Everyone’s an expert on agriculture these days. Talk to anyone in the City: when they’re not boring you with how much copper wire it takes to build a satellite city outside Shanghai and what that means for mining shares, they’re telling you about soy bean yields in Brazil and the rising price of powdered milk. Fascination with food has been brought on by a sudden realisation in financial markets that there’s money to be made in farming. After several decades of stagnation, the prices of pretty much everything edible has started to soar. In Britain the price of wheat is up 90 per cent on last year and the price of barley up 100 per cent, while anyone who bothers to look at their supermarket receipts will have noted that milk, beef and sugar are ticking up in price too. The reasons behind this are now well known; the world’s population is growing steadily while the big Asian economies are producing a massive middle class with the disposable income to chuck a chicken in the pot pretty much whenever they fancy it. The result? A global rise in demand for protein, which has in turn (as Martin Vander Weyer observed here a couple of weeks ago) driven up demand for grain, on which most cows and chickens are fed.
This wouldn’t be such a big deal had it not coincided with the biofuel boom. In the US, George Bush has been humouring the Corn Belt by introducing silly targets for biofuel use and equally silly subsidies for biofuel producers. The fact that the targets are all but impossible to meet and that corn is a famously inefficient source of fuel (sugar is much better) are by the by: most green policies in the US are political rather than rational — just as they are in the UK, where the target is for 5 per cent of fuel sold at the pump in 2010 to be biofuel. The result? Huge areas of land diverted from growing food to growing fuel; price rises in supermarkets; and a new breed of City bore.
Can the boom go on? There are bears out there who say that it cannot. They point out that farming is not like mining. There is a finite amount of copper in the ground but that’s not the case with most crops: if you haven’t got enough sugar, you plant some more and, hey presto, 12 months later your problem is solved — which is why fertiliser prices have risen between 40 and 60 per cent this year. Farmers across the world are gearing up to take advantage of high prices. Next season they’ll be using more fertiliser and planting more land: in Europe, ‘set-aside’ is to be abandoned. So we can follow the bears’ logic — but still it’s difficult to see how farmers, however hard they try, can really plant enough of anything to stop prices rising further. In the US, where growing corn has become a licence to print money, only 1.5 per cent more land will be planted next year. This hardly suggests that there’s fallow land going begging in America — or anywhere else. China has only 18 per cent of the area of agricultural land per capita compared to the US, and India only 26 per cent, while soil erosion, desertification and water shortages are continuing problems for many Asian farmers.
The upshot is that we can’t always just plant more sugar or wheat. Supply is limited, both short- and long-term, which means we can expect agricultural prices to keep rising for years to come. We can also expect our own farmers to be markedly more cheerful over the next decade than they have been for the last two: feed and fertiliser costs are going up, but not by as much as the prices of their final products.
That said, if you want to make money out of the soft commodities boom, I wouldn’t rush out and buy a farm in Britain. Our land is priced for the status value it gives bonus boys, not for its financial yield: the cost of the wheat required to make a loaf of bread would have to move way beyond crisis levels for the current price of a fertile Devon acre to make any financial sense. The only relatively cheap land in the UK comes with hill farms and, sadly for the long-suffering farmers of Wales and Shetland, the Chinese don’t much like lamb: its price actually fell this year.
So what else is there? If you’re rich and have nothing better to do, you might look at land in Argentina or in Brazil, or even Australia. But the lazy man’s option — and perhaps the better one — is to buy exchange-traded funds based on the price of a basket of soft commodities (try ETF Grains, LSE code: AIGG) or to buy shares in the CF Eclectica Agriculture Fund which is heavily invested in agricultural products and infrastructure: think tractors, silos, and lots and lots of fertiliser.
Merryn Somerset Webb edits MoneyWeek.