The Effect of Commodity Prices on Farmland Investments

Agricultural Productivity and Commodity Prices

This article since the effect of commodity prices on agriculture investments continues to be produced when considering providing quality reference material to the prospective Investor thinking about the sector, specifically for that Investor desperate to better understand to relationship and influence of commodity prices and agricultural productivity in agriculture investments.

Investors are consumed by the agriculture sector for a variety of reasons; most famously the undeniable fundamental trends of skyrocketing demand and contracting supply very likely to drive higher asset prices and revenues in the foreseeable future. Farm revenues on the very basic level can be a combination of agricultural yield multiplied by commodity prices, in order to better view the performance of the asset class, we have to look at commodity prices and productivity in the historical context that allows you to ascertain whether higher pricing is here to stay, or a part of a longer term price cycle.

At present, humankind utilises approximately 50 % of accessible, productive land for agriculture. Put yet another way, one half of the Earth’s surface which is not desert, water, ice or some other such unusable space for example urbanised areas is needed to grow crops.

With current emphasis firmly upon increasing productivity in order to meet current and future interest in food, feed and fuel from an expanding, wealthier global population, the fact we only use 50 % of the usable global stock of farmland indicates that we ought to be in a position to simply bring more land under agricultural cultivation from the application of well-placed infrastructure and technology investments. Unfortunately, the problem as always, just isn’t quite as simplistic as that. In fact, the land do not currently use for agriculture remains so given it accommodates vital natural ecosystems, can be found in areas of conflict, or possibly is simply not capable of producing commercially viable yields at current commodity prices i.e. the revenue produced from the land doesn’t cover the expense of the farming operations because of poor yields.

Before the creation of what can be considered modern agricultural practices, the worldwide population ebbed and flowed at about 4 million people, rising when use of food was abundant, and falling in occasions when food was tricky to find. These people existed as hunter-gatherers collecting the meals they consumed for survival each day from nature, and then the size on the human race was intrinsically tied to a sustainable level. To put this into context, up until the development of modern agriculture, the worldwide population was roughly half todays population of London.

Then, some 10,000 years back, modern agriculture was created, presenting us having the ability to cultivate plants and rear livestock inside a concentrated fashion, enabling us to give ourselves regardless of vagaries of nature.

As the population continues to expand after dark current degree of 7 billion and towards commonly accepted total carrying capacity of planet Earth of 13 billion, primarily think tanks believing the worldwide population will peak at about 9 billion people between 2030 and 2050, we’ve got to continue to improve productivity not only to secure ourselves, but additionally more recently for biofuels as oil supplies diminish as well as for livestock feed to sate the will for meat from a more and more wealthy, urbanised population in Asia.

Initially, increases in productivity to satisfy growing demand came from simply cultivating more land. But as the worldwide shortage of suitable land will continue to diminish, we’ve got relied a lot more heavily around the increasing using fertilisers, herbicides, fungicides and water to enhance yield, certainly during the last 50 years.

Between 1961 and 1991, global cereal production doubled, mostly as a result of the introduction of nitrogen based fertilisers, commonly referred to because the Green Revolution, whereas bringing more land under cultivation played a rather minor role. According to the Food and Agriculture Organisation from the United Nations, (FAO), this sharp 30 yr spike in agricultural productivity is usually broken down to show that 78% from the increase was caused by a boost in productivity per unit of land, and 7% could be attributed to greater cropping intensity, with only 15% as a result on the development of previously unused land into farmland.

The Recent Commodity Boom

Commodities happen to be quite the main objective in recent times, with prices rising consistently since 2000, finally peaking at record levels in 2008. Many reason that this is simply section of a long-term cycle in agricultural commodity prices, noting that this same effect was felt in the oil crisis with the 1970’s. During that time, the expense of oil rose by 200%, which in-turn drove food prices because the price of oil is usually a significant aspect in the overall cost of agricultural inputs including fuel and fertilisers.

In the long-term though, when adjusted for inflation food prices happen to be in decline because the 1950’s. In fact, between 1950 and 2000, food prices in solid terms fell by about 50 per cent on the same time the worldwide population increased from 2.5 billion in order to six.1 billion.

Whilst about the face than it this does apparently go against the essential economics of supply and demand, when further investigation is done things start to make more sense. Whilst it applies that requirements have literally exploded – and it is now being compounded from the use of ‘food land’ for your production of non-food crops for biofuels – for the same time, on account of the technologies designed by the Green Revolution, agricultural productivity has tripled, increasing at a faster pace and allowing supply to outpace demand.

This happy situation continued until across the mid 1980’s, where grain production per capita peaked at about 380 kg per person, having risen from around 280 kg per part of the early 1960’s. It is also worth noting the majority of increased production was ultimately employed for livestock feed to sate the growing requirement for meat from a progressively more wealthy population. Before that this same thing happened throughout the great depression with the 1930’s.