grain production could be going to biofuels by 2030.322
Peak oil thus has the potential to increase global farmland
prices enormously. This could occur reasonably quickly if
the peak occurs soon or in 2008 as many commentators
postulate (and historical production data suggest). This is
particularly true in view of the fact that, like with food, the
demand for transport fuel is little affected by increasing
price and the large scale development of substitutes would
be both time consuming and costly.
According to the Hirsch Report: As noted in previous
literature, peak oil presents the world with a risk
management problem of tremendous complexity
and enormity. Prudent risk minimization requires the
implementation of mitigation measures roughly 20 years
before peaking to avoid a very damaging world liquid
fuels shortfall. Since it is uncertain when peaking will
occur or whether it will be due to geological or investment
limitations, the challenge is indeed vexing.323
Being the only viable short-term mitigation strategy for
global oil shortages, biofuels are likely to play a very
important role in a post peak world. This view is already
being expressed by major investors in the sector. In March,

Figure 9.24: Comparison of oil consumption in various

economies
Million Barrels per Day
24

18

12

0
1960

1965

1970

1975

1980

1985

1990

1995

United States

Japan

Former U.S.S.R.

China

Russia

India

2000

2005

Source: US Energy Information Administration, 2007

7.8%

Forecasted annual increase in

demand for grain from biofuels
sector over next 20 years

153%

Forecasted rise in the price of corn

due to biofuels demand if oil returns
to $140
Royal Dutch/Shell, which had sold most of its solar business
two years ago, said it is freezing its research and investment
in wind and solar power to focus on biofuels whilst BP
continues to push forward with its investments in Jatropha
(an oil seed plant used in biodiesel production).324 High
demand for farmland and feedstocks from the biofuels
sector is also likely to continue for a prolonged period after
the peak according to the findings of the Hirsch Report:
Mitigation will require an intense effort over decades.
This inescapable conclusion is based on the time required
to replace vast numbers of liquid fuel consuming vehicles
and the time required to build a substantial number of
substitute fuel production facilities.325

112

Current activity in the automotive sector provides some

insight into the extent to which the world is unprepared
for a sudden reduction in the availability of conventional
transport fuels. In June 2009 The Financial Times reported
on a study in which it was estimated that carmakers
around the world would produce 100,000 electric cars in
2015. To put this in perspective, this represents 0.1% of
total car production.326
Given that the automotive sector consumes 50% of the
oil produced worldwide (a figure forecast to rise to nearer
60% by 2030), a substitute for liquid fuel cars of 0.1% in
2015 seems somewhat modest. Add to this the fact that
car numbers continue to increase rapidly and it is clear that
adding 100,000 electric cars a year is a bit like trying to put
out the great fire of London with a pipette.
Between 1990 and 2005 the number of motorists in India
tripled and in China the number rose tenfold. Compared
to the west (or even their emerging market counterparts),
they have barely started.327 The US, with the highest, has
940 cars for every thousand residents; the EU an average
of 584 and Brazil has 122.328 China now has roughly
twenty vehicles per thousand residents.329 As Chinese
environmentalist Liang Congjie points out: If each Chinese
family has two cars like US families, then the cars needed
by China, something like 600 million vehicles, will exceed all
the cars in the world combined.330

Supply Side Implications of Peak Oil and Gas

Increased biofuels demand is not the only effect, however,
which higher oil prices would have on agriculture.
Agriculture, especially in the era of the Green Revolution,
is hugely dependent on oil and other fossil fuels. As Figure
9.25 shows, agriculture is responsible for 13.5% of all
greenhouse gasses compared to transports 13.1%.
Ten percent of the energy used annually in the United
States was consumed by the food industry.331 A 2002 study
from the John Hopkins Bloomberg School of Public Health
estimated that, using current agricultural systems, three
calories of energy are needed to create one calorie of edible
food, with grain-fed beef requiring thirty-five calories for
every calorie of beef produced.332 If the energy used in
processing and transporting food is included, it takes an
average of seven to ten calories of input energy to produce
one calorie of food.333
The single biggest culprit in the consumption of fossil
fuels in industrial farming is the use of agrichemicals
(pesticides, fertilisers, growth agents etc). These chemicals
are absolutely critical to the supply side of the equation.
Increased fertilizer application has in the past been
responsible for at least 50% of yield increases.334, 335 From
1961 to 1999, the use of nitrogenous and phosphate
fertilizers increased by 638% and 203%, respectively, whilst
the production of pesticides increased by 854%.336

Figure 9.25: Global greenhouse gas emissions by sector

in 2004
Waste and
wastewater 2.8%
Residential and
commercial buildings 7.9%
Energy supply
25.9%
Transport
13.1%

Agriculture
13.5%

Industry
19.4%
Forestry
17.4%

Source: Intergovernmental Panel on Climate Change, 2007

$5.8 billion
US subsidies for biofuels in 2006

As much as forty percent of energy used in the food

system goes towards the production of artificial fertilizers
and pesticides.337 Nitrogenous fertilizers are synthesized
from atmospheric nitrogen and natural gas, a process
that takes a significant amount of energy. Producing and
distributing them requires an average of 62 litres of fossil
fuels per hectare.338
A discussion of the long-term implications of peak oil for
global agricultural productivity and the human species as a
whole is beyond the scope of this document. However, from
the perspective of the farmland investor, there is precedent
for assessing the possible short to mid-term effects in view
of recent experience with the oil shock of 2008.
Current Food and Agriculture Organisation of the United
Nations (FAO) projections for increases in food production
for the period 2015 to 2030 actually assume an average oil
price of US$21/barrel, while their 2030 to 2050 scenario
assumes US$53.4/barrel. However, at the peak of the 2008

113

food crisis oil prices hit US$147/barrel and were still above
$70 in July 2009 in the midst of the worst global economic
recession since the Great Depression.339 This apparent
disconnect between the realities of the recent history of oil
prices and the FAO forecasts, provides some insight into
the extent to which world policy makers, even at the very
highest levels of the United Nations, may be completely
unprepared for a future of higher average oil prices.
Despite sticking to their long-term forecast assumptions
of oil price, the UN does acknowledge this. In the words
of a recent FAO report: If peak oil supply is reached
within the period under consideration, this will have major
consequences for the economics of virtually all aspects of
food production.340
As a recent UN report acknowledges: The projected
increases required to sustain demand assume a substantial
increase in the use of fertilizers by small-scale farmers.341
Most of the projected increases in production assume an
increase in the use of fertilizers to exploit the yield gap
in key expansion regions such as Sub-Saharan Africa and
South America In a world of more expensive oil, this could
have profound implications as forecast supply increases
could fall short of forecast demand increases.

As Figure 9.26 shows, during the 2008 price spikes fertiliser

prices reached historic highs, due to a combination of rising
global demand and high oil prices, and farming input costs
increased dramatically. Farmers in low-income countries
who could not afford fertilisers reduced their usage, relying
on the residual nutrient content in the soil from natural
stocks and previously applied fertilisers, a process known as
nutrient mining.
An inevitable consequence of nutrient mining is the
lowering of yields over time. This in turn resulted in a
drop in worldwide grain production which fed through to
higher agricultural commodity prices. The result was that
at the same time as fertiliser prices were reaching historic
highs, so were agricultural commodity prices. Farmers with
suitable cash flow or access to credit thus benefited from
higher fertiliser prices whilst farmers in poorer countries
suffered. The higher regional differentiation in production
and demand also lead to greater reliance on imports for
many countries, further exacerbating the demand side of
the equation.

This would place upward pressure on agricultural

commodity prices, causing farmland profits in high-income
countries more capable of absorbing rising fertiliser prices
to rise. High income countries also generally have better
access to international markets and strong demand from
wealthier domestic consumers and are therefore more
able to capitalise on upward fluctuations in commodity
prices. Indeed, farm incomes in the developed world
increased substantially during 2007 and 2008, despite
higher input prices.342

Figure 9.26: Prices of fertiliser nutrients since 1975

1.0

Dollars/pound of nutrient

0.8
Nitrogen

Phosphate

Potash

0.6

0.4

0.2

0
1975

1978

1981

1984

1987

1990

1993

1996

1999

2002

2005

2008

Source: US Department of Agriculture, 2008

114

CHAPTER 10

Farmland as an Asset Class

We think right now is an excellent point of entry for taking a long-term

position in agriculture. If you look at the macro picture today, we have an
extraordinary situation. If you take governments printing money as fast
as they are, borrowing as fast as they are, and bailing out white-elephant
corporations, were surely going to have an inflationary situation fairly soon. In
that kind of environment, owning a hard asset like land is a good hedge.
Lord Jacob Rothschild, 2009

Investor Appetite for Farmland under Current

Market Conditions
Under market conditions in the second half of 2008 and
early 2009, many investors are seeking alternative asset
classes to boost returns without dramatically altering their
overall risk profile. The current markets are characterised by:
1. Price volatility in mainstream asset classes.
2. U
 nusually high levels of positive correlation between
virtually all traditional asset classes and their
subcomponents.

10%

UK farmland returns in 2008

-18.9%

Fall in UK house prices in 2008

3. U
 ncertainties over valuations due to low levels of
visibility with respect to the global economy.
4. C
 oncerns over inflation in light of mass quantitative
easing in many global markets.
5. T he disappearance of risk free returns on cash due to
unprecedented low central bank interest rates.

Many investors are now looking for alternatives with the

following characteristics:
1. Real or hard assets that are expected to provide
protection of value.
2. G
 reater return than traditional fixed income
investments provide in the current market climate.
3. L ow correlation to mainstream investments such
as stocks and bonds and traditional alternative
investments such as commercial real estate and hedge
funds.
4. S uperior performance in an inflationary environment,
to mitigate market risks due to global monetary policy
(low interest rates, quantitative easing, commodity
driven inflation etc).
5. G
 ood long-term fundamentals to support future capital
growth in an investment environment where shortterm visibility is at historic lows.
6. S imple, secure investments, preferably involving direct
ownership of underlying assets.

-27%

Fall in UK commercial property

in 2008

-30.9%

Fall in FTSE 100 index in 2008

116

As this section will demonstrate, direct investment in

farmland has the potential to provide all of the above
features. This has resulted in rapidly rising interest among
professional investors in farmland as an asset class. If
this trend continues, it will provide meaningful lsupport
for farmland values in the coming years. The sector was
previously dominated by agricultural buyers with a relatively
small number of investment buyers having very little impact
on demand.
The attempts of countries to ensure their domestic food
security by acquiring large tracts of productive land in
foreign states, further raises farmland prices.

A Note about the Perils of Assumptions Based on

Historical Data
It is important to note that this chapter includes references
to third party reports which discuss farmland as an asset
class in a favourable light. These studies are specific to the
circumstances they cover, such as: the time period covered
by the study, geographical region and farmland type. For
this reason, their conclusions, whilst providing an interesting
insight into scenarios with similar conditions, should be used
as a guide rather than a basis for any investment decision.
Past performance is no guarantee of future performance
and investors should of course be cautious in the use of
historical data when making investment decisions.
As has been so clearly demonstrated by recent market
events, the time period used to provide data for predicting
future events, is crucial. Other than simply using the longest
time period possible, as dictated by the availability of
complete and accurate data, an alternative may be to focus
on data for time periods most likely to be characteristic of
future conditions.
For example, during the 1980s, commodity prices fell due
to depressed demand in many developing countries and
the accumulation of large grain stocks. If you believe that
these are likely to be representative of prevailing market
conditions in the coming years, then data from this period
would be relevant. As a result you might expect land prices
to decline, leaving farmland returns low or negative in the
mid to long-term.

Note that in the context of this document, when farmland

investment is being discussed it is assumed that the
investment is in direct freehold ownership of farmland (i.e.
not through an equity position in a farm business, fund or
some other form of securitised structure). It is also assumed
that the farmland is located in a developed, free market
economy with a robust legal system protecting property
ownership rights and allowing direct freehold ownership
of land. Under such conditions an investor might expect to
earn a return in three possible ways:
1. Income from agricultural tenancies.
2. Capital growth from rises in agricultural land values.
3. The potential for windfall returns if land is developed
for alternative uses at some point in the future (e.g.
infrastructure, industrial, commercial or
residential development).
Throughout history, land has been the most basic repository
of wealth and value through good times and bad. Future
supply and demand fundamentals could make farmland
even more attractive for the long-term investor. In the
view of a growing number of professional investors,
farmland offers particularly appealing portfolio planning
characteristics under current market conditions.

Alternatively, during the 1970s commodity prices were

high, agriculture was more profitable, land prices rose
and those who had bought land prior to the 1970s made
higher returns. The same conditions occurred again in
recent years and, again, returns in terms of rising land prices
and agricultural rents were generally higher. If the investor
believes that higher agricultural commodity prices are likely
in the mid to long-term then data from these periods may
be more relevant for forecasting future trends.
This document does not seek to advise investors on the
appropriateness of farmland for their particular investment
circumstances. This would depend on a number of factors
such as the investors personal strategic investment
goals, views on future markets conditions and the likely
performance of competing asset classes, risk tolerance etc
The following sections are meant to provide a summarised
overview of farmlands characteristics as an asset class.
Bibliographic details for the farmland investment research
and reports referred to in this document are available at the
end of the chapter for those investors interested in a more
detailed review.

117

Farmland as a Portfolio Diversification Tool

A number of studies have shown that, historically, farmland
returns have a low or negative correlation with traditional
asset classes such as stocks and bonds and only a modest
positive correlation with commercial real estate.343
A study in the US, using data over a period of 33 years up
to the 1980s, considered six asset classes including farm
real estate, large and small capitalisation stocks, long-term
corporate bonds and Treasury bills. The study concluded
that inclusion of farmland in the portfolio had highly
attractive characteristics, particularly in view of the low
correlation with other assets in the portfolio (especially large
capitalisation stocks).344

Assuming farmland is properly managed and is located in

a jurisdiction where property rights are well protected, the
investment is backed by a solid asset in finite supply which
is unlikely to depreciate in value. The asset is completely
secure and immune to theft or fraud (as long as due
diligence and conveyancing are properly and professionally
conducted at the point of acquisition).
Farmlands historical risk/return profile compares favourably
with more traditional assets such as stocks and bonds.
Studies have shown that even taking into account the
transaction costs associated with less liquid assets, farmland
still constituted a substantial portion of the optimal portfolio
across a wide range of scenarios.346

These characteristics make farmland an attractive

diversification tool that can help reduce the impact of
broader market volatility on a diversified portfolio. The
farmland component can be further diversified by varying
crop types, management styles and geographic distribution
within the portfolio. In a direct ownership structure,
investors can acquire farmland across a range of farms in
different countries and/or climate zones and under different
asset managers.

Farmland as an Inflation Hedge

Farmland returns have been shown historically to have
a positive correlation with inflation, making farmland an
effective inflation hedge and capital preservation vehicle.
According to the Hancock Agricultural Investment Group
(HAIG), part of the US investment management division
of Manulife Financial, during the period from 1941 to
2002, average farmland values increased by almost two
percent more than the average rate of inflation over that
time period.345
This may be especially appealing to investors concerned
about inflationary government policies such as low interest
rates and quantitative easing prevalent under current
market conditions in many of the worlds economies. Unlike
other popular hedges against inflation, such precious
metals, farmland also provides a regular income to the
investor. This makes it a useful replacement for lost risk
free income on cash deposits.

High Level of Capital Security and Low Level

of Risk
Many investors, whilst seeking higher returns when times
are good, are now placing greater emphasis on capital
preservation during periods of severe market turmoil.
Historically, data show that farmland has exhibited strong
capital protection characteristics over prolonged periods
of time.

Farmlands Superior Risk- Adjusted Returns

The most commonly used measure of risk- adjusted return
is known as the Sharpe Ratio. It is a measure of the excess
return, or Risk Premium, per unit of risk in an investment
asset or trading strategy and is used to assess how well
the return on an investment compensates the investor for
the risk taken. The higher the Sharpe Ratio for a particular
asset, the higher the return earned per unit of risk an
investor is exposed to when owning that asset.
As Figure 10.1 from the US National Council of Real Estate
Investment Fiduciaries (NCREIF) shows, the Sharpe Ratio
for US Farmland was higher than large capitalisation US
equities, T-bills and commercial real estate for the period
1991 to 2007. In terms of total returns, farmland was
outperformed only by stocks (by 0.3% annually). Stocks
however had more than double the risk (in terms of
standard deviation) compared to farmland. These figures
are particularly impressive considering that the study period
ended in 2007, prior to the recent crash in equity and
commercial real estate values.

118

Figure 10.1: Sharpe Ratios for US assets classes between 1991 and 2007 (geometric mean % total returns)
Asset Class

Average Total Annual Return

Risk (Standard Deviation)

Sharpe Ratio

Government bonds

7.2

5.9

0.53

S&P 500

11.4

17.0

0.41

Farmland

11.1

7.6

0.93

Urban Real Estate

9.2

7.1

0.72

Source: National Council of Real Estate Investment Fiduciaries, 2008

A General Look at Farmlands Performance against Other Asset Classes

Some comparative studies on farmland have been criticised for taking numbers derived from agricultural equity type investments
(i.e. data which include income from the commercial operation of a farm), thus making a direct comparison between straight
farmland ownership and other asset classes difficult. However, in a much referenced and well respected study conducted in the
US, where farmland was specifically analysed from the perspective of capital growth and income from rents, the findings were
consistent with other studies in terms of its benefits compared to other asset classes.347
Figure 10.2: Efficient portfolios when asset classes are unrestricted
Annual Return

Standard
Deviation

Asset Allocation
Farmland

S&P 500

Business Real
Estate

Long term
Corp. Bonds

15.56

6.49

100.00

15.50

6.31

98.4

1.6

15.00

5.33

87.9

12.1

14.50

4.72

78.8

12.0

9.2

14.00

4.17

69.3

10.8

19.7

0.2

13.50

3.68

61.7

8.8

26.2

3.3

13.00

3.26

54.1

6.7

32.8

6.4

12.50

2.90

50.5

5.2

36.2

8.1

12.00

2.58

49.2

4.2

37.3

9.3

11.50

2.31

48.1

3.2

38.4

10.3

11.00

2.09

46.0

2.0

40.3

11.7

10.55

2.03

42.8

43.1

14.1

Source: Journal of the American Real Estate and Urban Economics Association, 1992

The study concludes as follows: The study used cash rents after property taxes to derive the income part of the returns on
farmland for the period 1967-88 and showed that diversification enhances portfolio performance for institutional investors. The
results were robust across wide variations in variance and annual returns to farmland.
For the period 1967-88, farmland exhibited a higher return than that of stocks and bonds. Further, returns on farmland were
negatively correlated with stocks and bonds and positively correlated with inflation. Thus investment in farmland not only was
a good hedge against inflation but also provided diversification for those who included it in their portfolio. The implication is
that, by including farmland in their portfolio, they may be able to reduce the possibility of shortfalls of their funds in times of
higher inflation.348

119

Another more recent study, based on figures from the NCREIF Farmland Index, reported similar findings.349 As Figure 10.3
indicates farmland performed well during the study period (1991 2004) compared to other assets such as US investment grade
bonds (as represented by the Lehman Aggregate Bond Index), a diversified portfolio of the top 1,000 US large capitalisation
stocks and top 2,000 small capitalisation stocks (as represented by the Russell 3000 Index), as well as mainstream real estate (as
represented by the NCREIF Property Index)..

Figure 10.3: US farmland returns against other asset classes over different time periods ending December 2004
1 Year

3 Yrs

5 Yrs

7 Yrs

10 Yrs

13 3/4 Yrs

NCREIF Farmland

20.50%

12.20%

9.04%

8.48%

8.76%

8.56%

NCREIF Property

14.52%

10.03%

9.91%

11.00%

10.87%

7.59%

Russell 3000

11.95%

4.80%

-1.16%

5.09%

12.01%

11.29%

Lehman Aggregate

4.34%

6.20%

7.71%

6.59%

7.72%

7.54%

Source: NCREIF Farmland and Property Indexes, 2004; Lehman Aggregate Bond Index, 2004; Russell Investment Group, 2004

As Figure 10.4 shows, farmland also showed low or negative correlation with traditional asset classes and real estate, whilst
showing a positive correlation with inflation as measured by the Consumer Price Index (CPI).

Figure 10.4: Correlation of US farmland to other asset classes and inflation over different time periods ending December 2004
RETURN

STD DEV

CORRELATIONS
CPI

Bonds

Stocks

RE

CPI

4.8%

3.2%

1.00

Bonds

8.9%

7.2%

-0.34

1.00

Stocks

12.7%

17.2%

-0.23

0.33

1.00

Real Estate

9.4%

5.6%

0.38

-0.20

0.06

1.00

Farmland

10.3%

7.8%

0.54

-0.52

-0.13

0.11

Farmland

1.00

Source: UBS AgriVest, 2004; U.S. LT Government Bond Index, 1970-1977; Lehman Aggregate Bond Index, 1978-2004; S&P 500 Stock Index, 2004;
Evaluation Associates, 1970-1977; NCREIF Property Index, 1978-2004; Core Farmland Index, 1991-2004; Ibbotson Associates, 1970-1990

A further study conducted in Saskatchewan, a prairie province which produces just under half of Canadas grain, compared
farmland with a number of other asset classes found in a typical globally diversified investment portfolio held by a Canadian
mutual fund investor. The study concluded that: the addition of farmland ownership would have enhanced financial
performance across the portfolio for average or medium levels of risk. The financial gains from farmland are a result of its
negatively correlated returns with equity markets. When added to an equity portfolio, the risk level is reduced while maintaining
the same rate of return on investment.350
The study compared Saskatchewan farmland with Canadian T-Bills and long-term bonds, forming the lower risk end of the
portfolio, and various equity markets (Canada, United States, Japan, United Kingdom, France, Germany, and Italy) at the higher
risk end of the portfolio. As can be seen from Figure 10.5, Saskatchewan farmland out-performed the local equity market whilst
exhibiting a lower level of risk (measured in terms of volatility).

120

Figure 10.5: Comparison of average risk and return for Saskatchewan farmland and other asset classes
between 1970 and 1998
14%
USA Equities

UK Equities

12%

France Equities

Farmland

10%
Return o1n Investment

Japan Equities

Germany Equities

Canada Equities

Long Bonds

8%

Italy Equities

T-Bills

6%
4%

2%
0%
0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Risk (Standard Deviation)

Source: University of Saskatchewan, 2000

Although returns in some equity markets were a little

higher, farmland did show a lower level of risk than all the
equity markets and was outperformed in risk terms only
by long-term bonds and T-Bills. The average total return
(income from leases and capital gains in the value of the
land) for Saskatchewan farmland during the study period
was 9.6%.

Investment Appeal in Times of Market Turmoil

Credit crunch

4,500
4,000
3,500

High interest rates,

ERM, Gulf War,
US savings
Interest rates
& loan crisis
at 15% +
Winter of
discontent

3,000
2,500
2,000
1,500
1,000

1973
oil crisis

500

05
20

00
20

95
19

90
19

85
19

80
19

19

75

70

According to a recent Bloomberg article, returns from

farmland in the United Kingdom averaged about 10%
during 2008, whilst UK house prices fell 18.9% and
commercial property 27%.353 In 2008 the FTSE 100 dropped
by 30.9%. In North America, in the words of Gary Bader-

5,000

19

According to estate agent Savills Agricultural Land Market

Survey 2009: UK farmland has once again proved resilient
to recessionary pressures as in the previous three recessions
(mid 1970s, early 1980s and early 1990s) during the past
thirty years. Farmland is also one, along with gold, of the
worlds principal defensive hedges and is sought after in
times of economic volatility. Although some limited pressure
on values was recorded during previous recessions the
general upward trend was not stifled. We believe this will
again be the case in the current economic climate.352

Figure 10.6: Historical resilience of UK farmland to

recessions between 1970 and 2008

per acre ()

Historically, land (and agriculture in general) has repeatedly

benefited from flight to quality investment behaviour.
It performs comparatively well during times of market
uncertainty, thus acting as an ideal recessionary hedge. As
the title of an Economist article published in March 2009
puts it, No matter how bad things get, people still need
to eat.351

Source: Savills, 2009

121

Chief Investment Officer of the Alaskan Retirement Fund

(which in recent years increased its holdings of farmland
from $200 million to $500 million -approximately 5% of
assets under management):

prices in regions where earnings from farm operations do

not support current real estate values is essentially a bet on
future real estate development and, as such, is inherently
higher risk.

People are going to need to eat no matter what happens

to the economy. The [farmland] portfolio returned 14.97%
for the year [2007 2008] ending Sept. 30, at a time
when virtually all other asset classes and strategies [in our
portfolio] are posting negative numbers.354

3. Farm Sector Debt

Further reassurance of fundamental value comes from the
fact that both the debt-to-equity and debt-to-asset ratios
are low in the farming sector. This reflects the fact that
farmland values have risen in step with, or more rapidly
than, debt levels over the past few years.

A further study on US farmland conducted in 2002

compared the effects on portfolio efficiency of including
farmland in a mixed asset portfolio under market conditions
of certainty and uncertainty. It concluded that, in both
certain and uncertain world models, farmland can be shown
to improve portfolio efficiency.355

As a general rule this is in stark contrast to residential and

commercial real estate. The ratios in the farmland sector
could also be taken as an indicator that the sector is less
overbought (and therefore less likely to be overvalued) than
other forms of real estate.

Fiscal Advantages of Farmland Investment

Farmland as a Real Estate Investment

Whilst farmland falls under the general classification of
real estate, it has a number of unique characteristics when
compared with other forms of real estate. This has had the
effect of sheltering farmland assets from the more extreme
falls in commercial and residential property values which
have scared many investors off during the recent global
financial meltdown.
1. Fundamental Limits to Supply
Unlike other forms of real estate where supply can be
increased by building new units, the supply of farmland
is fundamentally limited. This is especially true when
considered in the context of the constraints to further
expansion (and the potential for an aggregate reduction in
global cropland area) discussed in this document.
2. Price / Earnings and Yield
As a general rule, agricultural land values are supported by
earnings (although some agricultural areas may experience
upward price pressure from development speculators
thus driving farmland values up beyond pure agricultural
value). Farmland has therefore shown itself to be a reliable
vehicle yielding, over a prolonged period of time, returns
which include both the capital gains on principal as well as
income. Indeed, farmland has been referred to by investors
as gold with a coupon.
A note of caution. Purchasing farmland at above market

In many of parts of the world, including many developed

economies, there are a range of tax related incentives
associated with farm real estate. These may result in
favourable treatment across one or all of the standard taxes
(such as income taxes and capital gains taxes) which would
normally have an adverse effect on returns in other asset
classes. In some instances there are also special exemptions
with respect to inheritance tax which may make farmland
particularly attractive for estate planning purposes. Some
countries have additional incentives for forestry related
usage of farmland.
In the UK, for example, foreign buyers of farmland are
not charged capital gains at source and there are no
withholding taxes on the repatriation of funds in the event
of sale or on income earned from tenancies (i.e. all profits
from the sale of the asset and/or income from tenancies,
including in the case of death, may be repatriated by the
investor).
For UK resident farmers and Farmland Investors There are a
number of tax incentives for farmland investors (and their
farming tenants) that make farmland an attractive shelter
for individuals with significant capital gains and inheritance
tax liabilities. There are two different types of inheritance
tax relief; Agricultural Property Relief and Business Property
Relief. These reliefs operate by reducing the value of
qualifying assets liable to inheritance tax as follows:
1. 1
 00% for the agricultural value of farmland, including
farmland under tenancies. To benefit the land must
have been owned and farmed by the owner for at least
2 years, or 7 years if not farmed by the owner (e.g.
when farm is rented to a tenant farmer).
2. 1
 00% for interests in business assets owned by a
farming enterprise entity (either sole trader, partnership
or limited company).

122

There are also a number of capital gains tax reliefs available:

2. An election to treat a herd of breeding animals as a

capital asset rather than trading stock.

1. Rollover relief on the replacement of land and farm

buildings with other qualifying business assets and
vice-versa.

3. Rules to treat all farming as one trade, even if the farms

are in different areas.

2. Holdover relief on gifts, even where the farmland is

tenanted (with the same 2 and 7 year time constraints
as above).

4. The ability to claim capital allowances on farm

buildings and other permanent structures that would
not otherwise qualify for capital allowances.

3. Entrepreneurs Relief provides an effective tax rate of

10% on certain qualifying business disposals.

Additionally, no restrictions on foreign direct ownership and

the very highest levels of protection of ownership rights
under the British legal system add to the appeal of UK
farmland for foreign and local investors alike.

The special income tax rules for farmers / tenants include:

1. The ability to average the individuals farm results
between tax years, if this reduces the tax liability.

123

CHAPTER 11

Investing In Agriculture Guidance

for Investors

The trick here is not just to harvest crops but to harvest money.
Mikhail Orlov, founder of Black Earth Farming and former private equity manager with Carlyle and Invesco, 2008

A Comparison of Agricultural Investment

Strategies
There are a number of different ways of investing in
the agriculture sector. The choice of method will be
determined by the investors objectives: short, medium or
long investment term; liquidity and income requirements;
risk appetite, etc. Listed below are the principle methods
used by the investing community to gain exposure to the
agriculture sector followed by a brief assessment of their
relative merits and demerits.
1. Agricultural Commodities
Investors can get direct exposure to individual crop prices
through investing in agricultural derivatives such as futures
or options, or buy into a mixed basket of agricultural
commodities through exchange- traded funds which track
commodity indexes.
2. Direct Investment in Agricultural Equities
There are a number of agricultural equity plays available to
investors. It is possible to invest in large- scale commercial
farming enterprises involved directly in crop production; or
in other industries which supply the agriculture sector, such
as (fertiliser, pesticide and seed producers and agricultural
machinery manufacturers.
3. Collective Investment Funds
Investing in farmland through a securitised or unitised
fund which invests over a portfolio of different farms or
agricultural equities.
4. Direct Farmland Investment
Direct investment in agricultural land with a fixed rent,
possibly with an additional variable element linked to farm
income, profitability or commodity prices.

Whilst a direct comparison is problematic given the different

risk profile of each method, there are a number of benefits
to direct farmland investment, both in terms of asset
characteristics and mid to long-term supply and demand
fundamentals. As covered in the previous chapter, farmland
has performed well against the majority of other assets in a
number of different markets over a wide range of different
time frames.
There is also evidence to suggest that this holds true not
just across different asset classes but also across different
instruments in the agricultural sector. According to a 2009
study from UK estate agent, Savills: Rural land based
assets have significantly outperformed alternative assets in
recent years recording total returns of well over 20%. Even
over the long-term rural assets have recorded comparable
performance to other assets.356

Figure 11.1: Performance of rural land against other

asset classes over different time periods ending 2008
30%
25%
20%
15%
10%
5%
0%
-5%
-10%
3yrs
Let Land
Let Residential

10yrs
Farming Top 25%
Commercial - All

20yrs

30yrs

Forestry

Gilts

Equities

Source: Savills, 2009

What is most interesting about this particular study is the

comparison of leading agricultural equities with direct
ownership of rural land. As Figure 11.1 indicates, direct
farmland ownership has outperformed the top 25% of
agricultural equities (Farming top 25% in the graph) over
all time periods.
By owning farmland through agricultural companies, or by
owning companies which depend on the sector for revenue,
the investor obviously assumes additional risks such as
enterprise risk and other risks generally associated with

125

investing in companies. This additional level of risk has not

shown itself to be sufficiently rewarded by proportionately
higher historical returns.
Farmland is the foundation of all agriculture and the most
basic repository of wealth and value within the sector. The
fortunes of companies can wax and wane as management
and market conditions change or one competitor
outperforms another. Farmland on the other hand is fixed
and will always gain in value over the mid to long-term as
demand continues to rise. In the words of an agricultural
fund manager with ABN AMRO:
In any resource sector, if you want to get involved, you
always want to be in the upstream. It doesnt matter
whether its mining, whether its oil and gas or agriculture;
the highest return you get is always in the upstream. Over
the next five years, you will have 2 billion more people
eating bread, eating noodles, drinking coffee ... There is no
way in this world that the supply side can catch up with the
demand side.357
Additionally, as the studies in the previous chapter
demonstrate, there is less volatility in direct farmland
investment compared with other asset classes (including
agricultural equities and commodities). Farm enterprise
profits are more vulnerable to fluctuations in commodity
prices and input costs. It is this perceived volatility within
the farming sector that has caused the non-agricultural
investor to believe that farmland ownership is riskier than it
actually is.
The reality is that the income of agricultural landowners
is more insulated from changing market conditions, given
that rents are a fixed cost which the agricultural enterprise
must bear regardless of prevailing market conditions. Thus,
in the case of tenancy arrangements with fixed rental rates,
the asset class shows less volatility, producing a smoother
and more reliable income stream. In addition, a variable
top-up component to leases can provide the investor
with additional returns in good years. In essence, farmland
earns equity-like returns (showing both capital growth and
income) with a lower degree of volatility and capital risk.
Diversification is frequently cited as one of the advantages
of investing in farmland through a collective investment
fund structure. For investors with sufficient capital, similar
diversification is possible through direct farmland investment
by investing in a portfolio of farmland assets. Additionally,
a number of research studies suggest that if assets are
selected according to certain criteria, diversification is less of
a concern than in the case of other asset classes.
This is due to the fact that many farms operate a mixed
cropping system with rotation between crop types. This
creates diversification at the l farm enterprise level and
hedges against fluctuations in individual commodity prices.
If such farms are specifically selected during pre-purchase

due diligence, diversification at the portfolio level becomes

less of an issue.
One comprehensive study, conducted in 2002, which
looked at the importance of diversification in farmland
portfolios concluded that:
With respect to farmland investment and geographic
diversification, the results [of the study] question the
ability of an optimised mean-variance portfolio to provide
substantial improvement in comparison to a naive
portfolio. The marginal improvement in portfolio efficiency
of an optimised farmland portfolio is not statistically
significant.358
This is especially pertinent when considered in the context
of historical data on asset managers failure to outperform
investment benchmarks (achieve alpha). One of the more
recent and comprehensive studies on this subject, which
analysed monthly returns for over 2,000 actively-managed
US, open-ended, domestic equity mutual funds between
1975 and 2006, concluded that359:
1. 7
 5.4% of funds are zero-alpha funds, with managers
excess returns over their benchmark being eliminated by
fees and expenses
2. 24.0% of funds are unskilled, displaying an alpha of less
than zero (i.e. nearly a quarter of mutual fund managers
actually loose investors money when compared to
passive index based returns)
3. 0.6% of funds exhibited a true positive alpha (i.e. less
than 1% of managers were able to generate true alpha
and outperform passive index benchmarks)

Aside from investment performance, there is also the

matter of capital risk. It is hard to imagine an investment
with better characteristics in this regard. In a worst- case
scenario, even if a farmland tenant is unable to make a
rent payment, the investor still owns the underlying asset.
The bulk of their capital is always preserved. This cannot be
said of agricultural equities where the worst- case scenario
is the loss of 100% of capital; or agricultural commodities
where the loss of capital has the potential, under certain
circumstances, to exceed the amount invested.
Betting on short-term movements in commodity prices
is not for the faint hearted. This is especially true under
the current market conditions. Firstly, in these nervous
times sentiment prevails in many cases over fundamentals.
This exposes investors to additional risk from external
random events (e.g. the collapse of another major financial
institution) which can alter investment sentiment very
suddenly. Secondly, predicting future events in the short to
mid-terms is made all the more difficult by the fact that the
markets are exposed to unprecedented levels of artificial
intervention (e.g. mass fiscal stimulus and quantitative
easing happening simultaneously across numerous
financial markets).

126

Because there is no precedent on which to base forecasts,

the level of guesswork is at an all time high. Indeed, many
of the politicians and economists orchestrating these
interventions admit that they are unable to predict with
any degree of certainty the outcome of their actions. This
additional level of uncertainty brings with it levels of risk
which of course can be rewarding. If, on the other hand,
an investors long or short positions are unexpectedly
caught on the wrong side of a sudden and extreme
market fluctuation, then major risk to capital is a very real
possibility.
Many investors in todays market, characterized by low
levels of short-term visibility and continuing uncertainty over
asset values, are finding it difficult to make decisions based
on short-term market fluctuations. Under such conditions,
there is an argument for making investment decisions based
on what is likely to happen over the next five to ten years
rather than over the next five to ten months. With a direct
investment in farmland and an appropriate time horizon in
mind, short-term fluctuations in market prices become less
important. Farmland investors are guided more by the longterm investment proposition, as dictated by fundamental
trends in demand growth and the constraints to increasing
supply discussed in the earlier part of this document.

inconsistencies in the short-term. It may not be possible

for speculators with a short holding horizon to obtain
systematic excess returns by trading in land markets (due to
transaction costs), however, farmland markets are efficient
and prices are consistent with standard farmland valuation
models (even allowing for transaction costs) if a longer term
investment horizon is accepted.360
As for points 2 to 4, in general, many investors fear
that by adding farmland as a separate asset class into a
portfolio, this may increase its complexity and maintenance
costs. Simple inertia also plays a role to the extent that
many investors (or their advisors / investment managers)
have a greater degree of familiarity with more traditional
asset classes and feel put off by a lack of experience in
agricultural land investment.
The reality is that these issues can be dealt with by
outsourcing the investment process to an advisor with the
appropriate expertise. Its just that this sort of advisor is
more difficult to find than advisors who know all about
the equity and bond markets. Because the asset class does
require a higher level of expertise and specialist knowledge,
identifying the right partners is, of course, absolutely critical
to investment success. The risks in farmland investing are
very real for a novice but very manageable for an expert.

Preservation of capital invested in individual assets within a

portfolio is one of the most important contributing factors
to long-term performance across the portfolio as a whole.
In the words of renowned long-term value investor, Warren
Buffett:
There are three rules I try to follow when investing:
1. Dont lose money.
2. Dont lose money.
3. Dont lose money.
Despite the obvious advantages of direct farmland
investment which not only make sense in theory but also in
fact (as proven by historical performance figures) the asset
class has been all but neglected by the majority of investors.
There are a number of reasons for this:
1. T he perception of a lack of efficient market information
on price and value.
2. The level of specialist expertise required to identify,
assess and acquire farmland.
3. The perception of a lower level of liquidity within the
asset class.
4. The lumpiness of asset size usually restricts the asset
class to high / ultra-high net worth or institutional
investors.
5. The perceived burden of managing the asset.
On the first point, a study conducted in the United States
which assessed farmland values over a prolonged period
from 1900 to 1994 demonstrated that values only show

A Discussion about Portfolio Weightings in

Farmland Investment
As the previous chapter demonstrates, there is much
historical evidence showing that farmland can enhance the
overall performance of investment portfolios dominated by
traditional asset classes such as stocks, cash, bonds and/or
commercial and residential real estate. Farmland provides
competitive returns anchored by a solid income component
hedged against inflation (because rental income is linked
to commodity prices which are positively correlated with
inflation). Although a number of institutional investors
and specialist funds have acknowledged through their
asset allocations the positive investment characteristics

127

of agricultural land, this does not (yet) seem to be widely

accepted in the mainstream investment community,
especially at the private investor level.
The Financial Times, Association of Private Client Investment
Managers and Stockbrokers (FTSE APCIMS) index series
published by the FT on a weekly basis: provides investors
with an objective benchmark against which they are able
to measure their investment portfolios, based upon the
assumption that they are domestic investors with sterling
denominated accounts. The index series represents
performance for growth-oriented, income and balanced
portfolios, and incorporates returns from FTSE indices

farmland in 2003 was approximately $1.2 trillion, yet

according to the National Council of Real Estate Investment
Fiduciaries, total investments of fund sponsors at the
time were only around $900 million (as of 31/12/04).
This represents less than 1% of the total U.S. farmland
market.364 In other words, despite the fact that farmland
represents roughly 5% of the market wealth in the United
States, it remains a relatively insignificant component of
institutional investors portfolios.365
A comprehensive study conducted in the late 80s in the
United States analysed model portfolios containing US
farm assets, government and corporate bonds and Treasury

Figure 11.2: Asset allocations for FTSE APCIMS private investor indices (effective as of January 19th 2009)
FTSE APCIMS
Portfolio Index

Portfolio Objectives

UK
Equities

Foreign
Equities

Bonds

Cash

Commercial
Property

Hedge
Funds

Stock Market Growth

Portfolio Index

Aiming for growth/

capital appreciation from
predominantly equity
investments

47.5%

30.0%

7.5%

5.0%

2.5%

7.5%

Stock Market Income

Portfolio Index

Aiming for income from

predominantly equity and
fixed interest investments

45.0%

10.0%

37.5%

5.0%

2.5%

0.0%

Stock Market Balanced

Portfolio Index

Aiming for a balance

between growth and
income

42.5%

22.5%

20.0%

5.0%

2.5%

7.5%

Source: FTSE APCIMS, 2009

representing UK equities, foreign equities, fixed income,

and cash, according to variable percentage weightings set
by committee and based upon average allocations across
private client investment managers.361
Given that these portfolios are based upon average
allocations across private client investment managers it
is assumed for the purpose of this document that these
are considered model portfolios in terms of achieving the
investment objectives they are intended to benchmark.362
The three model portfolios and their asset allocations363 are
shown in Figure 11.2.
Farmland is not included, and even if it were included under
the Commercial Property component, is a 2.5% weighting
appropriate? This question is legitimate both in terms of
observations from actual past market data and the potential
for future upside in farmland values from a supply and
demand perspective.
In the US, according to US Department of Agriculture
Economic Research, the total aggregate value of US

Bills. Efficient sets used in the study included farm assets

ranging from 30% to 68%of the portfolios. They concluded
that agricultural assets entered efficient portfolios at levels
far greater than were historically observed in the capital
markets.366 A further study conducted in the early 90s
found that farmland entered the optimal portfolio at a fairly
high level of risk and remained a choice asset to the low
end of the risk spectrum, reaching a portfolio proportion of
50% near the middle.367
Modern Portfolio Theory quantifies in mathematical and
technical terms the old adage: Dont keep all your eggs in
one basket. The modern asset manager seeks to increase
return, or maintain return at stable levels, whilst reducing
overall volatility (risk) by combining assets with low or
negative return correlations.
For these reasons, in order to achieve the intended portfolio
objectives asset ratios are as important as asset types. The
question of appropriate portfolio weightings for farmland
needs to be considered not only in the context of the
current rather unique and unpredictable market conditions,

128

but also in terms of the investors future expectations of

market activity.

Things to Consider When Choosing a Direct

Farmland Investment

Despite asset allocations remaining low compared to the

value of the sector within the economy, interest in farmland
has risen rapidly in recent years. According to a recent
article in Fortune Magazine:

While farmland investing is expected to provide a

diversification benefit, an inflation hedge and a greater
return than fixed income, it entails challenges and risks.
The farmland marketplace is characterized by relatively
few investment managers (relative to the sectors weight in
the economy), an investing community with low levels of
expertise (compared with other asset classes), and relatively
sparse data regarding risk, income potential and valuations.
This means identifying the right investment partner is not
only challenging, but absolutely vital.

Over the past few years hedge fund gurus like George
Soros, investment powerhouses like BlackRock, and
retirement plan giants like TIAA-CREF have begun to plough
money into farmland. As of the first quarter of 2009, more
than $2 billion of private equity money had been raised for
farmland investments globally, and another $500 million
was planned. Even after the correction, grain prices remain
above their 20-year average, and food stocks around the
world are still near 40-year lows. For many investors, last
years shortages are a preview of what could lie ahead.368
Even so the sector remains under bought. Increased interest
from institutional investors should create a new layer of
demand to support farmland values in the future. Indeed,
interest in the sector has received impetus from current
market conditions. In the words of Paul Spencer, agriculture
manager at Lloyds TSB:
Other factors influencing the agricultural land market
have included institutional investors, such as pension
funds and investment portfolio managers. Having seen
returns from their more traditional investments reduce,
managers will always be looking for more attractive returns.
Farmland, in comparison to some of the higher-risk
ventures, can provide a more stable and attractive longerterm return. Land will continue to be an asset capable of
delivering a strong return on investment and the long-term
fundamentals for the sector remain favourable.369

When choosing an investment advisor / manager,

demonstrable expertise in all of the following fields will be
required:
1. Identification of potential acquisitions according to
investment objectives (risk, potential for capital growth,
income requirements, etc)
2. Pre-purchase due diligence with respect to target
farmland assets
3. Acquisition and negotiation with respect to the
purchase of farmland assets and rental incomes
4. Post investment monitory and asset management
(including both portfolio oversight and the tenant
farmer)
Much of value an advisor is able to add, in assisting
an investor to enhance returns and reduce risk, will be
performed prior to the acquisition actually being made.
The investment partner will use her expertise to assess key
elements which ensure the right assets are purchased at the
right prices, and that future income streams from rents are
as secure as possible.
As farms vary in the quality of both the land and its
management, there will be considerable variability in
profitability between farming enterprises. Direct farmland
investment involves both capital and income components
and assessing the asset itself is as important as assessing
prospective tenants.
A good tenant / contract manager will maintain the
property through sound land management practices. They
will also be able to add value to the underlying asset (the
land) by improving agricultural infrastructure in order to
intensify or expand productive capacity. Indeed, as noted
below, ensuring sound land management practices is a
fundamental component of managing risk.
Therefore, comprehensive due diligence is required on
the land itself, and on the proposed tenant or sitting farm
enterprise. Assuming the right acquisition is identified and
its characteristics well researched, the level of future income
will be dictated to a large extent by the quality of the tenant
farmer. Getting both the land and the tenant selection right

129

will require specialist expertise in the advisor and in the third

party experts he employs. By way of providing an insight
into the complexity of the process and the need to partner
with the right advisors, a list of some of the items due
diligence might include (but not necessarily be limited to) is
provided below:
LAND AND INTERNAL INFRASTRUCTURE
E xact hectarage; boundaries; boundary disputes;
distance from centres, markets, railheads/ports
Ownership and title
Past use and existing tenure
Current ownership and legal status
Legal or social encumbrances
Existing occupation of the land, arrangements for
vacation purchase, assistance, compensation,
eviction, commitments to evacuees
Existing Infrastructure on the farm land
drainage, roads, road drainage and bridges, power,
communications, water, boundary marking/fencing,
irrigation equipment, farm buildings (offices, sheds,
workshops, fuel points, silos, stores, security points),
housing senior, junior, amenities inc. electricity,
potable water
Rivers, dams and water rights

$2 billion

Global private equity investment

in farmland in the first quarter
of 2009

Soils soil maps and descriptions

Soil depth
Physical analysis, soil texture and ease of drainage
(e.g. light or heavy, well or poorly drained), organic
matter content
Chemical analysis pH, major and minor nutrients,
short and long-term fertiliser requirement, toxicity
Constraints pollution from past use, acidity/
alkalinity and requirement for pH correction,
compaction and requirement for amelioration,
salinity
Past land use and surrounding agriculture details of
crops previously planted inc. yields and constraints;
details of crops, yields and constraints on
surrounding land,
Agricultural constraints details of pests and diseases
known to occur or which may occur in the area;
problem weeds
Land condition and preparation extent of existing
clearing; current vegetation cover; type of clearing
work that would be required to prepare for planting if
expansion of existing operations is planned
FINANCE AND VALUATION
A
 nalyse historical and current financial position cash
flow, P&L, balance sheet
Assess potential to enhance profitability by increasing
production or diversifying into new crop enterprises
Assess fair market valuation based on the above
Financing possibilities equity, loans
Loan servicing, dividend or rental payments (currency
considerations in the case of foreign farmland)
Assets acquired with acquisition of the land
Taxes and levies
Identification of local accountants, auditors, legal
advisors

EXTERNAL INFRASTRUCTURE
MANAGEMENT
P hysical roads, power, communications, water,
housing, sewage
ENVIRONMENT
B
 iological environment sensitivities,
government legislation
Surrounding farms and plantations competition /
opportunities for cooperation
AGRICULTURE
C
 limate annual patterns for local rainfall, max and
min temperatures, humidity, wind speed, sunshine
hours, soil temperatures; occurrence of extreme events
e.g. hail, hurricane (information should be based on at
least 10 year records from met stations at specified site
or within reasonable proximity to it)
Topography contour maps and description

C
 ompany structure and corporate due diligence relating
to proposed corporate farming tenant, including
financial and performance history with respect to
past success rates to assess capability to maintain
uninterrupted payment of rents for the period of
the tenancy
Identifying an investment manager with good local
connections in the rural community is also crucial to
ensuring that farmland is acquired at the right price. In the
words of a US agricultural fund manager:
Its really hard to buy property at the right price. Half of
all farmland that trades in the United States never sees
a broker. We believe youve got to have a lot of local
knowledge of the marketplace. Farmers are smart and they
talk. And if one Town Car full of Wall Street types rolls into
town and makes a bid, suddenly all of the prices go up.370

130

Risk Considerations in Direct Farmland

Investment
Other than the obvious supply / demand risk to revenue
from farmland tenancies and the link with agricultural
commodity prices, there are a number of other risks to
investing in farmland.
1. Land Management
The greatest risk is that the farmer fails to employ best
management practices such as those which ensure that
soil nutrients are continuously replenished, and soil
degradation, particularly topsoil erosion, is rigorously
avoided. This risk can be mitigated by selecting on the
basis of a track record of good management at the tenant
selection stage of the investment.

trend has been towards reducing trade tariffs (e.g. GATT,

NAFTA) and increasing support for the scaling back of farm
subsidies; however, the possibility always exists for a rise
in protectionism and new trade barriers, such as export or
price restrictions, in the name of food security.
These risks can be mitigated at the asset selection stage by
investing in regions which do not have a history of imposing
such restrictions. This would generally involve investing in
regions with free market trading policies, higher levels of
per capita GDP and lower levels of food insecurity.

2. Climate and Weather

Climate and weather risk can be minimised by following
strict and carefully considered selection criteria on factors
such as geographical location, access to water supplies, etc.
With respect to short-term weather risk, there is usually
detailed information available in mature farming regions
on everything from rainfall patterns (including likelihood
of drought or flooding) to annual daylight hours and wind
conditions. This information allows investors to effectively
screen and select acquisitions according to risk appetite.
In terms of mid to long-term climate risk, there are
numerous climate models which assign levels of probability
to climate change induced severe weather events.
Comparative analysis of a range of such forecasting models
should be able to provide the longer term investor with a
reasonable degree of comfort.
Tenant farmers are also able to obtain insurance to protect
against natural disasters and certain extreme weather
events.
3. Pests, Disease, Fire and Other One off Events
To a large extent, the risks of pest and disease can be
mitigated by good management practice such as regular
crop inspections, rotation of crop types, use of mixed
genetic stock or pest and disease resistant strains, and
integrated pest management control measures. Perennial
crops (which often yield higher returns) are more vulnerable
to bad weather and disease because the trees or vines that
produce the crops can take longer periods of time to fully
recover, although again, risks can be minimised by sound
management practices.
Fire insurance packages are also available in many farming
regions.
4. Trade Tariffs
In addition to global competition, worldwide trade tariffs
and government subsidy programs provide additional
risks to farmland investing. In recent years the overall

Current Market Conditions and the Implications

for Investment Timing
Current market conditions have created what might
be described as a perfect storm in terms of buying
opportunities. There are a number of different factors
which, in combination, are producing a rise in the number
of distressed sellers, whilst simultaneously restricting
the number of buyers able to take advantage of those
opportunities:
1. S hort-term pressure on farm profits due to lower
commodity prices. This is exacerbated by the fact that
input prices (such as fuel, fertilizers etc) have not fallen
to the same extent as revenues from the sale of crops.
2. Tightening credit policies of many agricultural lenders
due to the credit crunch, meaning that some farmers
are struggling to obtain the cash flow finance their
businesses need to operate.
3. Down-valuations of plant and machinery owned
by agricultural enterprises, creating unfavourable
adjustments in debt to equity ratios, resulting in loan
capital repayment demands from lenders.
Despite the fact that the majority of agricultural businesses
remain profitable on an EBITDA basis (even at lower
commodity prices and higher input prices) when debt
comes into the picture, the current conditions of tight credit
and higher lending rates in the farmland sector can conspire
to produce distressed sellers.

131

So, whilst many farmers remain confident about the future

and, in the case of cash- rich farmers, continue to acquire
land in order to expand production, there are a limited
number who do not have sufficient cash flow and capital to
weather the current squeeze on profits whilst still servicing
debt or making equity payments due to down-valuations.
This is particularly true in a post boom environment. A
number of farmers who leveraged their businesses more
than they would have done previously, buoyed by the
commodity price hikes of early 2008, are now caught
between a rock and a hard place as lenders tighten their
terms. This opens a buying window for astute, cashrich buyers who are able to step in with capital to assist
distressed farmers during their time of need. Such farmers
would rather sell to a buyer prepared to lease the land back
to them, than to a competing farmer who would usually
require vacant possession of the land for their own use.
Having said this, opportunist investors soon close the
value gap. Many experts see the window of opportunity
available in the first half of 2009 beginning to close in
the second half of 2009, as agricultural commodity prices
recover, general economic sentiment and credit availability
improves and agricultures long-term fundamentals reassert
themselves. The signs of this were already in the air as this
document went to print with corn prices having risen 26%
between December 2008 and June 2009 and wheat and
soy by 20% and 10% respectively.371
In the words of leading UK rural land agent, Knight
Frank: For the far-sighted investor, an agricultural
downturn could be the ideal time to buy farmland. Most
commodity analysts believe the current situation is a dip
in a longer upwards trend driven by factors such as an
increasing world population and a slowdown in agricultural
productivity gains.372

Liquidity and Investment Horizons in Farmland

Investment
Buying and selling farmland, like other types of real estate,
carries higher transaction costs than many other assets. The
sale of farmland will generally include items such as transfer
taxes, legal fees and real estate commissions. Additionally,
transactions generally take longer to execute than more
heavily traded unitised assets.
As such, farmland has often been characterised as trading
in a less active and efficient marketplace with a lower level
of liquidity and marketability relative to financial assets
that trade regularly in a secondary market. Any investor,
attracted to the asset class due to its fundamentals, should
enter the investment understanding its liquidity limitations.
Not only should farmland be considered a long-term
investment due to the high initial costs, it should also be

understood that it usually takes 2 to 3 months to initiate an

exit. However, for those investors with a longer investment
horizon and for whom drop-of-a-hat liquidity is not a
priority, direct farmland investment has the potential to be a
very rewarding strategy in the coming years
Indeed, it has been argued that in the short-term, the
fact that liquidity issues restrict the number of investors
prepared to consider farmland may even be a benefit for
those who do. A research study which looked at just this
issue concluded that: There are barriers to the flow of
non-farm equity into farm real estate markets due to high
transaction costs and illiquidity. These barriers create a
segmented farm real estate market where compensation
for risk on farmland investment is high relative to wellestablished secondary markets.373

Choice of Geographic Location - Factors to

Consider
Farmland prices and farming profits vary depending on
local conditions in the area being considered. For example,
rainfed arable land prices in Western Australia range from
A$150 per acre to A$250 per acre in low rainfall areas
and A$1,500 to A$2,000 per acre in high rainfall areas.374
Historical averages over the past 10 years show that
farmland returns have been slightly higher (as a
percentage of land value) in low rainfall areas than in high
rainfall areas.375
The downside of investing in low rainfall areas, however,
is that farm income is less reliable and more volatile than
in high rainfall areas. This may adversely affect a low
rainfall tenants ability to pay rents. Even though farms
in low rainfall areas may produce higher returns relative
to land value during an unusually high rainfall year, they
will produce little or no revenue during drought years. In
contrast land in high rainfall areas can often produce viable
yields even during regional droughts.
As discussed in this document, trends in climate change
mean an increasing number of severe weather events are
affecting many regions of the planet. Droughts in Australia
are a case in point. Higher priced land in areas less affected
by drought fares better than lower priced land in more
drought prone locations. Indeed, if drought trends continue
in Australia, any case for lower priced land based on
historical average returns may become less convincing.
Also, the very fundamentals which have been the subject of
this document and which underlie the appeal of farmland
as an investment, provide further support for the selection
of farmland at the lower end of the risk spectrum. In 2008
commodity prices spiked due to unusually low global grain
production relative to demand. This benefited those able
to produce and sell grain at the time. However, higher
commodity prices were of no use whatsoever to Australian
farmers who had lost their entire crop due to drought.

132

The trends in this document suggest that for the

foreseeable future, global agriculture will be characterised
by an increasingly tight relationship between supply and
demand, low global stock levels, a higher frequency of
human induced and natural disasters disrupting production,
and increased commodity price volatility. In such a climate
it is farmland upon which above average production levels
can be maintained consistently which will benefit the most.
Tenants of high quality farmland will be best positioned to
capitalise on cyclical peaks and maintain rental payments
during cyclical troughs. This will feed through into higher
levels of income for investors.

26%

Rise in maize prices between

December 2008 and June 2009

11.3: Percentage of people globally who reported

paying bribes during 2008
Police
Judiciary
Land Services
Registry &
Permit Services
Eduction
Services
Medical
Services
Tax Revenue

Utilities
0

10

15

20

25

% of respondents paying bribes to corrupt

officials in the previous 12 months

Additionally, free access to international markets will be a

prerequisite of benefiting from higher global commodity
prices. This favours the selection of countries where export
restrictions or price controls are less likely to be imposed
(especially bearing in a future likely to be characterised by
higher levels of food insecurity).
From a portfolio planning perspective it is also important to
recognise that natural disasters and manmade disruptions,
such as wars and social or political unrest, often have
negative effects on equity holdings in an investment
portfolio. These same conditions have the opposite effects
on agricultural commodity prices because production
disruptions effect supply. In this respect, allocation in
investment portfolios to farmland at the higher end of
the quality spectrum and lower end of the risk spectrum
can actually provide investors with a hedge against such
extreme events.
Other issues requiring careful consideration include security
of tenure and/or restrictions on foreign ownership of
farmland which apply in many jurisdictions. While a detailed
discussion of the laws on a country by country basis is
beyond the scope of this document, these issues should
factor highly during the due-diligence process.
Generally, more developed countries allow direct freehold
ownership of farmland by foreigners. Less developed
countries tend to restrict foreign ownership in some way,
either by granting foreigners the right to acquire control
over land only through long-term leases, or by only
allowing the acquisition of farmland through a locally
incorporated company (often with the requirement for a
local equity partner). This has obvious fiscal and commercial
consequences which need to be weighed up against the
potential for earning higher returns.

Source: Transparency International, 2009

As a general rule, the lower the level of political stability

and the higher the level of poverty and corruption, the less
secure will be tenure and the less robust (i.e. enforceable)
the legal contracts on which tenure is based. This of course
needs to be weighed against land prices which are generally
much lower in these regions. If the investment plays out
well there is the potential for higher returns, whereas if
things play out badly there is the potential for substantial
loss of capital, or in a worst case scenario, the total loss
of capital. As Figure 11.3 from Transparency International,
a global anti corruption organisation, shows, bribery and
corruption are particularly rife in the land sector, so risks to
capital are very real in some regions.
It is worth noting that the longer the time period of the
investment, the greater the opportunity for negative
outcomes. Given that farmland investment is by its very
nature a long-term investment, the level of risk accumulates
along with potential returns. The fundamental question
an investor needs to address with respect to their personal
risk tolerance and their views on the outlook for a specific
region, is whether returns will accrue at the same rate as
risks.
In the words of Lord Jacob Rothschild who has invested
heavily in farmland in recent years: Land might be cheap
and plentiful in Russia, but if the price of wheat goes up, is
your deed going to be honoured?376

133

CHAPTER 12

Conclusion

Even as the worlds population has more than doubled

over the half-century since 1960, global aggregate food
production has kept pace an astonishing achievement.

Figure 12.1: Total global arable land between 2005

and 2007
1,413,000

1,000s Hectares

A recent Chatham House (Royal Institute of International

Affairs) Report entitled, The Feeding of the Nine Billion,
Global Food Security for the 21st Century377, notes
mankinds impressive achievements with respect to
increasing food production in step with rising demand
(recent developments notwithstanding):

1. P er capita food production has been in decline since the

mid 80s
2. The per capita availability of arable land has been in
decline since the 20s
3. Yield increases delivered by the green revolution are
declining
4. Demand from food, feed and fuel continues to rise

2006

2007

Source: Food and Agriculture Organisation of the United Nations, 2009

Figure 12.2: Total global agricultural land between 2005

and 2007
4,950,000

1,000s Hectares

What is more, the trends observed in this document,

demonstrate that maintaining the balance between supply
and demand is likely to become more difficult as time
passes. Some key trends are:

1,411,500

2005

Looking towards the future, the report quotes Northern

Foods Chairman Chris Haskins as saying:
The Malthusian predictions were wrong for 200 years,
but might prove right in the next 50 if evasive action is not
taken in time.

1,412,000

1,411,000

With reference to the current predicament, however, the

report states:
The underlying point is that a concatenation of trends on
both the supply and demand side was involved creating
a situation in which global consumption outstripped
production for several years in succession. The phrase
perfect storm has become over-used in recent years; in this
case, it was justified.

1,412,500

4,945,000
4,940,000
4,935,000
4,930,000
2005

2006

2007

Source: Food and Agriculture Organisation of the United Nations, 2009

12.3: Total global agricultural land between 1961 and 2007

5,100,000
5,000,000
4,900,000
1,000s Hectares

In other words, there is less availability of food and

farmland per person with each passing year. Additionally,
farmland is being lost to urbanisation, land degradation and
desertification quicker than new farmland is being added.
As Figures 12.1 and 12.2 show, for the last 3 years both the
total arable land and the total agricultural land (includes
pasture and permanent crops) globally have declined.
Indeed, as Figure 12.3 shows, total agricultural land actually
peaked in 2001.

4,800,000
4,700,000
4,600,000
4,500,000
4,400,000

polynomial trendline

4,300,000
4,200,000
4,100,000

Considered as a whole, some readers may find the trends

discussed in this document rather alarming. Thoughts of
mass starvation for may even spring to mind. Therefore,
before drawing to a conclusion it may be worth analysing
the reality of food supply in the foreseeable future.

1961

1970

1980

1990

2000

2007

Source: Food and Agriculture Organisation of the United Nations, 2009

135

The truth is that, theoretically, we are producing more than

enough food to feed humanity. The problem for those
spending a large proportion of their income on food is not
one of availability, but rather of price. The reason why prices
become an issue is that there are three Fs in the demand
picture: in addition to Food, there is also Feed and Fuel. A
W for wastage could also be added to the list.
Sudanese refugees would no doubt be overjoyed with
a cup of rice a day. They pray for food security. For
American consumers, on the other hand, food is not a
worry. For them the priority is cheaper fuel. In China, the
preoccupation is with emulating the western meat- rich
diet. So, the food crisis, at least in the short to mid-term,
has more to do with competition between the three Fs than
with a general lack of food. If we all stopped eating meat,
and biofuels were no longer part of the equation, everyone
would have their cup of rice.

about 1 million kcal/year needed per person. From a calorie

perspective, the non-food use of cereals is thus enough to
cover the calorie need for about 4.35 billion people.
It would be more correct to adjust for the energy value of
the animal products. If we assume that all non-food use
is for foodproducing animals, and we assume that 3 kg
of cereals are used per kilogram animal product and each
kilogram of animal product contains half the calories as in
one kg cereals (roughly 1,500 kcal per kg meat), this means
that each kilogram of cereals used for feed will give 500
kcal for human consumption.
One tonne cereals used for feed will give 0.5 million kcal,
and the total calorie production from feed grains will thus
be 787 billion kcal. Subtracting this from the 4,350 billion
calorie value of feed cereals gives 3,563 billion calories.
Thus, taking the energy value of the meat produced into
consideration, the loss of calories by feeding the cereals
to animals instead of using the cereals directly as human
food represents the annual calorie need for more than 3.5
billion people.378
In other words, apart from the question of dietary protein,
this simple calculation shows that we could feed the
additional 2.5 billion people expected by 2050 with some
grain to spare. On the other hand, the starving masses
face the problems of oil scarcity and the rapidly growing
consumption of meat. This means competition for the
worlds limited (and potentially diminishing) land resources
will continue to intensify for the foreseeable future. In the
words of John Roach of National Geographic News:
The land base is relatively fixed, and when you get these
high prices what you have are the different commodities
fighting for acres on the basis of profitability to the farmer.379
Having said this, the purpose of this document is not to
forecast trends in hunger. The intention of the last few
paragraphs has been to reassure the reader. In theory, as
long as humanity has the humanity, we should be able to
survive the foreseeable future without the massive increase
in starvation some observers predict. Although, as Gandhi
once said: There is enough for everyones need, but not
for everyones greed.380

The United Nations answered the question How many

people can be fed with the cereals allocated to animal
feed? in a 2009 report on The Environmental Food Crisis
as follows:

It is certainly clear that mankind is at a point in its history

when the challenge of resolving the increasing divergence
between supply and demand is intensifying. The objective
of this document has been to assess the fundamental trends
driving this divergence and the implications for farmland
values over the next 10 to 20 years.

By 2050, 1,573 million tonnes of cereals will be used

annually for non-food, of which at least 1.45 million tonnes
can be estimated to be used as animal feed. Each tonne
of cereal can be modestly estimated to contain 3 million
kcal. This means that the yearly use of cereals for nonfood use represents 4,350 billion kcal. If we assume that
the daily calorie need is 3,000 kcal, this will translate into

As Figure 12.4 shows, commodity prices sit at the centre

of an intensifying tug of war between rising demand and
diminishing supply. The greater the tension on the rope, the
higher commodity prices, and with them farmland values,
will go.

136

Figure 12.4: The tug of war between supply and demand between now and 2050

210%
DEMAND
TENSION
+100

+80

+60

+40

+20

0%
Population

Per-capita
income

Oil
Depletion

Demand Drivers (%)

Ranges of possible loss of cropland (%)
Biofuels

Other
non-food
crops

Land
degradation

Grain
Demand

COMMODITY
PRICES

Urban
build-up

Meat
Demand

Biofuels
Demand

Rise in Demand (%)

Ranges of possible yield decrease (%)
Water
scarcity

Climate
change

Land
degradation

Invasive
species

0%

-2

-4

-6

-8

-10

SUPPLY
TENSION

Source: All figures on the supply side (except climate change) were compiled by the United Nations Environment Program (UNEP) in 2009(381). As the UNEP did not include
the effects of extreme weather(382) nor the cumulative loss of ecosystems services endangering the entire functioning of food production systems in the climate change
component of their figures, the World Bank (2009) figure of a decline in agricultural productivity of between 1 and 10 percent by 2030(383) has been used. The World Bank
purports to take the effects of extreme weather into account in this figure. The demand side, the population forecast comes from the United Nations Population Division (2007)
(384); the per-capita income forecast comes from the World Bank World Bank LINKAGES model (2009) estimate for 2015 to 2030 of 1.7% per annum compounded forward
to 2050(385); the grain demand forecast from the Food and Agriculture Organisation of the United Nations (2009)(386); the meat demand forecast comes from the Food and
Agriculture Organisation of the United Nations (2006)(387). No oil depletion or biofuels demand figures are provided as these are dependent upon the timing of peak oil which
remains uncertain.

137

With reference to the demand side of Figure 12.4, it

should be noted that no figures have actually been given
for biofuels demand because the effect will depend on oil
scarcity. The extent to which this will become an issue, and
how quickly, remains hotly debated. Having said this, and
given the fact that demand from biofuels has the potential
to far outweigh all other factors in the foreseeable future
(the next 10 to 20 years), it is worth taking note of a
number of recent comments on the subject.
In an internal World Bank document leaked to the
Guardian Newspaper in 2008, its author, Don Mitchell, lead
economist for the Development Prospects Group of the
World Bank, concluded that
70-75 percent increase in food commodities prices [between
January 2002 and June 2008] was due to biofuels.388
The International Monetary Funds World Economic Outlook
Report 2008 observed that:
Although biofuels still account for only 1.5% of the
global liquid fuels supply, they accounted for almost half
the increase in the consumption of major food crops in
200607, mostly because of corn-based ethanol produced
in the United States.389
A paper produced in December 2008 in consultation
with the Food and Agriculture Organisation of the United
Nations analysing the causes of the surge in global food
prices and the likely outlook for the future, stated:
If energy prices continued to be high and/or rising and
probiofuel policies remained in place, the diversion of crops
to biofuels could continue. This could prevent the current
commodity cycle from unfolding in the normal way
over the short- to medium-term and prices trending back
towards their pre-surge levels.390
Finally, investment bank Goldman Sachs, estimates that
demand growth for food crops could increase from 2.0%
annually to 2.6% annually within a decade, principally due
to increased demand from biofuels.391 It is interesting to
note that if these figures are correct, the estimate in Figure
12.4 of a 100% increase in cereal demand by 2050 could
be highly conservative. A simple calculation of compound
growth of 2% between 2007 and 2016, followed by
compound growth of 2.6% between 2017 and 2050, gives
a demand increase of 286% by 2050.
Another conclusion which can be drawn from an analysis
of long-term trends is the fact that global agriculture is
currently in a cyclical transition phase from rising supply
to falling supply relative to demand. As this document
has made clear, cropland expansion has been the primary
driving force behind increased food production throughout
most of history.

Between 1804 and 1927 the worlds population doubled

from one to two billion people.392 This was accompanied
by a doubling of cropland area. A further billion people
were added by 1960. During this period cropland expansion
slowed down somewhat but still accounted for much of
the growth in production, with arable land rising from
1 billion hectares to 1.4 billion hectares.394, 395 After this,
circumstances changed.
Leading up to the great depression there was a period of
unprecedented (for the time) economic growth. In fact, the
conditions were very much like those which preceded the
recent bubble. Production gains from cropland expansion
were beginning to lag behind growing demand from more
affluent consumers so food prices began to trend upwards.
The result was that the number of people suffering from
malnutrition and hunger also trended upwards between the
early 1920s and the early 1950s.
This motivated the Mexican government and the Rockefeller
Foundation to commission the establishment of a crop
breeding station in 1943 to develop higher yielding
varieties of wheat that could be used to feed the countrys
rapidly growing population. This was the first step in the
transformation of agriculture now known as the Green
Revolution. Starting on wheat in Mexico and then rice
in Asia, the Green Revolution crop improvement miracle
spread to the four corners of the world and made possible
a staggering ballooning of the human population (which
more than doubled again from 1960).396

138

Since then, the Green Revolution has been responsible

for producing a greater volume of food than was being
produced across all the worlds farmland in the early
1950s. In 1943 Mexico imported more than half of its
wheat. By 1956 Mexico was self sufficient and became a
wheat exporter. Net exports peaked in 1965 then began
to fall because the population continued to increase while
production was already approaching a peak. Domestically,
the work of the Green Revolution had been done and the
production gains banked. By 1977 Mexico was back in the
hole. In 2007 Mexico imported 3.4 million tonnes, five times
more than the 0.68 million tonnes it exported in its best
year in 1965.397

Parts of Sub-Saharan Africa are among the last major

regions of the world which still remain untouched by the
Green Revolution. Unfortunately, this is unlikely to solve the
worlds supply problem. As the UNs High Level Task Force
on food prices recently noted:
While there is scope in some developing countries for
bringing new land into cultivation and ... intensifying
land use through irrigation, these options are costly, have
potentially adverse environmental consequences, and will
not be feasible on the scale required to resolve the massive
problem of accelerated soil productivity decline.398
Figure 12.5 shows the relationship between population
growth and arable land area. As the graph indicates, until
1920 global arable farmland expanded at a faster rate than
the human population. In 1920 the per capita availability of
arable land peaked at 0.48 hectares per person and began
a long period of decline which continues to the present
day. In 2007 per capita arable land availability stood at 0.21
hectares, less than half its peak level (see Figure 12.6).

Of course, for Mexico this state of affairs, whilst not

ideal, has been bearable because over the years it has
been able to import food from other countries where the
Green Revolution continued to work its magic. Eventually,
however, like Phileas Fogg, the Green Revolution will have
completed its circumnavigation of the world. Indeed, the
diminishing returns observed in this document suggest that
Phileas Fogg is now writing his memoirs. Unfortunately,
unlike Mexico, planet earth has no trading partners.

Figure 12.5: Trends in per capita availability of arable land between 1700 and 2050
0.6

Higher Estimate

Lower Estimate

Arable land per capita (Ha)

0.5

2007

0.4

2050
forecast period

0.3

0.2

0.1

50

40

20

30

20

20

20

10

20

00

20

90

20

80

19

70

19

60

19

50

19

40

19

30

19

20

19

10

19

00

19

90

19

80

18

70

18

60

18

50

18

40

18

30

18

20

18

10

18

00

18

90

18

80

17

70

17

60

17

50

17

40

17

30

17

20

17

10

17

17

17

00

Source: Arable land figures between 1961 and 2007 - Food and Agriculture Organisation of the United Nations, 2009; Arable land figures between 1700
and 1960 - Integrated Model to Assess the Global Environment (IMAGE), Netherlands Environmental Assessment Agency, 2006; Population figures
United Nations Population Division, 1999 & 2008

139

After the per capita availability of arable land peaked, the

world entered a period during which food production rose
at a slower rate than demand. Between the early 1900s
and the late 50s to early 60s, when the Green Revolution
took over as the primary driver of production growth, per
capita food production fell with obvious consequences for
commodity prices and hunger rates. Indeed it was this state
of affairs which set the scene and provided the impetus
for the enormous increases in crop yield which the Green
Revolution breeding programmes achieved.
These increases have allowed western consumers,
throughout most of their living memory, to feed themselves
with an ever diminishing fraction of their income (recent
developments notwithstanding). For this trend to continue,
supply will need to expand at a sufficient rate to meet the
doubling (or more) of demand which is forecast by 2050.
As discussed in this document, it is highly unlikely that
cropland expansion will play anything more than a minor
role, at best, in increasing food production between now
and 2050. At worst, it is possible that the area of land

suitable for agriculture actually diminishes. Figure 12.5

shows two different forecasts for per capita availability of
arable land, one which assumes the same average rate of
expansion as seen between 1961 and 2007 and the other
which assumes contraction at the rate seen in the last few
years (see Figure 12.1). Based on these forecasts (the lower
of which may still be optimistic bearing in mind trends
noted in this document), per capita availability of arable
land in 2050 will be 0.15 ha per person or 0.17 ha per
person respectively. This is approximately one third of the
peak level in 1920.
Similarly, the ability of conventional crop breeding to
produce a further doubling of production is in serious
doubt. Recall, from Figure 5.1 in Chapter 5, that the
average gain in cereals production between 1991 and the
year 2000 was 0.61%. A simple calculation demonstrates
that if food production increased by this rate between 2007
and 2050, the compound growth in production by 2050
would be 30%.

140

The fact is that supply is already falling short of rising

demand, much as it did post 1920 when cropland
expansion began to lag behind population growth. Between
2000 and 2008, consumption exceeded production in 7
out of 8 years.399 It is quite clear that agriculture is now
at a point in its development when a revolution of equal
proportions to the Green Revolution is required.
As Figure 12.6 shows this view is borne out by agricultural
commodity prices which have risen again since their
December 2008 lows despite supposedly depressed demand
due to the global recession. Indeed, by June 2009 the
International Monetary Funds food price index already sat
at 41% above the 20 year average.
Over the last 100 years there have been good times and
not such good times to be in agriculture. This document
concludes that agriculture is now entering one of the most
challenging, but also most profitable, periods in its history.
Figure 12.6 highlights how this time of transition in the
commodity super cycle (at least the next 10 to 20 years)
has similar characteristics to past periods when agricultural
commodity prices and farmland profits were at their
highest.In the words of agricultural commodities bull and
farmland investor Jim Rogers (co-founder of the Quantum
Fund with George Soros which gained more than 4,000%
in 10 years, while the S&P rose less than 50%):
Eventually, of course, food prices will get high enough that
the market probably will be flooded with supply through
development of new land or technology or both, and the
bull market will end. But thats a long ways away yet.400

Figure 12.6: Food prices over the last 20 years

200.00

Food Price Index

166.25

132.50

20 year average

98.75

9
Ju

l2

00

07
20
A
ug

05
20
A
ug

03
20
A
ug

01
20
A
ug

A
ug

19

99

97
19
A
ug

95
19
A
ug

93
19
A
ug

91
19
A
ug

A
ug

19

89

65.00

Source: International Monetary Fund, 2009

141

FUTURE

2050: Per capita

arable land at
0.15 to 0.17 ha?

2009

2007: Per capita arable

land now 0.21 ha (less
than half 1920 peak)

6.8 billion (2009)

2000

1999: 6th billion

(12 years)
1987: 5th billion (13 years)

2000: Consumption begins

to exceed production
1985: Per capita grain production
peaks and begins to decline

1974: 4th billion (14 years)

1960: 3rd billion (33 years)

1950

1960: Green Revolution supersedes

cropland expansion as
primary source of production growth

FALLING PRICES

2050

9.2 billion

RISING PRICES ?

Figure 12.7: Trends in world population and sources of agricultural production between 1700 and 2050

1927: 2nd billion people

(123 years later)

RISING PRICES

1943: Beginning of Green Revolution

1920: Per capita arable land availability

peaks at 0.48 hectares and enters a
long-term declining trend

FALLING PRICES (Rapid cropland expansion and some productivity gains)

PAST

1900

1850

1804: 1st billion people

1800

1750

1700

Deficit
Green Revolution

Population

Cropland

Source: Arable land figures between 1961 and 2007 - Food and Agriculture Organisation of the United Nations, 2009; Arable land figures
between 1700 and 1960 - Integrated Model to Assess the Global Environment (IMAGE), Netherlands Environmental Assessment Agency,
2006; Population figures United Nations Population Division, 1999 & 2008 (Note: The total area of arable land under cultivation globally is
assumed to remain at 2007 levels.)

142

In summary, we can draw the following conclusions from

the various trends observed in this document:
1. M
 uch of the best agricultural land has already been
used
2. Agricultural land is being lost at a faster rate than the
rate at which it is being added
3. There are a number of fundamental constraints to
further cropland expansion
4. It is probable that the aggregate area of land under
cultivation continues to decline
5. Meeting expanding demand leading up to 2050 will be
extremely challenging, if not impossible
6. Crop breeding for increased yield is unlikely, in its
current form and at its current stage of maturity, to
meet this challenge
7. The world sits now at the beginning of a transition
period when major new technological fixes are required
to substantially impact the supply side of the equation
8. The demand side of the equation will inevitably increase
9. There is the potential for extreme increases in demand if
oil prices return to, and remain at, higher levels
10. It takes time for economic incentives to feed through
into action in the agricultural economy
11. Based on historical prices and price inelasticity of
demand for food there is great scope for agricultural
commodity prices to increase well beyond current levels
12. In the foreseeable future (i.e. the next 10 to 20 years or
even up to 2050) farming is likely to become ever more
profitable
13. This, combined with a shrinking supply of quality
farmland (both in total and per capita terms) should
lead to appreciation in farmland values
14. Farmland is likely to yield increasingly attractive returns
both in terms of income and capital growth over at least
the next 10 to 20 years
15. Farmland investment provides an extremely effective
means of capitalising on (and hedging against) the
mutually reinforcing impact of the three most significant
trends of the modern era: population growth, resource
scarcity and climate change
16. Farmland is an investment safe haven during turbulent
times and an effective hedge against inflationary
monetary policies

The best investment opportunities are those which are

supported by fundamental long-term trends. It is extremely
rare to find an investment that is supported simultaneously
by a number of powerful trends all of which act together
to support the proposition. It is even rarer to recognise
such an opportunity at the right point in the business cycle
before the growth story has already played out. From a
timing perspective, we are in the early stages of a food
and agricultural super cycle driven by a structural shift in
demand and constrained supply. What is more, these drivers
are, to a large extent, not contingent upon the fortunes of
the wider global economy.
Direct farmland investment offers the best means by which
to achieve exposure to these trends. Farmland is not only
the source of the food, feed and fuel upon which mankind
depends; it also represents a stake in a finite (and potentially
diminishing) resource. When all else is stripped away, what
does any organism, including mankind, really need to
survive? Food and space.
In June 2009, Jim Rogers was asked in an interview by the
Economic Times what advice he would give a confused
fund manager during these tumultuous times. His
response:
Become a farmer. Ten years from now, it will be
farmers who will drive the Lamborghinis and the stock
brokers will drive tractors.401

143

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Tilman et al. (2002). Agricultural sustainability and intensive production practices. Science 418 (6898): 671-677.

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47

Ibid.

World Bank (2009). Global Economic Prospects: Commodities at the Crossroads. World Bank, Washington, D.C. Available online at: http://siteresources.worldbank.
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49

Ibid.

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FAOSTAT (2009). FAOSTAT. Available online at: http://faostat.fao.org/default.aspx [Accessed on the 20 January 2009].

51

Tilman et al. (2002). Agricultural sustainability and intensive production practices. Science 418 (6898): 671-677.

FAO (2008): The state of food and agriculture 2008. FAO, Rome. Available online at: http://www.fao.org/docrep/011/i0100e/i0100e00.htm [Accessed on the 20
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52

53

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58

Ibid.

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66

UN Population Division (2007). UN 2006 population revision. UN, New York. Available online at: http://esa.un.org/unpp/ [Accessed on 20 January 2009].

67

Ibid.

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Cassman, K. G. Ecological intensification of cereal production systems: yield potential, soil quality, and precision agriculture. Proc. Natl Acad. Sci. USA 96, 59525959
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74

Ibid.

75

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95

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100

101

Ibid.

102

Ibid.

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103

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107

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110

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FAO (2006b). Livestocks long shadow, pp. 416. FAO, Rome. Available online at: ftp://ftp.fao.org/docrep/fao/010/a0701e/a0701e.pdf [Accessed on the 20 January
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113

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340

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341

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348

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349

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350

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351

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352

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355

Hardin, W. and Cheng, P. (2002). Farmland Investment Under Conditions of Certainty and Uncertainty. Journal of Real Estate Finance and Economics, 25 (1): 81-98.

356

Savills (2009). Savills Agricultural Land Market Survey 2009. Savills.

357

Financial Times (30 September 2008). Agriculture: The battle to bring more land into production

155

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Hardin, W. and Cheng, P. (2002). Farmland Investment Under Conditions of Certainty and Uncertainty. Journal of Real Estate Finance and Economics, 25 (1): 81-98.

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364

Howard, B (2005). Farmland Investing: An Overview. Callan Investments Institute.

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Fortune Magazine (16 June 2009). Betting the Farm: As world population expands, the demand for arable land should soar. At least thats what George Soros, Lord
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374

Authors conversation with Gordon Verrall (June 2009). Gordon Verrall is a director of Farmanco, a leading Australian agricultural management consulting firm.

375

Ibid.

Fortune Magazine (16 June 2009). Betting the Farm: As world population expands, the demand for arable land should soar. At least thats what George Soros, Lord
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376

Alex Evans (2009). The Feeding of the Nine Billion, Global Food Security for the 21st Century. Chatham House (Royal Institute of International Affairs). Available
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377

United Nations Environment Programme Rapid Response Assessment (2009). The Environmental Food Crisis: The environments role in averting future food crises.
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378

John Roach (2nd June 2008). With U.S. Farmland Maxed Out, Growers Tap Into Reserves. National Geographic News. Available online at: for http://news.
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379

Alex Evans (2009). The Feeding of the Nine Billion, Global Food Security for the 21st Century. Chatham House (Royal Institute of International Affairs). Available
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380

United Nations Environment Programme Rapid Response Assessment (2009). The Environmental Food Crisis: The environments role in averting future food crises.
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381

382

Ibid.

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385

United Nations Environment Programme Rapid Response Assessment (2009). The Environmental Food Crisis: The environments role in averting future food crises.
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156

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Alex Evans (2009). The Feeding of the Nine Billion, Global Food Security for the 21st Century. Chatham House (Royal Institute of International Affairs). Available
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394

Ibid.

395

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396

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397

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Alex Evans (2009). The Feeding of the Nine Billion, Global Food Security for the 21st Century. Chatham House (Royal Institute of International Affairs). Available
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399

Jim Rogers (15 June 2009). Buy Farmland. The Best Investment Of Our Lifetime. Jim Rogers Blog. Available online at: http://jimrogers-investments.blogspot.
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401

157

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