WHAT'S THE CHALLENGE?
First and foremost the challenge is productivity. To meet demand we need an increase in efficiency. That in turn should lead to opportunities in products and services such as fertiliser and irrigation.
For example, for Australia to produce 15 billion litres of milk by 2025, up from nine billion today, ANZ calculates an investment of $A8.6 billion is needed. Productivity must be gained from non-productive land.
One of the most egregious and yet surmountable challenges is waste. Nearly a quarter – a quarter – of global food production is simply wasted, for a wide variety of reasons. Consider some of those reasons:
- In developing countries, waste happens at the bottlenecks so that requires improved logistics, trade, processing and infrastructure.
- In developed markets, waste mainly downstream, in retailers, homes.
In both cases, waste improvement is an opportunity. In China, cold storage and transportation are estimated to generate between $US12 and $US18 billion in revenues and are expected to grow 10 to 15 per cent per annum. In developing markets, innovations like extended shelf life and new packaging create opportunities
Itis simple supply and demand: there is a diminishing asset pool in FB&A, particularly in supply chains. In Australia, for example, the number of grain companies has dropped 80 per cent through merger and acquisition.
Demand meanwhile is being driven by a desire by investors to diversify risk – for example, sourcing milk from different markets. Saputo now takes milk for China from Canada and Australia. And investors have high levels of liquidity.
Despite the overarching and fundamental challenge of producing enough calories for growing and wealthier populations, more immediately food security, in its most basic form, is not a challenge for governments. There is not a food shortage. The challenge is to keep populations satisfied with what's available. That means quality and variety.
That political imperative brings governments and state-owned enterprises into the supply chain and they have cheaper capital and greater liquidity. Agri could also be seen as a good place to park foreign exchange reserves as it is a long term play likely to return better than US treasury bonds.
Many SOEs and semi-government enterprises operate under – often opaque – government food security mandates. That in turn brings the danger of protectionism and market restrictions.
While complex, the interaction of these market, technology and political forces is likely to fuel asset prices. Consider the Kidman cattle stations in Australia as a prime example. The price publicly reported was well north of $A350 million, perhaps $A100 million over book value.
As acreage prices climb, farmers can be squeezed out. As regulation grows it can create product shortages. Larger, more complex agribusinesses require specialist management, a challenge especially in developing countries.
Ultimately though the challenge is political, it is not just about facilitating the necessary investment capital but avoiding intervention which distorts markets.
Michael Whitehead is Director, Industry Insights, Agribusiness at ANZ