Agriculture Investments Examples
Agriculture Investments Examples
Agricultural productivity and commodity prices
This article on the impact of commodity prices on agricultural investment has been prepared to provide high-quality reference material to the potential investor who takes into account the sector, especially for the investor, the relationship and influence of commodity prices and agricultural productivity would like to better understand investments in agriculture.
Investors are attracted to the agricultural sector for a number of reasons. Not least the undeniable fundamental trends of rising demand and falling supply are likely to lead to higher asset prices and revenues in the future. Agricultural revenue at a very simple level is a combination of agricultural yield and commodity prices. To better understand the performance of this asset class, we should look at commodity prices and productivity in a historical context to see if higher prices are here to stay or part of a longer-term price cycle.
Humanity currently uses about 50 percent of the accessible, productive land for agriculture. In other words, half of the earth’s surface, which does not consist of desert, water, ice or any other unusable space, such as. B. urban areas, is used for the cultivation of plants.
Given the current focus on increasing productivity to meet present and future demand for food, feed and fuel through a growing, wealthier world population, the fact that we use only half of the usable global farmland stock shows that we should be able to , easy to produce more agricultural land through the use of well placed infrastructure and technology investment. Unfortunately, the situation is not always that easy. In fact, the land that we currently do not use for agriculture remains so because it harbors important natural ecosystems, is in conflict areas, or is simply unable to generate economically viable returns on current commodity prices, ie, the revenues The costs incurred by the farms do not cover the land due to low yields.
Before the introduction of modern agricultural practices, the world population, with around 4 million people, has subsided and has risen as food access has been plentiful, and has fallen in times when it was difficult to obtain food. These people existed as hunters and gatherers who raised the food they consumed daily to survive from nature, and therefore the greatness of humanity was inherently limited to a sustainable level. To put this in context: Until the introduction of modern agriculture, the world’s population was about half of London’s current population.
Then, about 10,000 years ago, modern agriculture was born, which allowed us to breed plants and livestock in a concentrated way and to feed ourselves regardless of the whims of nature.
As our population continues to grow beyond the current level of $ 7 billion, and Earth’s generally accepted global capacity of $ 13 billion is reached, most think tanks predict that the world’s population will peak at around 9 billion between 2030 and 2050 Increase your productivity not only to feed yourself, but also more recently for biofuels as oil supplies decline and for livestock to satisfy the desire for meat from an increasingly affluent, urbanized population in Asia.
Initially, productivity increases to meet growing demand were simply for ordering more land. However, as the global shortage of suitable land continues to decline, in the past 50 years we have relied much more on the increased use of fertilizers, herbicides, fungicides and water to increase yields.
Between 1961 and 1991, global grain production doubled, mainly due to the introduction of nitrogen fertilizers, commonly referred to as the green revolution, while the management of more land played a relatively minor role. According to the Food and Agriculture Organization of the United Nations (FAO), this sharp increase in agricultural productivity by 30 years is due to a 78% increase in productivity per unit area, and 7% is due to a higher cultivation intensity, with only 15% the development from previously unused land to farmland.
The latest commodity boom
Commodities have been a recent focus and prices have been rising steadily since 2000, reaching record levels in 2008. Many argue that this is simply part of a long-term cycle of agricultural commodity prices, with the same effect felt during the oil crisis of the 1970s. During this period, the price of oil rose by 200%, which in turn drove up food prices, as the price of oil is a major factor in the total cost of agricultural inputs such as fuel and fertilizer.
In the long run, food prices have fallen in inflation-adjusted terms since the 1950s. In fact, between 1950 and 2000, food prices actually fell by about 50 percent, while the world’s population rose from 2.5 to 6.1 billion.
At first glance, this seems to violate the basic economics of supply and demand, but as more research is done, things start to make more sense. While demand has literally exploded – and is now compounded by the use of “food land” to produce non-food crops for biofuels – but also due to the agricultural technologies introduced by the Green Revolution, productivity has tripled has risen faster and supply has surpassed demand.
This fortunate situation lasted until the mid-1980s, when per capita grain production peaked at about 380 kg per person, after rising from about 280 kg per person in the early 1960s. It is also noteworthy that most of the increased production was ultimately used for livestock feed to meet the growing demand for meat from an increasingly affluent population. Before that happened the same in the Great Depression of the 1930s.
The question remains for investors interested in investing in agriculture, farmers and the general population, whether the recent price spikes in agricultural commodities were part of a long-term pricing cycle or whether this was indeed the beginning of a new cycle type. Well, there are a number of factors that need to be considered. First, recent price increases have been by far the most extreme of recent times. Over a five-year period, this was the longest and strongest ever rise in agricultural commodity prices ever recorded, even more so than the price spikes that occurred during the First and Second World War.
Also interesting is the fact that the price increases in the twelve months preceding the 2008 highs were unprecedented in their magnitude alone. For example, the price of the three main crops rose to such ridiculously high levels that they had never been observed before. Corn prices increased by 75%, wheat by 121% and rice by 215%. All this in the twelve months before their peak in 2008.
The reality is that in the 1970s, price increases were achieved through increased yields through the introduction of new technologies (the Green Revolution), which enabled a tripling of productivity, an increase in supply and a relaxation of prices. In the 1930s, too, there was plenty of untapped land that led to the cultivation of tens of millions of acres of fresh farmland, further increasing supply and lowering prices. In the current circumstances, for the first time since the 1970s, increases in yields have been less than population growth. H. Increasing productivity in this way is no longer profitable, and at the same time there is very little untapped land to work with.
This may indicate that higher food prices are pending, at least until new technologies are developed to increase productivity. This technological progress requires investment capital, which in turn requires higher revenues from agricultural holdings (commodity prices). Therefore, it is likely that food prices will now remain higher to finance the technological change needed to increase production capacity and yield. In this case, it’s more about sustainability than pricing, and we may be more worried about feeding the same way to ourselves and the 1 billion people already malnourished on this planet.
So back to the last commodity price explosion; is the fact that prices in the recent peak alone have risen so dramatically that this is actually the beginning of a new trend or cycle in agriculture, or is it simply part of a continuing cycle in which real assets are affecting everyone 40 or so years a strict revaluation?
Many market experts have pointed out that the extent of pure speculation by financial traders was at least partially responsible for the peak of 2008. In fact, trade volumes increased until 2008, with corn more than doubling between early 2005 and February 2008. A closer look at the trading volume also shows that the total volume has increased by 85%, but not – commercial traders (speculators) doubled their share of positive or long positions in the opening interest. The trading volume for wheat also rose well above 100%, as did the positive speculation bets.
While commercial trade in agricultural commodities boomed in the run – up to 2008, it is important to note that this was not just a coincidence, but the reason that more people were trading more goods, due to the fact that the fundamentals that underpin the commodity trade Commodity prices boosted, showed a screaming buy signal.
By far the most reliable indicator of global demand and global supply of agricultural commodities are records of global grain stocks. These numbers are the biggest driver of short-term agricultural commodity prices. When grain stocks fall, demand outweighs supply, and grain stocks rise, the opposite is the case. When a commodity is in high demand and scarce, the resulting bidding war drives up prices, especially if it is an important commodity that can not be dispensed with, such as food.
In 2008, global grain inventories reached a historic low, and as commodity prices peaked, average global grain reserves dropped to only 18.7% of annual consumption, which equates to a global supply of only 68 days, well below the long-term average. In other words, if global production were to be severely disrupted for two months, for example in the event of a severe drought or conflict, the whole world was risking the food going out completely.
Such low global inventories drew speculators’ attention to the fact that supply-demand ratios had worsened, but many seemed to overlook the fact that agriculture is inherently cyclical and high prices lead to investment in production Producing more while keeping prices high This in turn leads to an increase in production, a decline in inventories and prices, as the supply / demand ratio increases again. Those who put on sustained high prices suffered extreme losses as product inflows hit the market and prices plummeted. Welcome to the people who cyclise commodity prices!