Food for more than thought

Oct. 19, 2010 - PRLog -- August news brought attention to the issue of feeding the world’s population. BHP’s unsolicited takeover bid for Potash, the world’s largest integrated fertilizer and related industrial and feed products company and the largest producer of potash (fertiliser) worldwide by capacity, has attracted a lot of global attention.

Potash estimated its operations account for 11% of global production and 20% of global potash capacity in 2009. With a growing demand as the world’s population grows and increasing intensity of agricultural practices, fertiliser is set to play an ever critical role in the quest to feed humanity. BHP, obviously aware of this, is keen to position itself  strategically in this market as it seeks to take an interest in ‘...developing, owning and operating a diversified portfolio of large, low-cost, long-life, expandable, export oriented Tier 1 assets”.

The hostile takeover is yet to play out, and has subsequently attracted interest from Chinese government officials and Sinochem Group, according to The Times newspaper. No rival bid has come forth at this stage, despite the speculation.

So what are the issues driving this activity?

Russian restrictions

Russia has placed a ban on wheat exports as the country suffers a drought which is expected to reduce the production of wheat by 38% according to Russian officials. Based on data from the US Department of Agriculture, Russia accounted for 14% of global exports of wheat, flour and related products in the year to 30 June. Prime Minister Putin announced, “we can only review lifting the ban on grain exports after the next year’s crop is harvested and we have clarity on the balances”.

Global farming pressures

Given the backdrop of UN population projections that there’ll be an increase of 1.7 billion people within the next 15 years, the growing middle class of the developing nations and the significant shift toward urbanisation, we can expect more pressure on agricultural productivity in the years ahead.

The supply side for arable land has also effectively reached capacity, with future output largely to come from increases in yield rather than new sources of land, as was the case through most of the 20th century. Goldman Sachs Global Investment Research predicts huge productivity increases will be needed to meet rising food demands, as indicated by the chart on the next page.

Reductions in land clearing in an effort to tackle climate change will also impact the production equation. Activity in New Zealand is particularly interesting, with Bloomberg reporting that farmers have stopped clearing marginal land and are busy replanting trees for carbon credits, incentivised by a system introduced in 2008 and the introduction of the emissions trading scheme there in July 2010.

Food insecurities

Commercial food imports are also playing a major role in meeting the food supply of developing countries; not to mention the current situation in the world where the UN Food and Agriculture Organisation estimates that over 1 billion people face food insecurity across the globe today.

To summarise, the focus on food security and the associated increase in yield productivity is only going to intensify. At Advance, we see this theme as a factor influencing global activity, and believe companies that are strategically positioned will benefit from this in the long term.
Increases in agricultural production, land use and productivity required to meet rising global demand, relative to 2005 levels. Population growth is driving an increase in demand. Demand is met by increased output per hectare.

This document has been issued by Advance Asset Management Limited ABN 98 002 538 329 AFSL No. 240902 (Advance). The information provided is of a general nature only and has been prepared without taking into account the objectives, financial situation or needs of any particular person. It is not intended to constitute investment, legal or taxation advice and should not be considered or relied upon as a comprehensive statement on any such matter. Before acting on the information, a person should consider its appropriateness, having regard to their objectives, financial situation and needs.

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