“Whoever makes two ears of corn, or two blades of grass grow, where only one grew before deserves better of mankind…” Jonathan Swift – Gulliver’s Travels, 1726 Part 1 It may be self-evident that industries, and the business within those industries, follow a line of least resistance (or competitive advantage) as they develop. It would be perverse for individual businesses not to do so, as an alternative strategy would be expected to place them at a disadvantage. The point of interest, however, arrives when resource constraints or changes in the market close off that line of least resistance (business development and growth) and require a change of direction. The need to feed a global population, albeit growing more slowly, combined with the diet changes of the increasing urban middle class in much of Asia, suggests that the time for change in the global food supply system may be upon us. A simple analogy would be to look at the development of multiple grocery retailing in the UK over the past 70 years or so, and the changes in direction over the period. Virtually non-existent at the end of the ’40s, nascent multiple retailers developed a proposition that offered consumers value, self-service convenience, choice, continuity and a wide product range under one roof. Distribution efficiency kept costs down and they took on the traditional high street. Share of UK Grocery Trade by Type of Grocer, 1950-2000 Source: Retail Change: A Consideration of the UK Food Retail Industry, (1950-2010), Roger Clough Grocers, greengrocers, bakers, butchers and the panoply of small independent retailers could not compete, when a multiple retailer came to town. This competitive edge, which delivered relentless growth for the multiples, was the line of least resistance. All they had to do was show up for the fight. They were all doing the same thing, growing in the same way, out-competing the high street, and returns were fine. However, such growth could not continue indefinitely – there was not an infinite supply of small competitors to drive out of business. As the combined multiple retailer share for the grocery market reached 80% or thereabouts, they had to look elsewhere for growth and margin. Competing with each other was cut throat and hard. Looking back down the supply chain was the next line of least resistance, and one which had, in some cases, grown fat on the back of the rapidly expanding multiples. Supplier margins were squeezed; it quickly became clear that, for many products, supplied under own label brands, the supply base was far too diverse. From the mid-’90s suppliers to the multiples competed with each other to be the last man standing, and presented their customers (the retailers) with a decade of margin growth – supplier rationalisation had become the next line of least resistance. Of course, changes in the UK grocery sector are small, local and recent when compared to the global food supply system and global food security. However, for centuries the line of least resistance to secure an increase in supply (and all political rulers need an adequate food supply) has been to find and farm “new” land. Breaking new land, draining marshes and felling trees, however arduous, was always easier than seeking to understand how to increase yields, or upsetting the status quo (vested interests) that coalesce around land ownership and occupation. Saxons migrated to the Carpathians in the Middle Ages; the Black Sea Germans followed the Russian pacification of the Tatar steppe and the Crimea in the 18th century to open up the black earth regions, and, most significantly, the Americans crossed the Appalachians to unlock the potential of the mid-West. The global population boom of the 19th century was fed from ‘new’ land. Inevitably this ‘new’ supply did not always match (and often exceeded) increasing demand, putting huge pressure on the “old” agricultural practices and relationships of Europe, driving down commodity prices, farmers’ incomes and returns from land ownership. Australia, Argentina, Brazil and New Zealand followed on, again with land “new” to agriculture, usually boosting supply ahead of demand. Fear of urban starvation in Europe (a real issue of political and press concern in the 19th century) and the need to deliver food security, was explicit in advertisements encouraging emigration to these brave new agricultural worlds. Even in the disaster that was the collectivisation of Russian agriculture by the Soviets, “new” land was turned over to the plough. On top of that in the early 20th century we stopped using some 20% of arable land for growing transport fuel – oats for horses – creating more “new” land. The use of fossil fuels delivered food to market at lower cost and released more land. These “ups and downs” in food supply over the past few centuries can be observed through the prices of UK wheat – wartime disruption to the fore. 1646-1926 Nominal UK Wheat Prices (£/tonne) Source: English Farming Past and Present by Lord Ernle. 6th Edition Heinemann 1961 (first published in 1912) Today we have a population of 7.2bn; projected peak population ranges between 9bn and 10bn, depending on assumptions made about changing rates of fertility. Some countries are already in absolute population decline – Russia and Japan, for example. What is clear, however, is that increasing demand for food has not slowed, rolling on at about 2% per annum. More grains are turned into protein as people move out of subsistence and up the income ladder. Arguments about the impact of western diet on the health of the recently urbanised are relevant, but unlikely to affect the direction of travel. If eating more meat (or any meat) is an important cultural statement of success (and it is), then people will eat more meat. Consumption of rice per head does not increase with wealth, but you certainly eat more meat as you can afford it. The divergence between meat and grain consumption over the past 50 years exemplifies such uninhibited growing demand for protein (as long as wealth generation continues). Since 1961, global grain consumption has grown by three times, while meat consumption has increased fourfold over the same period. Global Consumption of Meat & Grain Since 1961 Source: USDA And now we do not have a “new” mid-West to exploit. Increasing demand, which cannot be met from “new” land, suggests that global food security has reached a crunch point. The centuries old line of least resistance has been quietly closing off; there really is very little new land. Indeed there are some analysts who are confidently stating that arable land is in decline, lost to cities and deserts. China’s Ministry of Land and Resources recently released its first public report since 1996 on national land and soil conditions and noted that between 2006 and 2009, China’s total arable land declined by 0.2 percent, or about 0.7 million acres. We are now faced with the challenge of identifying where next, of exposing vested interests, of finding those factors, which hold back productivity on the “old” land. We have no choice but to address the challenge laid down by Sir John Beddington, to produce more from less – sustainable intensification. To produce more from existing land but at the same time to protect soil, water and atmospheric resources by addressing the environmental impacts of farming. We no longer have the luxury of following the age-old line of least resistance. Part 2 “The power of population is indefinitely greater than the power in the earth to produce subsistence for man… This implies a strong and constantly operating check on population from the difficulty of subsistence.” Thomas Malthus, An Essay on the Principle of Population (1798) Mankind has been busy for the past 215 years doing our best to prove Thomas Malthus wrong. We have done so with increasing urgency, and that urgency is now frequently portrayed as the spectre of a forecast returning to haunt us and to consume the hubris of mankind. Feeding 9bn or more by 2050, and all the mouths from here ’til there represents a major challenge. It is one that can be met. However the likely means of meeting it does depend on the point from which you start: Politicians look for technical solutions to supply concerns (it is down to somebody else), while all too frequently putting in place policies, which discourage innovation or are weak attempts at social engineering. Scientists are happy to accept the technical challenge. It keeps them well paid. They very rarely point out that the vast majority of already well developed technology available to the world’s farmers is not well deployed, and very frequently not at all. “Old” science, or the effective transfer of such, does not attract funding like “new” science, and is less fun anyway. Farmers look for protection, if they can get it, from the slings and arrows of outrageous fortune; the weather and global commodity markets are so far outside the control of the individual farmer (correct) that they are able to “justify” all sorts of tax payer support. Disaster (famine) will ensue without it, in spite of all the evidence to the contrary. Farmers, if asked, quite like technical solutions, even if they often ignore those already to hand. The food supply chain, hugely complex and globally inter-connected, is finally waking up to the level of uncertainty in the supply of raw materials. They had become as complacent as Tony Blair in believing that there was enough and would always be enough. Thirty years of effective food surplus from the mid-70’s had allowed such complacency to develop. And systems of support, nominally in place to protect farmer incomes, created a whole raft of vested interests, comfortable with the current position, and who seek to deflect challenges towards the preferred political route of technical solutions. NGOs have played an important role in the politics and practicalities of agriculture in the developing world, often faced with hunger, malnutrition and natural disaster. On top of the challenges posed by local politics and natural challenges, the level of support on offer to European and North American farmers resulted in a prolonged period of global structural surpluses. Commodity prices remained low, generating miserable incomes for the poorest unsupported farmers, and low levels of investment in capacity. Since 2007 higher prices, which ought to be incentivising investment, has seen the poorest consumers placed under pressure. It seems hard to find a comfortable balance. Facing such seemingly contradictory pressures, NGOs tend to opt for social solutions at the local level, as opposed to those which increase long term farm productivity. The evidence tends towards the importance of scale, which is incompatible with keeping every subsistence (and usually under fed) farmer on his plot. And what about the providers of capital to agriculture, a capital intensive industry? To feed 9bn the industry needs capital, but there is rarely any debate about the source of or incentive for that capital. Bankers to agriculture in a few developed countries are content to lend (occasionally to excess) against the security of land (low risk) to farmers and the more risky activity of farming. This, however, is rare globally, as secure property rights are even less common for farmland than for other property. Much lending to agriculture is secured against crops at penal rates of interest, securing the subsistence farmers in a cycle of poverty. On top of that, during the thirty years’ of relentlessly low prices, capital markets fell out of love with the sector. The result today, even though farm profits have now generally improved, is a lack of understanding of the complexity, and the asset mix and blended return, combined with the correct and understandable concern about political risk. Where does this leave us, looking for solutions to feeding more people from the same area of farmland, whilst minimising the negative environmental impact into the future? Unconvinced capital, fearful of political uncertainty; politicians lacking a clear objective, saddled with poor policies from the past, and, in the west at least, more than enough food (what problem?); agricultural scientists eager to engage; and farmers failing to use all the tools at their disposal. Can we continue to feed the world? Of course, but there needs to be a remarkable coming together of political understanding, capital deployment and technical application. This creates very considerable opportunity for investment in the most capable farmers, operating in lower risk environments (both climatic and political), with excellent cost control, presenting them with a clear competitive advantage. Yes, markets for globally traded commodities will remain volatile, responding to short term supply variability, but the most able operators will continue to thrive and generate strong returns. Any comments and questions gratefully received. Sincerely, Nick Tapp Partner, Craigmore Farming Published: 13 February 2014
