Is Global Food Demand Outpacing Supply?
January 2011 started off with lower world stocks and improving commodity prices. The rising prices were largely due to challenging weather anomalies around the world reducing yield and quality. Combining this with an increasing world population, improved living standards and growing demands for livestock products which requires more grain production – and the future for Canada’s agricultural commodities was looking pretty good.However, the old adage, “Nothing solves high prices like high prices” may have had an impact during the balance of 2011. Wheat, for example, is an easy crop to manage and it is grown everywhere in the world. In fact, farmers are planting wheat somewhere in the world every week of the year. So if prices are high in the Canadian mid-winter, there are incentives to increase planting and fertilizers for those areas beginning to plant, such as India, China and the Australia.
Many market analysts are bullish on long-term commodity price increases. They belief in sustained profitability is predicted based on then notion that global food demand will outstrip supply capacities well into the 21st century.
On the other hand, others question the prediction of “food scarcity”. There are several reasons why the minority of analysts believes the world will not face food scarcity challenges and is, in fact, optimistic about increasing supply and food availability.
First of all, consider the real price of Canadian wheat and corn over a 105 year period (Figure 1). Despite some annual market fluctuations, the adjusted price is on a slow decline. Given the capacities of 21st century technology, research, innovation that will improve efficiencies and increase production, why would this long-term trend reverse?
Second, is the staggering amounts of food (grains, vegetables and fruit) lost to poor postharvest handling and storage around the world. The Economist’s “2011 Special Report on Feeding the World” documents that up to 50% of the world’s food supply is lost to spoilage, insect damage, poor storage and transportation inefficiencies.
While food loss cannot be totally stopped, halving the amount of food spoilage and waste by 2050 is considered a realistic target. This would equal approximately 50 million tonnes of food per year, roughly 25% of today’s production.
Third, there are substantial areas of quality farm land that are currently under-utilized; some obvious spots include parts of Russia, Kazakhstan, Ukraine and Africa. The UK Government’s 2011 Foresight Report estimates that the application of existing knowledge, management techniques and technology could increase average yields two to threefold in many parts of Africa, and twofold across the former Russian Federation.
Global Food Trade is Shifting to the Former Soviet Union
In 2009-2010, the United States Department of Agriculture (USDA) undertook an extensive study of the grain production potential of Russia, Kazakhstan and Ukraine. The report published in June 2010 predicts that the combined production of these former Soviet republics would control 37% of global wheat exports by 2019, taking market share mostly from the USA and some from Canada. It notes that Australia will likely maintain its share of the global market.
This is consistent with other recent reports indicating that Canada’s status as an agriculture exporter is diminishing despite the apparent need for more food demand. Canada currently accounts for approximately 13 percent of the global wheat trade and four percent of feed grains, down from 22 percent and 6.5% respectfully in 1995.
The Production Potential of Russia, Kazakhstan and Ukraine
Following the decline of the Soviet Union in 1991, the agricultural sector experienced a long, severe recession through the 1990’s. Even before the dissolution of the Soviet Union, the output of grains and other crops had begun to decline due to inefficiencies. The decline continued until 1999- 2000 because of the unavailability of fertilizers and other inputs, bad weather, and major readjustments during the period of transition.
The most dramatic declines occurred in livestock production. Farmers reduced their holdings of animals as the price of feed grains and other inputs increased. As meat prices rose, the composition of the average consumer’s diet included less meat and more starches and vegetables. Reduced demand in turn exacerbated the decline in livestock production.
Since 2000, economic restructuring and the rebuilding of the infrastructure has resulted in rapid increases in grains production and Russia, Kazakhstan and Ukraine have become a force in the export market. However, these are very much “boom and bust” economies due to management challenges, particularly in Dryland agriculture.
The Former Soviet Union reentered the grain export market in 2006 with high production in 2008 and 2009. These were a couple of “boom” years when Russia, Ukraine and Kazakhstan were all in the top 12 wheat exporters. Then the “bust” came in 2010 with a severe drought across the Eurasian steppe and Russia withdrew completely from the export market.
The rains came back to the steppe in 2011 and Kazakhstan, in particular, had record yields. However, those record wheat yields are still approximately one-half of western Canadian wheat yields, which in 2011 averaged approximately 40 bushels per acre across the prairies.
The Eurasian steppe consists of highly productive, rich Chernozemic soils, similar to the best of the Canadian prairies. However, the last ice age did not reach the steppe and did not scrape away the topsoil – consequently, much of the steppe has 12- 18 inches of topsoil, compared to 4-6 inches across the prairies. In Kazakhstan, the land has only been farmed since the 1960”s and the yield potential is equal to or better than western Canadian soils. Plus the high natural fertility means much lower fertilizer rates to achieve comparative yields.
Current Challenges to Post-Soviet Farming Systems
Russia, Kazakhstan and Ukraine have been importing the best Dryland farming equipment and technology for a number of years and this will continue to increase. But, technology is only as good as the management capacities. Most of the grain production still uses conventional tillage with summerfallow every three to four years.
While there is interest in the benefits of reduced tillage systems, most of the corporate farms practice conventional tillage because of the government incentives to maximize short-term results. Another management limitation is the agricultural land is government owned and there is no guarantee that progressive farmers can secure long-term use of improved land and capture the benefits of improved farm business management practice. On the other side, lease rates of $1 to $2 per ha put costs of production lower than farmers in other nations.
The major downside to conventional tillage is the inability to conserve moisture or manage limited precipitation typical of Dryland farming in the grasslands. This is one of the primary reasons why Russia and Kazakhstan, in particular, have a boom and bust production systems. When there’s good rainfall yields are good regardless of the management, but if not, there are not enough sophisticated alternative management systems to sustain average yields.
Agricultural and farm management have some of the Soviet-style carry-over, which tends to be top-down to the farm operators, who patiently wait for instruction. In other words, there is little incentive for personal initiative and no encouragement for multi-tasking. This is particularly evident during seeding time, where the tractor driver is indeed the tractor driver. He is responsible for keeping fuel in the tractor and driving straight and is NOT responsible for filling the drills or air-seeders with seed and fertilizer, nor for the seeding and fertilizer rates, nor for the seeding depth. Consequently, the drivers tend to seed at 6-8 mph resulting in poor seed placement and indeterminate establishment – the first step towards consistent, high yields.
This top-down management system is largely why grain yields across the Former Soviet Union are approximately one-half of Canadian or Australian yields. This is changing, however, due to several reasons including more joint venture management arrangements with European farmers seeking investments in the lucrative steppe region.
Check Your Business Model
All signs point to Russia, Kazakhstan and Ukraine taking control of the commodity wheat markets within ten years. Since the climate is similar to the Canadian prairies, it is a safe bet that canola, flax and pulse yields will also improve across the Eurasian steppe as management systems improve.
Shrewd farm business managers should not rely on the presumption that there will be a scarcity of global food supplies, nor that commodity prices will increase in the long-term, nor that the profitability of commodity agriculture will improve. They should continue to innovate and look for higher value marketing opportunities outside the race to be the “lowest-cost bulk producer” of grains and livestock.
Remember, Canadian agriculture is the most dependent on the export market with the majority prairie production destined for off-shore markets. There are not a lot of domestic market alternatives. The emerging Black Sea production areas in the FSU have lower production costs (fertilizer and land costs) and are closer to tide water.
Successful farmers will critically review their business model – perhaps look for market alternatives – markets that target the specialized needs of discriminating consumers in markets with a growing middle class. They must be well trained, astute managers and understand marketing principles, in order to capture more of the consumer dollar.