“I subscribe to the view that we’ll see more shortages and better prices more often in the years to come.”
To which view of the future of the grain business do you subscribe?
View No. 1: the growing world population and increasing prosperity will lead to a long-term uptrend in agricultural prices.
View No. 2: on average, production will exceed demand and low prices will be the norm most of the time.
You’d think that experts could analyze the data and the trends and come to agreement. That’s not the case. The experts are as polarized as farmers.
A just-released report by the experts at Deutsche Bank Group subscribes to the theory that there will be a 50 per cent increase in food demand by the year 2050 with nine billion people inhabiting the Earth. Meeting this demand, they say, will require huge agricultural investments.
On the other side of the debate are experts such as Daryll Ray, who holds the Chair of Excellence in Agricultural Policy at the University of Tennessee. In a recent opinion piece, Ray says overproduction relative to demand will likely be the overriding problem for major crop markets during all, or most, of our lifetimes.
In the grain industry, overproduction has certainly been the norm more often than not during the past 30 years. Observers thought the boom years of the mid-’70s would last forever. Instead, the grain sector has regularly struggled. Grain prices have all too often been below the cost of production.
Over the years, there have been occasional world shortages with a corresponding rise in prices, but it has always been short lived. For instance, in 1995-96, there were some good prices and a burst of optimism, but it quickly faded.
The 2008 price boom has again boosted expectations. Although prices have dropped substantially since last year, they haven’t collapsed. For the first time, biofuel production is contributing to the demand side of the equation.
The investment community has discovered agriculture with some of the heavy hitters betting big money in farming operations.
Through the decades of tough economics, there have always been analysts pointing to rising world demand and predicting sustained profitability for grain producers. Many producers have lost faith in those predictions.
At this juncture, the two opposing viewpoints once again make for an interesting debate.
Daryll Ray is correct when he points to the underutilized production capacity around the world. Ukraine, Russia and Brazil could produce a lot more grain. Infrastructure and political problems have held them back.
The report by Deutsche Bank Group identifies irrigation, fertilizer use, improved equipment, improved farm management, biotechnology and policy changes as the keys to increased production. None of this will happen if grain production isn’t profitable.
Along with the steadily rising population, global incomes are expected to increase so there will be money for more diverse diets. While feeding the world, farmers will likely have the added challenge of cutting greenhouse gas emissions.
Whether viewpoint one or viewpoint two is correct will only be known in retrospect. The whims of Mother Nature have a lot to do with whether grain is overproduced or in short supply in any particular year. Macro factors like a world economic crisis and pandemics can also change the dynamics.
For my money, I subscribe to the view that we’ll see more shortages and better prices more often in the years to come. Not every year will be good and even in the years of strong grain prices, input costs will rise and decrease profitability.
The future will no doubt hold a lot of surprises. But the next 30 years should present more opportunities for grain producers than the last three decades. If you believe oil prices will ultimately rise, grain prices will have to follow.
Kevin Hursh is a consulting agrologist and farmer based in
Saskatoon. He can be reached at [email protected]