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Über dieses Buch

This book is a one-stop reference for practitioners and academics in finance, business and economics, providing a holistic reference to the international agriculture business. It takes a multidisciplinary approach, looking at the issues, opportunities and investable themes in the global agricultural space, combining research and practical tools.



1. Introduction

The agricultural sector is characterized by several dynamics that distinguish it from other economical activities. They could be summarized as follows: 1.High sensitivity to natural conditionsThis includes discrepancies among climatic conditions (e.g., rain, temperature) from one season to another that impact the level of agricultural production, especially in perpetual farming areas, as well as in all areas in general. This results in an inconsistent relationship between production inputs (e.g., seeds, fertilizers, plaguing, weeding, hoeing) and the final product, and consequently in production fluctuations that require government interference to restore balance for the benefit of producers, consumers, or both. Man’s ability to control the agricultural environment is still limited and varies from one country to another according to the development achieved in biotechnology, which is determined in turn by the location of invention. This explains the slow transfer of these innovations to countries with differences in environmental conditions.

2. The Investible Agriculture Space

Bringing the different pieces of the agricultural puzzle together would yield a list that would invariably include the following: Growing world populationLower expected production growth for most cropsLimited availability of (additional) arable landImproved infrastructure to unlock new arable land where possibleIncreased affluence and changing dietary habitsNeed for additional (bio)technologies and fertilizers to improve crop yieldsWater scarcityUnknown impact of climate changeNeed for newer business models and supply chainsImpact of agriculture on climate changeEnhanced sustainability of the agricultural sectorImpact of biofuel productionClosing the emerging production gap between demand and supply for agricultural output, two potential solutions can be framed: (1) raise productivity (closing the yield gap) and (2) bring additional land into production. The major industry trends expected to drive agricultural productivity growth over the coming decades include greater irrigation, increased nitrogen fertilizer utilization, and higher yields for crops. While there has been investment in the agricultural sector over the past few decades, mostly in Europe and the United States, it has only had marginal impact on agricultural growth on a global scale.1

3. Climate Change and Agriculture

The severity and pace of climate change in the 21st century is presenting an unprecedented challenge.1 Current global surface temperatures are now about 0.6°C higher than the average for the last century. This increase is consistent with model predictions of the effects of rising atmospheric concentrations of carbon dioxide (CO2) and other GHGs, which are (potentially) a result of human activity. Also in line with the same model simulations, the observed warming is greater at higher latitudes — particularly in the northern hemisphere, where most landmasses are located — than in the tropics. At the same time, extreme-temperature events are becoming more frequent, causing increasing damage to ecosystems, agriculture, and human health. Such worrisome trends will intensify in this century if emissions of anthropogenic GHGs continue to follow a business-as-usual scenario, with global atmospheric surface temperatures predicted to rise by at least 4°C by 2100. Moreover, the hydrological cycle will strengthen because of increased rates of evaporation from land and sea surfaces. As a result, rainfall may increase in the tropics and at higher latitudes, while decreasing over large continental interiors, with critically water-scarce areas of the world expected to become drier and hotter. More frequent climate extremes will increase the incidence and intensity of droughts and flood events worldwide. Finally, a sea-level rise will put millions of people at risk, presenting a significant challenge for rural, low-lying areas in many poor, developing countries.

4. Agricultural Risk Management and (Crop) Insurance

Risk management in agriculture is important on several grounds: even if reducing farming risk does not always improve farmers’ welfare, failure to manage risks has direct repercussions on farmers’ incomes, market stability, and potentially food security. The two main risks faced by farmers — yield volatility and price volatility — are expected to rise due to changing weather patterns and tightening demand/supply fundamentals. Further, particular features such as the Common Agricultural Policy (CAP) of the European Union has been undergoing reforms that have significantly reduced the extent of market interventions. Tighter budgets, environmental factors, and trade considerations have resulted in an increased market orientation of the CAP. All in all, as market effects are gradually introduced, more of the actual risk will be in the hands of farmers/investors. This chapter therefore needs to be read in conjunction with the chapter on agricultural financial markets.

5. Biofuels and Agriculture

Biofuels date back to the late 19th century, when ethanol was derived from corn and Rudolf Diesel’s first engine ran on peanut oil. Until the 1940s, biofuels were seen as viable transport fuels, but falling fossil-fuel prices stopped their further development. Interest in commercial production of biofuels for transport rose again in the mid-1970s, when ethanol began to be produced from sugarcane in Brazil and since the 1980s from corn in the United States. During the 1990s, the industrialized economies of North America and Europe actively pursued policies in support of domestic biofuel industries to achieve energy security, develop a substitute for fossil fuels, and support rural economies. More countries have since launched biofuel programs, and over 50 countries have adopted blending targets or mandates and several more have announced biofuel quotas for future years.1

6. Biofuels and the Sustainability Conundrum

The development of biofuels, which has emerged at the interface of agriculture and energy at the global level, has been one of the most significant agricultural developments in recent years. During the 1990s, the industrialized economies of North America and Europe actively pursued policies in support of domestic biofuel industries to achieve energy security, develop a substitute for fossil fuels, and support rural economies. In addition, the rising concern over climate change in the last decade propelled interest in biofuels as a possible means of mitigating greenhouse gas (GHG) emissions.

7. Financing the Agriculture Firm

Within the context of this book, it would be (nearly) impossible to dedicate a full chapter to all the credit aspects of financing an organization and then to complement that with the specifics of financing the agricultural firm. Therefore it was decided to focus only on the specifics of the agricultural firm, thereby assuming that one is somewhat familiar with the principles of lending and the major fields of assessment — solvency, efficiency, coverage, leverage, liquidity, and profitability.2

8. Farmland I: An Investible Asset Class?

Farmland has gained significant attention in recent years by investors.1 Not surprisingly, since the start of the financial crisis, investors have been faced with economic uncertainty and poor investment visibility, periods of significant price volatility in many (mainstream) asset classes, inflation-related concerns, and dismal returns on fixed-income products (with only a few notable exceptions), and overall the fact that the monetary strategies deployed by many central banks in the world have perverted the proper pricing of risk of pretty much every asset around as pricing of assets ultimately feeds into the central banking rate. No wonder most investors were or are looking for hard tangible real assets that have a core capital value embedded, preferably with a pricing mechanism that shows no correlation with securities on the mainstream financial markets, where capital growth is driven by solid fundamentals, and where direct ownership (versus paper ownership) is a distinct possibility.2 Productive agricultural land ticks all those boxes, explaining the frenzy around agricultural land worldwide and the snapping up of land in often developing or even frontier nations by large overseas investors with a view toward benefiting from capital appreciation of farmland.

9. Farmland II: Capita Selecta

Population growth, resource scarcity, and climate change are the three defining economic trends of our modern times. Any sector positioned at the nexus of their convergence will offer investors the best midterm opportunity and the potential for stellar returns over the long term. Agriculture is one such sector. The consequent increasing scarcity of farmland has resulted in rapidly rising farmland prices across almost all regions of the world. Farmland values are determined by the relationship between demand on the one side, driven primarily by the profitability of agricultural enterprise, and the supply of productive farmland on the other. More specifically, rising demand for agricultural commodities will exert demand-side pressure on farmland values, while restrictions on cropland expansion will exert supply-side pressure. The interrelationships between supply and demand for farmland are complex. Demand for land increases when commodity prices rise. In response, supply increases if further land is brought under cultivation. However, there are many other factors at play. For example, efficiency increases or yield-enhancing technologies might mean that less land is required to produce the greater supply of commodities required in the future. On the other hand, losses in productivity from climate change and land degradation could have the opposite effect. The core objective of this chapter is to assess prevailing and emerging trends in supply and demand in the agricultural sector.1

10. Farmland III: Land-Expectation Value and Timberland Valuation

Wood and commodities made of it have worldwide importance. The global forest area consists of 3.9 billion hectares of forestland, which is about a third of the total global land area. In 2000, the amount of round wood felled was 3.4 billion cubic meters, half of it firewood. The global production of forestry commodities was about one billion cubic meters in 2000. The export value of these commodities in world trade was USD 134,000 million and the import value USD 141,000 million.

11. Advanced Technologies and Agriculture: Genomics, Nanotechnology, and Beyond

Advances in genomics, the study of all the genetic material (i.e., the genome) of an organism, have been remarkable in recent years.1 Publication of the first draft of the human genome in 2001 was a milestone, quickly followed by that of the first crop (rice) in 2002 and the first farm animal (chicken) in 2004. Huge technological advancements have meant that sequencing has become dramatically quicker and cheaper over time, so the genomes of many of the important crops, livestock, forest trees, aquatic animals, and agricultural pests are now already sequenced or soon will be.2

12. Challenges in Agricultural Production and Natural-Resources Management

It has been mentioned already on a number of occasions that the expected growth rates in agricultural output are slowing down while population growth powers on. Regional or global studies do unavoidably mask intercountry differences. This chapter brings together the most prevailing challenges and supports them with data, albeit within the indicated parameters.

13. Sustainability of Agricultural Productivity Growth

Global agriculture will face multiple challenges over the coming decades. It must produce more food to feed an increasingly affluent and growing world population that will demand a more diverse diet, contribute to overall development and poverty alleviation in many developing countries, confront increased competition for alternative uses of finite land and water resources, adapt to climate change, and contribute to preserving biodiversity and restoring fragile ecosystems. Climate change will bring higher average temperatures, changes in rainfall patterns, and more frequent extreme events, multiplying the threats to sustainable food security. Addressing these challenges requires coordinated responses from the public and private sectors and civil society that will need to be adapted to the specific circumstances of different types of farmers in countries at all levels of development.

14. Commodities I: Derivatives Markets

In the last ten years, commodity-derivatives markets underwent major changes in at least two areas: (1) the amount of money invested, and (2) the types of investors. An important source of information is provided by the CFTC (Commodity Futures Trading Commission), which releases weekly data on the investment positions held by the different types of traders on the US commodity-derivatives markets.1

15. Commodities II: Trading Agricultural Commodities

Many economic factors, including temperature, precipitation, changing customer needs, substitute products, and new market participants, are far beyond our control. However, they are key to determining the supply and demand for vital commodities such as corn, wheat, soybeans, soybean meal, soybean oil, rice, and oats.2 As a result of continuously changing global supply and demand for grains and oilseeds, commodity prices can vary substantially from day to day.

16. Commodities III: Speculation on (Agricultural) Commodity Derivatives and Financialization of Commodity-Price Formation

Billions of human beings rely on commodities to eat, heat, and commute. Brutal hikes in agricultural commodities in 2008 and 2011 — and to a certain degree on a continued basis ever since — caused malnutrition for hundreds of millions of people, and related “food riots.” The rise of energy prices and agricultural-related commodity prices weighs on the daily lives of billions as well, as the part they take in monthly spending increases. For these reasons, the issue of excessive speculation in commodity derivatives has been covered by substantial reports and research.2

17. The Global Water Challenge

Water — as we know it — is a commodity, but that is about to change. Consumption patterns and levels, population growth, the need for energy, and changing climate patterns will all be arguments in that mix.1 This will ultimately mean an increase in demand for water — in the face of a limited supply of this key resource. Usage conflicts are inevitable and will become more acute on account of wasteful use and pollution. Investments in water infrastructure as a whole will have to increase over the next few decades to be able to satisfy the growing demand. Naturally, the focus of investment in industrialized countries differs from that in developing countries and emerging markets. Further, the question is how the relationship between public and private levels will emerge in terms of the investments needed to support this evolution and create sufficient supply. Also a mix of technological solutions will be needed to enhance supply levels and support reuse. Conflicting use will be almost inevitable, and the geopolitical dimensions are the great “unknown unknowns” in this story.2

18. Future Agricultural Dynamics

During the last few decades we have been experiencing production surpluses in the developed world and stagnating growth in the developing part of the world — most of it being the result of (intended) policies. It is the policy reforms combined with the economic growth in emerging economies that the world is now and has been experiencing which led to changing patterns in the demand/supply relationships for most agricultural commodities. It has turned the agricultural industry into a market-driven environment ready to accept investments. This has also led to an increase in agricultural trade relations and volumes — a phenomenon the developing nations of the world have been benefiting from most. Despite the technology improvements in the industry, it is likely to experience a decline of productivity in the short to medium term. Although projections conclude that supply should keep track of increasing global demand, the margin is minimal, and therefore it is to be expected that agricultural prices will stay relatively high.


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