Chapter 7. Proteins and Agribusiness: Billions and Billions to Be Served
Since the beginning of human existence, every man, woman, and child has required nourishment to embrace another day of life. This began with the hunter-gatherer method, which involved intense day-to-day pressure to skillfully acquire whatever sustenance one could find by foraging and scavenging. Later, around 9000 B.C., humans first planted and successfully domesticated grains in the Mesopotamian region of the Tigris and Euphrates Rivers. This development marked a profound inflection point and likely changed the course of mankind forever, as well as for the better. Through generations of practice and innovation, people honed their farming skills and eventually produced more stock than they could consume, with the difference available to trade for other goods or services. It soon followed that those who were disinclined or unable to farm could instead negotiate their skill sets in exchange for a share of the crop surpluses. This simple innovation of domesticating crops unified people beyond the tradition of tribes or bloodlines and led to coordination between people who could farm and those who wanted access to food production. In turn, the nonfarming people would spend their days in various pursuits that their neighbors valued. These pursuits took many forms, whether crafting goods or providing services to the remaining people who had assembled in these bountiful areas. In time, society based on commerce was born.
Fast-forward 11,000 years, and this simple paradigm remains alive and well. Perhaps most interesting and relevant to our discussion is that the rapid spread of globalization since the 1980s, resulting from intensified economic coordination among the many nations of the world, led to an age of prosperity that could hardly have been imagined in earlier centuries. In practical terms, this means that an increasing number of people have improved and continue to improve their lot by successfully joining the global economy. For lack of better words, entire nations that had previously been shut off from the world due to overbearing governments or dictators suddenly reversed course and joined what amounts to a new model for a global village. In particular, the people of China and India have done a remarkably good job of assimilating into the global markets after their governments rescinded policies that heavily enforced the allocation of resources by the state. As the people of these countries have sought opportunity in any number of ventures, such as operating manufacturing plants, writing computer code, attending universities, and launching their own businesses, their standard of living has increased dramatically. Returning to our simple example, these global villagers create goods and services that their neighbors value and in turn trade money for. We can use GDP per head, adjusted for purchasing power parity, as a proxy for the standard of living in China and India. Figure 7.1 shows that since 1980 the general prosperity of the two countries has been doubling every six and ten years, respectively. These advances in the standard of living are unprecedented and have been rapidly altering consumer behavior in these countries as well.
Figure 7.1. China’s and India’s GDP per head since 1980
Source: World Bank
Where’s the Beef (and Chicken and Pork, Too)?
During the past three decades, this growth in prosperity has affected the citizens of these countries in a multitude of ways. In particular, it has enabled them to improve their lifestyles, including their diets.
More specifically, as the citizens of China and India have improved their standard of living during the past 29 years, their protein intake has also risen substantially. So although inhabitants of the developed markets may take for granted the daily availability of protein sources such as beef and poultry, these goods in China are still transitioning from special occasion and holiday meals into the mainstream daily diet. In effect, many urban coastal region Chinese are already consuming protein in a similar fashion to Western developed-market consumers. But the phenomenon is in a nascent stage from a broader economic perspective, and the scope for adding new consumers to this fray remains considerable. In other words, despite all the rapid progress, these countries still have a long way to go in their development toward Western standards of living. To bring this relationship into better perspective, Table 7.1 examines the rate of per capita consumption in China compared to a developed market such as the U.S. Taken on a per capita basis, China’s consumption of poultry is only 25% of the U.S. level, and its consumption of beef is only 11.6% of the U.S. average.
Table 7.1. China’s Per Capita Consumption Levels Taken as a Percentage of Those in the United States
Expanding on the poultry example, this means that China’s current level of per capita consumption in poultry is on par with the U.S.’s dating all the way back to 1942 (18 pounds per capita). With that said, reading modern Chinese accounts that describe meat dishes as still part of a holiday or special-occasion menu sounds like childhood accounts from Americans of the Depression/post-World War II generation. Most modern Americans can appreciate that their standard of living exceeds levels from their grandparents’ generation. Some may even take for granted their relatively easy access to cheap meals of poultry and beef.
However interesting the historical context may be, the prospects for continued growth in consumption deserve our focus. Returning to the per capita GDP growth rates, in Figure 7.2, we can now better see the approximate relationships between rising GDP per head and its effects on the consumption behavior of its citizens.
Figure 7.2. China’s poultry and beef consumption
Source: USDA
As evidenced in the Figure 7.2, consumption growth for both poultry and beef in China has increased at an annualized rate of 10.3% and 11.8%, respectively. This suggests that both goods have trended in line with the long-term growth in GDP per head of 12.0% since 1980. The basic takeaway from these data points is that protein consumption is indeed scaling with the broader economic phenomenon of rising incomes and standards of living. The other key point is that these citizens do not have to wait a generation, unlike the post-war Americans, for their standard of living to double, and their consumption habits are adapting in comparatively real time. All protein consumption is growing sharply in these countries. However, the growth prospects for poultry consumption in China may possess the most interesting potential if consumer behavior patterns follow the market paradigms witnessed during the twentieth century in developed markets such as the U.S. More specifically, poultry is one protein that has demonstrated an accelerating demand trend as an economy becomes wealthier and more health-conscious. In other words, poultry receives yet another demand catalyst when higher incomes prevail and people can afford to take better care of themselves. In Figure 7.3, which shows the per capita rates of consumption during the second half of the twentieth century in the U.S., the trend toward higher poultry consumption at the expense of beef consumption is apparent. Again, the underlying cause of this substitution can be found in the greater attention paid to healthy diets among higher-income consumers. Another important driver is the low price of poultry relative to other meat proteins in the market.
Figure 7.3. U.S. per capita beef and poultry consumption
Source: FAO
So in the case of poultry, it might be reasonable to expect this protein in particular to experience a solid long-term growth pattern thanks to its low cost and healthier attributes relative to beef. In addition to the health trend in poultry consumption, another significant demand driver that is currently under way in China comes from the increasing need for convenience—in particular, ready-to-eat meals in the Chinese diet. Since the opening up of the Chinese economy and its pull on greater workforce participation and employment, the percentage of women in the workforce has steadily climbed. For example, the most recent data suggests that over 45% of the urban workforce was composed of women, compared to just 37% during the mid 1990s. This greater participation by women has created some departure from traditional Chinese meal preparation, which typically has involved several hours of cooking, in favor of more Westernized trends that prize little preparation and greater convenience. The ready-to-eat meals category experienced a sharp growth trajectory in the United States during the second half of the twentieth century through the proliferation of the iconic TV dinner. Now China appears to be following a similar trend. This trend toward ready-to-eat meals, and even eating out more in restaurants, creates additional demand for protein in the form of processed meat through the packaged foods category.
At the same time, this dietary phenomenon toward a heavier protein content covers more goods than just meat items. As we turn to other simple proteins such as soybean oil, we can see the same trend at work. Soybean oil has also experienced a high and sustained rate of growth over time, as shown in Figure 7.4.
Figure 7.4. China’s soybean oil consumption
Source: USDA
At this point, it seems fair to say that China—which appears to be on a trajectory to become the world’s largest economy in a matter of decades—has demonstrated a steadily increasing appetite for proteins.
Eating Good in the Global Neighborhood
This still leaves the most important question in our discussion unanswered: Can China supply its growing demand for protein through internal production? In many cases, the answer is no.
Figure 7.5 shows the internal supply and demand balances for China in the protein categories we have already mentioned: poultry, beef, and soybean oilseeds (which are crushed into oil).
Figure 7.5. China’s poultry (left) and soybean oilseed (right) production and consumption
Source: USDA
Judging from the recent data shown in Figure 7.5, Chinese producers have not met the internal demand for poultry and soybean oilseeds (imported for crushing). Meanwhile, the internal supply and demand balance for beef has not pushed into a deficit, but the balance has tightened enough to spur a twentyfold increase in beef imports from 1992 through 2008. The problem at hand is that China does not possess the natural resources to underpin this level of growth in the consumption of proteins. For starters, growing proteins, whether through poultry, cattle, soybeans, swine, or any other land-farmed variety, requires available arable land, water, and other resources, including feed. In this respect alone, China is struggling, because its level of arable land is already critically close to what officials consider a danger zone where food security becomes jeopardized. Chinese officials believe that their country possesses 1.83 billion mu (mu is a Chinese measure of acreage: 1 mu equals 6.07 acres) of arable land (300 million acres) compared to a “red-line” level of 1.8 billion mu. Recently, the Ministry of Land and Resources in China stated that it has halted a program of allowing marginal farmland to return to its natural state through reforestation because of these food security issues.1 Additionally, the government has enacted punitive measures in an attempt to discourage any further transfer of arable land to commercial use. For example, the central government has stated that any use of farmland must receive official approval first, and that no water, power, or loans can be provided to this development without approval. These policies are meant to protect what is left of the shrinking amount of arable land in China. This has been a consequence of industrialization in the country, which has led to increasing acreage dedicated to manufacturing and commercial sites. Local officials protecting their own interests have been quick to rezone or seize farmland during this period of economic expansion, because the prices commanded by the commercial end users can be a quick source of revenue for these government officials. This trend of commercialization and urbanization has persisted to the point of creating a food resource problem borne out of China’s rapid ascent toward prosperity. The problem is obvious, if not paradoxical. China’s increasing standard of living due to its commercial success is driving new consumption patterns in proteins. But the same commercial success comes at the expense of being able to internally supply these new consumption trends for protein in the country. China’s arable land resources taken on a per capita basis highlight its weak ability to supply its internal needs. The country holds a modest 80 hectares (1 hectare equals 2.47 acres) per 1,000 people, ranking it 144 out of 199 countries according to the World Development Indicators published by the World Bank. This compares unfavorably to other large nations such as the U.S., which has seven times more hectares per 1,000 people.
Another important point about China’s inability to internally supply its growing protein demand is its terribly weakened water resources. Although it is bountiful by other countries’ standards, with China having three of the world’s ten longest rivers, China’s water supply is insufficient for its large population. The basic problem that China and India share comes down to simple arithmetic: The two countries combined make up 73% of the world’s population but possess only 47% of the water available. This poses a remarkable contrast to the Western Hemisphere, where the Americas have 14% of the world’s population but 40% of the world’s water. The key takeaway is that the Americas have far more water to spare than Asia (see Figure 7.6). To get a better sense of the status of China’s water resources, consider that its per capita rate is approximately 25% of the world average. Even within the country itself, tremendous disparity exists. In northern China, the rate drops from the national average of over 2,000 m3 per year to only 757 m3 per year, which is well below the designated “water scarcity” threshold of 1,000 m3 per year.
Figure 7.6. Per capita water resources by country
Source: World Bank
The comparative bounty of water in the Americas is critical for protein production and, for that matter, agricultural production. When we reduce these relationships to their barest elements, China and India are importing water from the West through these agricultural goods. The reality is that agricultural production is the largest consumer of water on the planet, because irrigation alone is estimated to take up to 70% of all freshwater used for human consumption. In simpler terms, it requires a great deal of water to produce agricultural items such as grains, meat proteins, and dairy items (see Table 7.2)—water, it turns out, that Asia cannot spare.
Table 7.2. Water Use by Liter of Kilogram of Product
China’s water problem in particular has been deeply impacted by the urbanization and industrialization of its economy. So although the economy has been progressing, and its citizens have experienced a higher standard of living, negative consequences have resulted through increased demand on its strained water resources, in addition to more wide-scale pollution. From a simple demand perspective, China’s annual demand growth for water during the 2000s has been just under 1%, while the growth in supply has been half that rate at approximately 0.5%. There is an obvious mismatch between supply and demand. Before we get too carried away, though, we should emphasize that at least some of these water issues are brought on by wasteful practices by the Chinese themselves that need to be and, over time, can be corrected. One clear example is the amount of water recycling in the industrial sector. Industry accounts for 24% of water consumption in China and is estimated to recycle only about 40% of its intake compared to 75% to 80% in developed countries. Rather than beat up on industry, however, the real culprit in China’s water issues comes from the domestic front. Since 2000, the domestic sector has been the principal wastewater contributor to pollution, because only 56% of municipal sewage is treated before finding its way back into the water system. Comparatively speaking, the industrial sector looks like environmentalists for treating 92% of its waste discharges. The water treatment shortcomings have led to severe consequences. Studies conducted in 2004 revealed that in China’s river system 28% of the water was in the Grade V standard, meaning that it was not fit for any use. Another 32% of the river system fell in the Grade IV category, which means it is suitable for industrial and irrigation use, but not human consumption. This means that a full 60% of the country’s river system should not be consumed or probably even handled by people. In the lake system, the numbers only go downhill; 48% is Grade V and 23% is Grade IV, meaning that 71% of the lake system should be avoided for human use. So as we absorb these data points, we can better understand some of the factors behind China’s water shortage, because some of this water, but not all, is intentionally held back by producers. Even so, according to World Bank estimates around 300 million people in China drink water that is unsafe. All told, World Bank estimates suggest that between the effects of pollution and shortages, China’s water situation costs the country around 2.3% of its GDP annually. In any event, the problem of too little water to meet demand can be helped with better practices and treatment methods. However, these improvements will still not solve the outsized need for water to meet agricultural uses as incomes rise and citizens consume more protein.
Although the land and water issues in China present a problem, insofar as the problem relates to meeting protein demand, the problem is easily solved. The solution has been, and will likely continue to be, bridging the supply deficits by importing the goods from external markets (see Figure 7.7).
Figure 7.7. Compound annual growth in Chinese imports since 1990 (Beef begins in 1992)
Source: FAS, USDA
The relationship between production and consumption in China for various protein goods creates a situation where the country must access markets that can readily supply its growing demand. Just as ancient man had to resort to capable farmers, as mentioned at the beginning of the chapter, the Chinese and many other Asian emerging markets must look toward a similar global producer that can produce large surpluses of agricultural goods.
Brazil Has the Competitive Advantages in Agribusiness
Based on mounting evidence contained in years of global trade statistics, this producer is Brazil. Brazil has been winning in the global agribusiness trade for two simple reasons: its world-leading low cost of production, and its ability to expand production. Figure 7.8 helps you understand Brazil’s ability to expand its production in agribusiness. The figure illustrates a plotted time series of the expansion of arable land in three countries: Brazil, the United States, and China. It is readily apparent that Brazil has expanded its arable land, and thus its agricultural capacity, by a much faster rate than the U.S. The figure also shows the relative decline in China we discussed earlier.
Figure 7.8. Growth in arable land since 1970 (baseline 100)
Source: FAO
Just as important as Brazil’s historical track record for expanding its production is its scope for future expansion. Brazil ranks first among the major producing nations for possessing the largest amount of unutilized arable land, with well over 400 million hectares, even excluding rain forest, available for further development (see Figure 7.9).
Figure 7.9. Spare capacity among largest holders of arable land
Source: FAO
Turning to the cost of production in Brazil, if we take soybeans as an example, on average the cost of producing a ton of soybeans in the Mato Grosso region of Brazil is only half as much as producing a ton in the U.S. Two reasons underscoring the lower cost of production in Brazil versus the U.S. are the country’s access to vast land resources and cheap labor. The importance of these cost advantages spills over into the remaining protein markets, because soybeans comprise feedstocks, and feedstocks comprise a good portion of the cost of production in meat goods. Put more simply, Brazil’s cost advantages are prevalent throughout its agribusiness and food product value chain. These cost advantages have translated into sharp growth rates and market share gains in the global market for proteins, as shown in Figures 7.10 through 7.12.
Figure 7.10. Brazil’s poultry exports
Source: USDA
Figure 7.11. Brazil’s soybean oilseed exports
Source: USDA
Figure 7.12. Brazil’s beef exports
Source: USDA
Brazil’s consistent double-digit growth rates in exports over the past two decades are impressive, but the easiest way to detect a true competitive advantage in a producer is to examine its ability to gain market share over time. On this measure Brazil again demonstrates its prowess in the protein space, as shown in Figure 7.13.
Figure 7.13. 1990 and 2008 export market shares for poultry, soybean oilseeds, and beef
Source: USDA
Based on the available evidence, it appears that Brazil has established itself as the dominant producer in the global trade for protein, and China appears to be the key demand driver.
Our discussion thus far has focused on the interplay between rising per-head GDP levels in the emerging markets and the effect this has on the global protein end market. But we should also note that the protein demand driver has a broader effect on the value chain for food consumption, because proteins require a substantial amount of grains in the production process. For better or worse, each kilogram of protein meat produced in the livestock business is supported by a disproportionate amount of grains that must be supplied as feedstock. This is known as a feed grain multiplier. It can actually take up to 7 kilograms of feed to produce 1 kilogram of beef, as shown in Figure 7.14. This is one reason why the beef industry in Brazil has such a strong competitive advantage in its cost of production versus other markets. In Brazil, with its abundant arable land, beef is grass-fed and circumvents this onerous cost to production. However, turning to the other proteins, it is still necessary to dedicate a fair amount of costs to feedstock.
Figure 7.14. Kilograms of feedstock per kilogram of meat
Source: FAO
As you can see in Figure 7.14, which shows the disproportionate amount of feed grains that must be dedicated to livestock production, when protein demand accelerates, so does demand for the grains that are used in the production process. Furthermore, when demand rises for grains and prices react by rising, farmers in turn react by trying to maximize the amount of grain they can produce to bring to the market for sale. Farmers can produce more grain in two ways. They can add fertilizer in an attempt to raise crop yields, or they can expand their operations. When the process sets in, demand for fertilizer rises in the effort to increase yields, and demand for farming equipment such as tractors increases in the effort to expand operations.
Starting with grains, this space carries compelling fundamentals in and of itself. Irrespective of the cyclical impact from the global recession, there is a surprising long-term growth story to back steady grain consumption. We are not referring to the defensive nature of grain consumption, which is well known. We are instead referring to the growing demand for protein consumption discussed earlier, as well as institutional sources of demand owed to energy regulation. As it turns out, the U.S. government’s insistence on incorporating corn-based ethanol into its energy policies has placed corn at a focal point for rising demand in proteins, rising demand for biofuels, and low grain stocks, when taken on a historical basis. To add perspective to the supply characteristics of corn on a worldwide basis, it is apparent from Figure 7.15 that stocks relative to consumption are as low as they have been in 30 years. This is occurring in spite of the financial crisis and the worst recession in at least a generation.
Figure 7.15. Worldwide corn stocks to consumption
Source: USDA
These relationships suggest that when demand improves from the cyclically depressed factors, supply is still in a position that could lead to a resumption of rising prices. In any event, government policies are ensuring a steady backdrop for continued corn consumption through the ethanol demand driver in the U.S.
In particular, the Energy Independence and Security Act of 2007 has created an ambitious goal for the United States: consuming 36 billion gallons of renewable fuel compared to the recent run rate of approximately 11 billion gallons in 2009 (see Figure 7.16). Put another way, the U.S. government has mandated 9.5% growth in these renewable fuels over the coming 13 years. Placing this into a more comprehensive time series of past and present, we should note that it seems likely that the lion’s share of rapid growth in ethanol consumption has already occurred. This is due to the installed base of vehicle technology. Motor vehicles (with the exception of flex-fuel vehicles) can operate with only a 10% blend of ethanol in their tanks and still meet the manufacturer’s warranty. This means that absent any technology changes (flex-fuel engines that could accept E85 ethanol blends), the rapid near-term growth in ethanol consumption has likely run its course. The blend of ethanol found in gasoline has already increased from 1% in 2000 to 7% in 2008 based on USDA estimates. However, the long-term demand trajectory remains in place thanks to the 2007 bill, and all things being equal, the market still has an artificially created but all too real source of demand for corn to be processed for ethanol. For example, in 2000 just 6% of the U.S. corn crop was utilized for ethanol. This number rose to 24% in 2008 and is expected to stay in the range of 30% to 35% over the coming decade, based on USDA estimates. This means in a sense that over the coming years perhaps about one third of corn production is already “spoken for” through these ethanol mandates.
Figure 7.16. U.S. ethanol consumption
Reprinted with permission from Paul C. Westcott, Amber Waves, Volume 7, Issue 3.
Source: USDA, ERS
An artificial source of demand is consuming a significant portion of the world’s largest corn producer’s crop, set against an already low stock backdrop. It is not hard to imagine that more corn will need to be added in outside markets over time to meet the world’s growing demand for protein and, by extension, grains. If we return to the numbers, it is clear that world demand for grains has been increasing during the past several years at a rate that is outpacing production (see Figure 7.17). This dynamic has occurred in both the corn market and the broader market of coarse grains, which can be seen as a more comprehensive view of feed grain. These production deficits have been the real driver behind the declining stocks-to-consumption ratios that have persisted even in light of the cyclical collapse in business conditions during late 2008.
Figure 7.17. Corn (left) and coarse grains (right) worldwide production and consumption compound annual growth rate (CAGR) 2004 to 2009
Source: USDA, FAS
Just as its ability to supply the growing demand for meat protein in the market has been demonstrated, Brazil has been stepping up its production to meet this growing demand. For that matter, Brazil’s ability to increase its production of these goods at a much faster rate than the other major players in the market is underscored by its deep competitive advantages in the agribusiness market (see Figure 7.18).
Figure 7.18. Corn (left) and coarse grain (right) production CAGR 2004 to 2009
Source: USDA, FAS
Tying all this together, as the continued demand for protein drives further grain production, pitched against the backdrop of low grain stocks leading to rising grain prices, this price incentive should support stronger production growth in the grains. In turn, this will require further fertilizer application. Further fertilizer application will be necessitated on two fronts: farmers looking to increase their existing yields, and farmers who increase their overall plantings. The demand for fertilizer should occur in both the developed and developing worlds’ grain markets. But with arable land already near capacity in developed markets, the long-term demand drivers for fertilizer will likely come from the expansion of agribusiness in the emerging markets such as Brazil. The developing markets have considerable scope for fertilizer usage, because many farmers do not use fertilizer at levels on par with their developed-market peers. This is partly due to a lack of knowledge of the benefits, or resources, of doing so. Either way, there is significant room for the use of fertilizer to increase, based on how little is applied compared to developed-market standards. Table 7.3 shows that farmers in the United States use exponentially more fertilizer per hectare than their developing-market peers.
Table 7.3. Rate of Fertilizer Application (Kilograms Per Hectare)
These shortcomings in fertilizer application highlight an important divide between crop yields in the United States and those in the developing world (see Figure 7.19). There is little doubt that crop yields in the developing markets could be raised well above their current levels through better use of fertilizer.
Figure 7.19. Corn bushels per acre
Source: FAS, USDA, World Bank, AGCO
Strong Fundamentals Across the Value Chain
In addition to the protein demand growth driver, we should keep in mind the role of the oil market in this overall feed grains equation. Rising oil prices will pull additional corn away from U.S. food and livestock and toward ethanol. Likewise, in Brazil farmers may also favor sugar plantings given the robust and relatively well-developed sugar ethanol market in that country. More simply put, during the past several years, when oil prices have stayed above $50 per barrel, there has been a much stronger correlation between oil prices and grain prices. This relationship is due to the favorable economics presented to farmers selling their product into the fuel market as fuel prices rise. With that said, government policies have created a dynamic for crops that did not materially exist prior to the 2000s: When oil prices are high, corn and sugar can be thought of as petrocommodities. The bottom line is that high oil prices stimulate potentially higher grain prices, as well as fertilizer demand to match the pursuit of increased yields and plantings.
As you can imagine, fertilizer alone will not get the job done. Farmers also require equipment such as tractors, harvesters, combines, and sprayers to raise their yields and expand their operations. The need for additional equipment across the developing markets creates the same relationship we just reviewed in the fertilizer space. To summarize, the use of farming equipment is far more advanced and prevalent in the developed world, which is not that surprising. When we examine the use of tractors per hectare in the markets that are poised for the most long-term growth, thanks to their ability to expand production, we can see that, in particular, the South American growth markets of Brazil and Argentina use far less equipment than their developed-market peers. In fact, tractor use in these countries is below the world average, as shown in Figure 7.20.
Figure 7.20. Tractors per 1,000 hectares
Source: FAOSTAT
Figure 7.20 shows that the emerging markets have much room for growth in tractor use over the near, medium, and long term. As this dynamic unfolds over the coming years, it should provide a key market opportunity for a short list of oligopolistic producers in the farm equipment space. In the meantime, we should be careful not to overlook the large role that the developed markets play in the overall farm equipment industry. These developed-market farmers also play a critical role in the farm equipment market. The good news on this front is that, despite the recession and financial crisis, developed-market farmers are actually in the best financial shape they have been in during the past 30 years, as shown in Figure 7.21.
Figure 7.21. Farm debt-to-equity ratio, 1960 to 2007
Source: USDA
The healthy financial condition of the U.S. farmer is yet another positive story in the agribusiness space. It means that farmers have the balance sheet to purchase more fertilizer and equipment or to expand their operations, because conditions appear ideal. Taken as an industry, farmers in the U.S. may possess one of the cleanest aggregate balance sheets among all industry groups. Although the overall debt-to-equity ratio stands at approximately 12%, it is also estimated that around 70% of farmers carry no debt. So although many sectors of the U.S. economy are in the midst of a deleveraging process, the U.S. farm industry has not become encumbered by the debt overhang. This is an important factor, because it clears the industry for a resumption of growth and the ability to respond to demand signals from the emerging-market consumer, as well as the energy markets.
Finally, even with the compelling supply and demand factors notwithstanding, the agribusiness space possesses other beneficial attributes that investors may prefer over the coming years. To reiterate, the agribusiness value chain is supported by relatively inelastic demand, all things considered. That is not to say that demand is impervious to the business cycle, but we can all appreciate the importance of food to our everyday existence. For this reason, many of these businesses can take on relatively defensive attributes compared to other pro-cyclical businesses. Furthermore, because the industry is tied to food commodity prices from the demand side, these businesses can also provide some buffer from inflation, because food and grain commodity prices store value during episodes of inflation. Still, all stocks carry risks, but it does appear that producers in the agribusiness value chain have an opportunity to make hay in the coming years.
Endnote
1 Xinhua. “China’s arable land barely above critical minimum: report.” http://www.chinadaily.com.cn, February 29, 2008.