Apologies for the delay in coming back to this post, time seemed to race away this week.  In part I we saw how the agricultural commodity prices were at record heights, or at least those long since seen.  The pertinent questions for the farmer and investor alike are is the high sustainable and is there any further upside?  TheCityFarmer looks at the influencing shifts of both supply and demand in the global market.  There are 3 factors that need to be considered.  Firstly lets take population.  All we really need to understand is that population growth is expanential.  An important text on the issue was first published in the 70’s and commissioned by the inticingly titled Club of Rome.  The Limits to Growth was a controversial study that sought to model the effects of increasing economic and population growth on the finite resources that our world supplies.  One such resource is food.  As the absolute number of extra people in the world accelarates year on year, the pressure of demand on all commodities is heightened, including wheat and other cereals.  Population growth is nothing new and so it is difficult to attribute the relative recent steep gains only to that.  We can look back to the Limits to Growth, for the second factor which is economic growth.  We have in recent years seen unprecidently rapid economic growth the developing world; most particularly in China and India – both with huge populations.  Hand in hand with economic growth comes changes to the consumption habits of food including more meat and a generally more western diet.


If the Chinese consume resources in 2031 at a level that Americans do now, grain consumption per person there would climb from around 600 pounds today to around 2000 pounds needed to sustain a typical western diet. This would equate to 1,352 million tons of grain, equal to two thirds of all the grain harvested in the world in 2004. OneWorld 


As the statastic above shows this development could have a truely fundamental impact on the global market.  Now on to the third factor; the ever increasing use of biofuel has quite suddenly provided an additional and fierce increase in the demand for combinable crops.  This is placing added pressure on land usage around the world.  Whereby land once used for growing wheat is now utilised in the supply chain of bio ethanol and diesel producers.  The main input to this industry is corn.  The graph below shows that dramatic increase and how further growth is still expected. 

 US Economic Research Service of the Department for Agriculture

 While there is much debate around the environmental and economic benefits of biofuels (debates TheCityFarmer is likely to post on in the future) for now it is enough to comment on the fact that demand for farm products has increased to serve the growing biofuel industry and the supply of crops that are not used in biofuels are impaired as land is turned over the produce those that are. 

So is the price sustainable?  The 3 factors I describe are not going to go away anytime soon.  TheCityFarmer believes the important factors to watch for in the medium-term are the global price of oil, if it were to fall significantly it would damage the competitiveness of the Biofuel industry.  Also further developments in the industry which enables significantly more efficient energy transfer, or transfer from material that is not in the traditional sense “farmable”, could well reduce the demand.  Secondly and most importantly, the question is how much under-utilised land is out there that could be brought into use (and of course high commodity prices add to the incentive to do so) to satisfy this extra demand.  It is quite possible that a more productive agriculture industry in the land rich developing world could increase output sufficiently to meet the extra demand, which could have a very positive impact on the development of some of the poorest nations and act to supress prices.

It is difficult to predict, but on balance TheCityFarmer would expect, at least for the next few years , prices to remain at similar levels as today, if not rise further still.  But to sustain these levels into the long-run is more unlikely, however that said it is quite possible that we will not see the days of wheat at £60/ton again in a hurry.