Thinking About Food at Davos
While climate change may not be a focus at this year’s World Economic Forum at Davos, some analysts say its impact is still front and center on the agenda.
Food prices and security, threatened by weather-caused production declines and relentless rising demand, will be a key issue at the conference of world business, political and social leaders.
“We believe that the general trend for food commodity pricing is upwards,” says David Philipp, CEO of Ambata Global Advisors, an investment and advisory firm focused on sustainability themes.
He says “many factors [are] driving up demand versus a slower increase in supply coming primarily from increased agricultural productivity.”
Climate change is still the main culprit behind the price increases, says Garvin Jabusch, chief investment officer and investment firm Green Alpha Advisors.
“[People] think of climate change as slow-moving and occurring over extremely long periods of time,” he says, adding that markets therefore “don’t need to concern themselves with it when making short-term economic decisions.”
But he points out that “large-scale changes are occurring so fast” that its impact are measurable “within human life spans” now.
Many analysts see one forecasted effect of climate change — more extreme weather in the form of destructive storms, prolonged droughts and larger seasonal floods — as degrading agricultural productivity.
In 2011, Russia stopped exporting grains after a disastrous drought, and booming China became a net importer of soybeansafter widespread floods.
Reinsurance giant Munich Re said 2011 was the worst year for catastrophic natural event losses, hitting $380 billion worldwide.
Jabusch said US losses were $12 billion for non-earthquake related natural disaster, including hurricanes in northeast and Midwest flooding, “the highest that’s ever been in the history of the Republic.”
Whatever observers think of the connection between food prices and climate change, food supplies are also stretched by growing global demand, says Dallas Kachan, managing director of cleantech research firm Kachan and Co.
“Increased awareness of the math underlying the planet’s current population growth rate and how that’s going to impact our ability to feed the world” is one of the reasons he sees for a potential agri-tech boom this year.
Food commodity pricessoared in 2011, despite the muddling-along economy.
At year-end in 2010, Blackstone vice-chairman Byron Wien predicted “rising standards of living in the developing world seriously increase the demand for agricultural commodities,” adding that “commodities become a component of more institutional portfolios.”
He saw corn rising to $8.00/ton, wheat to $10.00/ton and soybeans to $16.00/ton.
While Wien did get corn right by New Year’s Day 2012, he missed on soybeans and wheat – but according to the UN’s Food and Agriculture Organization, FAO, their index of 55 food commodities grew for sixth straight months through December 2011, hitting 214.7 points.
That topped its previous peak in June 2008 by a point.
This drove big agricultural firms like Monsanto to beat street estimates all year on the growing demand.
While those firms are often criticized for burdening farmers, especially in the developing world, with high-cost seed and fertilizers, many analysts see them as part of the solution, providing a potential upside for agricultural equities.
Green Alpha’s Jabusch says that he has no problem with genetically modified seeds, for example, but that other agricultural inputs, like water, as also becoming a limiting factor.
Ironically, one aspect of climate change – the search for non-fossil fuels – could be causing part of the problem.
Food crop-derived biofuels, like corn-based ethanol, have effectively added every car on the road to the agricultural checkout line.
Kachan and Co.’s Dallas Kachan says corn-based ethanolwas “at least partly to blame” for these spiking commodity prices.
Even the “Arab Spring” uprisings across northern Africa and the Middle East might be more of a symptom of food supply issues than a political uprising, says Green Alpha’s Jabusch.
Jabusch says that while the uprising “did have some positive outcomes, like the removal of unjust dictators,” if it is food-driven, it will likely only get worse and more widespread.
“History surely shows that resource wars are horrible, zero-sum disasters overall,” he says. “From this point of view, the Arab spring is less of a blossoming of freedom than it is a harbinger of destructive struggles among more and more people for less and less stuff.”
Ambata’s Philipp, whose firm focuses on that region, says the connection to the Arab Spring is less direct.
“Price hikes in basic necessities magnify the divisions between socioeconomic groups,” he says. “It was a tangible daily problem that transcended ideological differences and affected people that may not have otherwise rallied for political reform.”
But whether driven by global demand or climate change, pricing will continue to drive innovation in the agrifood sector, says Kachan.
He predicts this segment will be a big growth area in cleantech sector in the coming years, no matter what key driver you choose.
“Look for food prices to increase in 2012,” says Kachan. “Crop yields today are dependent on inexpensive oil and gas, especially petroleum-based fertilizers.”
He sees fossil fuels rises 2012, meaning “prices at the grocery will rise inevitably, too.”
“Food prices are dependent on so many other variables than population growth,” he says. “Change in how we produce food is needed now.”