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Up until now, there was no greater point in human history where the world was more connected. At the forefront of this are the global food supply and the systems around it. Both are getting much more complicated.
We have enjoyed decades of globalization that accelerated food production through both shared knowledge and trade.
Say whatever you want about genetically modified organisms – the end result is that they feed more people.
In a world where there are still around 9 million people dying every year from hunger, we need to find a way to more evenly distribute the world’s food.
Now, with embargoes adding to deglobalization, this problem will only exacerbate as we’re seeing the base ingredients necessary for a lot of products skyrocket in price.
This week, in <5 minutes, we’ll cover the agriculture industry:
A Brief History 👉 Agriculture creating cities
Current Global Trading Environment 👉 Who imports/exports what?
Impact of Covid 👉 Supply chain constrained, but Ag held in
Impact of Russia/Ukraine 👉 Embargoes, Pricing Power, and the Ripple effect
Let’s get started!
1. A Brief History 👉 Agriculture creating cities
I promise this part will be quick.
I was recently reading ‘Atomic Habits’ which explained early settlements were much more effective in agriculturally expanding east-west than they were north-south.
The reason is that in an east-west orientation, the climates are extremely similar so this is the path of least resistance. In the path of least resistance, technological know-to can be transferred.
If you are growing bananas in Brazil, it would be much easier to transfer your know-how and expertise to Peru than it would to the colder climate of Canada. So the early days were based on east-west expansion.
During the neolithic revolution about 12,000 years ago, traditional hunter-gatherer lifestyles were replaced by permanent settlements with reliable food supply, creating agriculture.
Out of agriculture, came cities and civilizations, and since crops and animals could now be farmed to meet demand, the global population skyrocketed from about five million people about 10,000 years ago to more than seven billion today.
The switch from a nomadic to a settled way of life is marked by the appearance of early Neolithic villages with homes equipped with grinding stones for processing grain with the origins of rice and millet farming dating to around 6,000 B.C.E.
During this time period, cattle, goats, sheep, and pigs all had their origins as farmed animals in the so-called Fertile Crescent, a region covering eastern Turkey, Iraq, and southwestern Iran. Genetic studies show that goats and other livestock accompanied the westward spread of agriculture into Europe, helping to revolutionize Stone Age society.
From here, rapid advances in technology drove the domestication of both plant and animal production forward rapidly. From using machinery to till lands all the way to genetically modified plants and animals, technology and science drove more and more production.
I’ll spare the entire history lesson because I think you’re starting to get the point. When globalization increased through government policy as well as transportation methods like railways, steamships, and air cargo, we could then shift the production of goods to the country with the best relative competitive advantage.
From there, we could maximize global production through trade. But when the “government policy” part of the equation turns from treaties to sanctions, we have a big problem in the interconnected global agriculture infrastructure.
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2. Current Global Trading Environment 👉 Who imports/exports what?
The trend in the post World War period for globalization can be seen as the value of exported goods as a percentage of GDP:
When it comes to the impact regarding the current Russia/Ukraine war, I covered the import/export web of Russia in the newsletter two weeks ago, which you can find here.
But additionally, let’s try to understand the trade web from an agricultural-specific lens. Many basic food ingredients have remained the same, with the top five basic food commodities being wheat, rice, potatoes, maize (corn), and sugarcane.
On the whole, China, the US, India, and Russia contribute a major chunk of the world’s food basket.
China has a huge agricultural sector (farming, forestry, animal husbandry, and fisheries) that contributes to 10% of its gross domestic product (GDP). China is the world’s largest producer of wheat, rice, and potatoes. It is the second-largest producer of maize and the third-largest producer of sugarcane.
The agricultural sector in the US is highly mechanized, which has resulted in it being among the top producers despite the fact that just 1% of the total employed population is employed by agriculture. The US is the world’s largest producer of maize (corn), the third-largest producer of wheat, fifth-largest producer of potatoes, tenth-largest producer of sugarcane, and twelfth-largest producer of rice.
Agriculture for India’s economy contributes around 18% to the country’s GDP and provides employment to approximately 45% of its population. India is the second-largest producer of sugarcane, wheat, rice, and maize and the sixth-largest producer of potatoes.
The agricultural sector, which employs 10% of the population, accounts for 4% of its $2.05 trillion economy. It uses just about 13% of Russia’s land area because of the country's climatic and geographical limitations. Out of the total agricultural products produced, about 40% is from crop farming, and the remaining 60% is from livestock, including wool, meat, and dairy farming. Russia is the third-largest producer of potatoes, fourth-largest wheat producer, and twelfth-largest producer of maize.
Before we continue, let’s check in with our Outrageous Chartered FinMEME Analyst Dr. Patel!
3. Impact of Covid 👉 Supply chain constrained, but Ag held in
The first shockwave sent through the entire supply chain was from the global pandemic. The OECD identified three main impacts on the agricultural sector:
The production of certain agricultural goods was reduced due to the unavailability of seasonal labour, restrictions in the access to intermediate agriculture inputs, and the incapacity to sell output.
There were impacts on consumer demand driven by unemployment and income shocks associated with the containment measures, reduced demand for high-value products, consumer shift in demand from food services, and decline in biofuel demand.
Supply chain disruptions were observed in many countries, due in part to the contamination of employees in processing firms, the adoption of distancing and sanitary requirements, and transport and logistic issues.
However, on an annualized basis, the agriculture and food sector had an economically successful year. Global production of wheat, maize, rice, and soybeans increased over the year. While trade dropped initially during the first few months of the outbreak, it recovered quite rapidly.
On top of this, average food prices remained relatively stable through Covid, until now…
4. Impact of Russia/Ukraine 👉 Embargoes, Pricing Power, and the Ripple Effects
The war in Ukraine has delivered a shock to global energy markets. Now the planet is facing a deeper crisis: a shortage of food.
A crucial portion of the world’s wheat, corn, and barley is trapped in Russia and Ukraine because of the war, while an even larger portion of the world’s fertilizers is stuck in Russia and Belarus.
The result is that global food and fertilizer prices are soaring. Since the invasion last month, wheat prices have increased by 21 percent, barley by 33 percent, and some fertilizers by 40 percent.
Compared with the nearly 6% YTD loss of the S&P 500, shares of the top three U.S.-listed fertilizer producers are having a great year. Mosaic (NYSE: MOS) is up a staggering 70%, CF Industries (NYSE: CF) is ahead by 50%, while Nutrien (NYSE: NTR) is up 40%, and the first quarter is not even finished yet.
As an aside, I invested in one of the world’s largest organic blueberry farms in Canada last year. If you want to know more about this investment that’s up 60% subscribe here to read about it in my paid newsletter coming out on the 31st!
True story, I just invested in one of the largest organic blueberry farms in BC, Canada. Why? I am diversifying into alternative assets, it’s an ESG play but most importantly I am trying to keep up with Bill Gates who is now the largest private owner of farmland in the US.
— Genevieve Roch-Decter, CFA (@GRDecter)
Apr 22, 2021
Pricing power is the ability of one party to set the price in a marketplace. If the good that you have is highly desirable, you can pass on the costs of an increase in inputs to the end consumer.
We can look at this problem through the lens of fertilizer. Fertilizer is made mostly with natural gas, which is spiking in price. In order to make the fertilizer, these producers have to ultimately increase their price to farmers in order to make up the difference.
Farmers are then price takers, as we’ve now seen the world’s major fertilizers more than double or triple in price over the last year.
When it comes to specific crops, the region is also directly affected by the percentage of total world production in either Russia or Ukraine:
But it doesn’t stop there. Brazil, the world’s largest producer of soybeans, purchases nearly half its potash fertilizer from Russia and Belarus. It now has just three months of stockpiles left. The national soybean farmers association has instructed members to use less fertilizer—if any—this season. Brazil’s soybean crop, already diminished by a severe drought, is now likely to be even smaller.
Brazil then sells most of its soybeans to China, which uses much of the crop to feed livestock. Fewer, more expensive soybeans could force ranchers to cut back on such animal feed, meaning smaller cows, pigs, and chickens — and higher prices for meat.
As we can see, this is causing a massive ripple effect across the entire food supply chain through deglobalization.
The end result of deglobalization is inflation. The two things putting a lid on inflation in the most recent decades have been globalization and technology. While technological advancements continue to be made, I believe we are only at the beginning of a trade war.
The Russia-Ukraine issues may turn into more of a political issue for the U.S. and Russian sanctions will largely persist even after a peace deal is struck as Biden will need a narrative/excuse for high inflation.
Time will tell, but hopefully, a soft landing can be achieved here to avoid a recession. In order for this to happen, inflation needs to ease through improved supply chains, removing sanctions, and a well-timed increase in rates.
This increase in rates has to be done as to not strangle GDP growth, which is an incredibly difficult tight-rope to walk right now.
The days of a slow grind up and to the right are over. Time to buckle up.
Until next time. Always Yours. Incessantly Chasing ROI,
-Genevieve Roch-Decter, CFA
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