Emerging Market Inflation Trends - By Andrew Dowie, Portfolio Manager; Advance - Investment Solutions, BT Financial Group

" according to a recent report by the Asian Development Bank, food expenditure comprises a large share of the poors’ total expenditure (60%) in Asia, while their expenditure on both food and energy comprises over 75% of total consumption expenditure. The ADB calculates that perhaps as many as 1.2 billion people within the Asia-Pacific region are vulnerable to soaring grain prices. On a global basis, food accounts for approximately 30% to 40% of the CPI basket in most emerging economies compared with just 15% in the G7. Thus, food price increases weigh more heavily on inflation expectations and hence wage demands than in the developed world. Even though world grain prices actually declined during the 1990s, a trend reversal occurred in 2000 with prices rising with a April 2010 with a pronounced sharp upturn experienced towards the middle of 2007.

Indeed, the “Agflation” that brought the world food crisis of 2007-8 to the fore at the beginning of 2008 saw a doubling of maize prices, rice prices increasing by nearly 75% and heat prices rising by approximately 50%. Tellingly, the influential “Economist” magazine’s food-price index reached its highest level since its inception in 1845. Although the global effects of the GFC may have impacted food prices in the short-term the upward price trend remains intact. Unsurprisingly, emerging world governments have tried to protect their populations from the ravages of increasing global food prices by both political and economic means. Export restrictions, domestic price controls and attempts to increase food inventories have all been elicited at varying times by government; however, such policy responses have invariably exacerbated rather than controlled price volatility.

UNDERLYING CAUSES OF INCREASING FOOD PRICES The recent increase in global food prices can be attributed to both cyclical and structural factors which impact upon the price of food by either increasing demand or alternatively by reducing supply.

Cyclical Factors
Although there is much conjecture amongst analysts with regards to the actual weighting assigned to each of the following drivers of short-term food prices, there is considerable agreement on the four actual drivers themselves:
 Random Disruptions
Adverse weather conditions: the recent Australian drought caused a 60% decline in Australia’s wheat supply in 2006. Precautionary demand to declining global inventory of stock: between 2002 and 2007 the Food and Agricultural Organisation of the UN estimates that stocks of rice, wheat and corn have declined by over 40%. The reinvigoration of food inventories by both public and private sector procurement contributes significantly to upward price momentum in international food markets.
 Financial Factors
- Steep decline US$ - the steep decline in the US$ against major currencies has contributed significantly to price increases of “soft’ commodities including wheat, whose prices are denominated in US$.
- Energy prices – The relationship between energy and agriculture has changed enormously in the past decade. Not only has agricult ure become more energy intensive with its increased use of fuel and fertiliser but also the diversion of cereal use from food to the production of bio-fuel has increased as oil prices have risen, effectively allowing for a window of arbitrage to now exist between these alternative uses for cereal crops.
- Inflation hedge – Increased demand by pension funds for agricultural commodities as an inflation hedge.
 Increased Demand from Emerging Economies
Although an increasing world population (The UN forecast that the current world population of approximately 6.5 billion will increase to some 9.2 billion by 2050) will increase demand for food perhaps a more significant and immediate development is the increased demand for meat and dairy products by the burgeoning middle classes of the emerging world. Meat and dairy production is highly inefficient with regards to both water and feedstock usage. Historically, global food demand increased by approximately 1.5% per annum. However, food demand had accelerated to 2.0% by 2007, with Goldman Sachs estimating demand will increase to 2.5% by the middle of this new decade. Indeed, according to The World Bank, food production will have to increase by almost 50% and meat by 85%, from 2000 to 2030 to meet estimated demand.
 Input Costs and Declining Productivity
Fuel, land and fertiliser are the three main input costs for food production and until the financial crisis all were rising. Fuel is important not only for cultivation but also for processing and freight; developing new land for cultivation is costly due to the fact that much new land is in remote areas and the associated infrastructure development costs can invariably be expensive; fertiliser costs are linked to energy costs. In the three decades leading up to 1990, increasing grain yields were responsible for almost three quarters of the increase in developing countries’ agricultural production. Since the 1990s the trend for increasing yields has slowed quite dramatically primarily due to a lack of investment in the development of high yielding and pest resistant strains of crops. Although the aforementioned cyclical factors may, by definition, be somewhat short term in nature, the following structural factors are medium to long-term phenomena suggesting that the problem of high food prices will continue to cause much concern going forward.

Structural Factors
 Policy responses – export bans and price floors are the typical policy options utilised by food exporting countries. However, these two initiatives have the unintended cnsequences of increasing both volatility and uncertainty in the international fod markets due to reduced incentives to food producers, with associated increases in production inefficiencies and the element of uncertainty itself, as policy options become a volatile political issue; they may be politically expedient, but they are economically self-defeating.
 Water scarcity – 97.5% of the world’s water is salt water; of the rmaining 2.5% of freshwater, the vast majority is at the two poles. Only 0.4% of freshwater is available at the earth’s surface in the form of lakes and rivers – the vast majority is underground. Maintaining enough water supplies for agriculture will be increasingly difficult due to climate change, the demands of industry, an increasing urban population and the need to produce bio-fuels.
 Climate change – The effects of global warming will most likely be more apparent in the longer term but will invariably adversely impact agricultural output and cause supply disruptions. The United Nations forecasts that rain dependent agriculture, which constitutes some 95% of African agriculture, may be halved by 2020, while tropical harvests will decline and inauspicious weather conditions and events will occur more frequently in temperate regions.
 Increasing affluence and changing diets – As both incomes and urbanisation increase in the developing world, the demand for meat and dairy products by the emerging middle classes has increased substantially.

i think non conventional gas will spell the end of bio diesel and ethanol turning food into fuel.

Taken from B's post above : "Fuel, land and fertiliser are the three main input costs for food production and until the financial crisis all were rising."

Heard a professor from the Univ. Tech. Sydney -


Peak phosphorous: mankind's latest threat
MATT CAWOOD
21 Jan, 2010 09:41 AM
SOME believe that dwindling supplies of potable water is humanity's great resource challenge; others think it is the imminent prospect of "peak oil".

But an equally important milestone in modern history will be an inevitable tightening of global supplies of phosphorus.

Phosphorus has underpinned the leaps made in agricultural productivity since World War II, and the world's economies and population levels have become dependent on a continous supply of the element.

Unlike nitrogen, which can by synthesised from the air, or the use of renewable energy to substitute for fossil fuels, there is no substitute for phosphorus. All the world's phosphate fertilisers come from mined phosphate rock, making it a finite resource.

Various analyses suggest "peak phosphorus" - the point at which supply falls behind demand - will occur around 2040, with all currently known reserves potentially exhausted within 50 to 100 years.

However, University of Technology Sydney researchers Dana Cordell and Stuart White warn that for most countries, a phosphorus squeeze is likely to come much sooner.

Demand for phosphorus is growing in line with population growth, and is being pushed higher by greater consumption of meat in countries like China and India.

(Based on European practices, the Swedish Environmental Protection Agency estimates that a vegetable-based diet uses 0.6 kilograms of phosphorus per person per year, compared with 1.6 kg for a meat-based diet.)

Few nations have access to enough phosphorus to supply their own agricultural needs: in fact, most of the world's known phosphate reserves are controlled by China, the United States and Morocco.

China has the largest reported reserves, but in 2008, at the height of the food crisis, China's central government introduced a 135 per cent tariff on exports to protect domestic supply.

The US, historically the world's largest consumer, importer and exporter of phosphate fertilisers, is now thought to have only about 25 years of domestic phosphate reserves left. US fertiliser manufacturers are importing large quantities of phosphate from Morocco.

Morocco supplies more than a third of the world's phosphate, but it is an industry that stands on politically unstable ground. Much of Morocco's phosphate comes from the disputed territories of the Western Sahara, an activity that has been condemned by the United Nations.

Phosphorus may be in finite supply, and that supply politically uncertain, but Australia's agricultural and food systems remain highly inefficient users of the fertiliser.

Dana Cordell calculates that only two per cent of phosphate fertiliser applied in Australia is eaten in locally-consumed food.

Up to 75 per cent of P fertiliser is locked-up in agricultural soils. About 20 per cent of applied fertiliser is exported in farm produce, and a minor amount is leached into waterways, contributing to nutrient overload or carried out to sea.

One researcher has estimated that of the billion tonnes of phosphorus mined since 1950, about a quarter now lies in water bodies or landfills.

Each year, Ms Cordell says, humans eat about three million tonnes of phosphorus, and excrete close to 100 per cent of it.

In some countries, that has led to serious investigation of recycled urine as a source of agricultural phosphorus.

Urine is "essentially sterile", and contains nitrogen, phosphorus and potassium in the correct ratios for plant growth.

If all human urine was recycled, according to Jan-Olof Drangert of Linköping University in Sweden, where Dana Cordell also studies, it could supply half the phosphorus needs of the world's cereal crops.

Two Swedish municipalities have mandated that all new toilets must divert urine away from solid waste. The urine is collected in tanks either at the house, or in a communal collection point, and picked up once a year by farmers who use it as fertiliser.

However, in countries like Australia, with a large land area and a relatively small population, nutrient recycling can at best provide five per cent of the nation's phosphorus needs.

g'day jonno.

peak phosphorus has been an interest for a while,but it does seem that an increase of 'p' prices will bring lower grade and stranded deposits into the profitable to exploit catagory.

the 'waste stream' from cities sewerage will become either too valuable to throw away at some stage,or tech will make the value unlockable at a cheaper price.

imho.

old favourite redmetal has a quarterly worth a look,as they now have a

'fertiliser minerals strategy'

Phosphate miners fall under the heading of mining too of course, so will also be subject to the mining tax.

the bhp strategy in gaining exposure to the potash market is interesting.

they indicate they intend to aquire large leases in a world class basin,then invest heavily enough in a large scale low cost operation big enough to marginalise the competition at lower prices

FAO report ""How to Feed the World in 2050,"

http://www.fao.org/fileadmin/templates/ ... n_2050.pdf

Cribbed : " ..excerpt from the report sums up the investment case:
Even if total demand for food and feed grows more slowly [over the next 40 years], just satisfying the expected food and feed demand will require a substantial increase of global food production of 70% by 2050, involving an additional quantity of nearly 1 billion tonnes of cereals and 200 million tons of meat....

In addition to the usual assortment of resource issues such as water and soil and climate change, there are some topics you wouldn't think of otherwise, such as biodiversity. Take a look at this:
The gene pool in plant and animal genetic resources and in the natural ecosystems which breeders need as options for future selection is diminishing rapidly. A dozen species of animals provide 90% of the animal protein consumed globally and just four crop species provide half of plant-based calories in the human diet..."

.

the fin reported a few days ago that bhp had considered 3 times the big moves into potash,based on reports of the projected growth in high quality protien from china and india,and this being a world class trend.


still didn't stop them selling phosphate hill to incitec pivot for a price of one years earnings .----although phosphorus seems far less loved than potash.

story on Brasil's food improvements

http://www.economist.com/node/16886442? ... N=39017331

It is a bit rosy IMHO in that rain is not predictable... and a lot of those infertile acres (Mato Grosso means 'thick bush' in Portuguese) were former Amazon marginal forest that got burnt and cleared earlier. All sounds capital intensive with big distances to boot. But then ....

Peak Farmland

.. (around) the world, the farmland rush is on. High-net-worth individuals like George Soros and Ted Turner are buying farmland in Argentina, for example. But the biggest buyers are the sovereign wealth funds of governments in countries where farmland is at a premium - think China, India and the sandy Middle Eastern countries.

They're finding willing sellers in developing countries. Figures are hard to come by, but the World Bank estimates foreign investors of all stripes bought 111 million acres in the developing world in 2009 - a 10-fold increase in 10 years. Two-thirds of those deals have been struck in Africa.

The iconic example is a deal that fell through. In 2008, South Korea's Daewoo Logistics signed a lease on farmland in Madagascar, the large island nation off Africa's southeast coast. The company planned to plant corn on territory larger than the state of Connecticut. Angry voters promptly ousted the government that leased the land. The new president revoked the lease, saying, "Madagascar's land is neither for sale nor for rent."

But Sudan's is. Nearly 10 million acres of Sudanese farmland have been sold to foreign buyers between 2004-09. More than 6 million acres in Mozambique have also changed hands. Liberia, Ethiopia and Nigeria have likewise sold sizeable tracts.

For investors, it's a high-risk proposition. Many of these governments are selling the land from underneath the peasants who tended it for generations and kicking them out. They're not very happy about that. If they can't get redress, they might well seek revenge. Even in countries where the rule of law and property rights has a stronger history, the rules can change in an instant. Brazil just passed a decree limiting acreage held by foreign-owned companies.......

- the Daily Reckoning

interesting niche.

milling oats are not going to be available in the west because of the dry finish.

the milling variety 'matika' has been found out as a simple disaster trap in the east.

the end users got conned by their consultants that it was yielding 2-3 percent more groat per tonne than the old vatiety,and if they changed the whole supply chain over to it,profit would lift by the same amount.

matika worked in dry seasons,but in the wet finish going on now it is rubbish. disease running uncontrollable [the only chemical treatment has a witholding period before harvest of near 2 months,so the mills say 'can't use that'

the wet stopped the main tillers in early sown matika,and the plant fought on by throwing out late secondaries,which kills milling grade.

the trap is that the mills offeed big contracts for milling grade matika,firm tonnage. lot of growers went hard at the bait,and now simply have no chance of filling the contract.

i took a lesser price 'multigrade' contract for lower money that was fillable from feed grade 'just in case' but once again the fixed contracts have done damage.