14/05/2008 - 22:00

Means of production important for food

14/05/2008 - 22:00

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AGRICULTURAL powers — those self sufficient in food, fabric, and hydrocarbon production — were once unambiguously regarded as strategic powers.

AGRICULTURAL powers -- those self sufficient in food, fabric, and hydrocarbon production -- were once unambiguously regarded as strategic powers.

This has remained true throughout history; powers which were not agricultural powers could never sustain strategic power.

Now, a new set of nations is likely to emerge in the 21st century with significant regional, if not global, influence demonstrably based on their agricultural capacity and their ability to match capital, productive land and emerging technology on a scale not possible in the past.

These emerging agri-powers are benefiting from trends making agricultural commodities more strategically important, and will gain from having a significant agricultural base.

Businesses that harness this trend, and position themselves to benefit from it, could expose themselves to significant upside potential, especially as structural change to agricultural commodity prices alter the economics of the entire agricultural industry.

For the purposes of looking at agriculture, in its broadest sense, the associated industry includes not only productive farm land, but the ability to produce and maintain the implements needed to farm the land and also access the necessary inputs (such as fertiliser and pesticide), as well as global positioning satellites, which is now becoming standard in broadacre cereal production.

If agriculture becomes more profitable, there will be a wide array of business opportunities across this industry.

During this transition to higher structural prices for agricultural commodities, historical returns from agricultural industries and commodities may not be a good guide for future returns.

In the period towards 2050, when global population numbers are forecast to surge to about 10 billion, agricultural capacity will be used by nations to a much greater degree than it is today.

In 2008, The Economist's commodity price index reached a new high, with the forward price for grain and soya bean at record levels.

The future economic and strategic value of agricultural surpluses, if only for nutritional requirements, will lead many governments to rethink how agriculture is undertaken and a greater likelihood of conflict over control of exports, and even productive land itself.

In February 2008, Kazakhstan, one of the largest grain exporters, announced it would impose export tariffs, in an attempt to curb sales.

Russia, Egypt and Argentina, also large grain exporters, have introduced similar export restrictions.

In some agricultural regions of Western Australia, for the 2008 growing season, there are already indications that some categories of fertiliser may simply not be available.

There is also emerging evidence that investment into farms in Australia is coming from international sources and an increasing number of entities which have not traditionally been involved in the agricultural business.

In this perfect storm of an increasing global population, greater demand from non-traditional users of agriculture -- such as energy producers and, potentially, industry -- alongside reduced areas of productive land, business will start to look more closely at agriculture.

According to the International Grains Council in early 2008, measures were taken in several countries to cut import tariffs or to lift consumer subsidies for certain food staples.

The economic impact of rising food prices, termed "agflation" by The Economist, is also creating internal tensions within nations, as an increasing share of household income is being diverted to food purchases.

If, on balance, it is thought that agricultural capacity and production.

will take on a strategic dimension, perhaps as early as the 2015 or 2020, Australia will need to reconsider its approach to the industry and formulate a long-term plan which prepares for this new reality.

While a national response to agriculture would provide greater investor confidence, most of the abnormally high returns would occur in the period when there is the most volatility and turbulence.

This period, approximately 2008-2015, could also be marked by a number of sharp adjustments and market turmoil.

At this stage it is unclear how the rise of agri-powers will play out.

However, in the short-term (2008-2015), there could be a significant number of commercial opportunities, but also corresponding high levels of risk.

Perhaps the greatest immediate opportunity that could arise from exposure to agricultural industries, and farming operations, may be the tax and financial benefits which can be gained by individuals or businesses owning or controlling farmland.

As energy and agricultural markets begin to converge, and a price is put on carbon, the underlying value of productive farmland may change.

Government incentives to encourage certain activities, or incentives from market-related carbon reduction strategies, combined with the tax advantages which primary producers enjoy, may be an important component of wealth creation.

-Andrew Pickford is a strategic analyst and is the research manager at Future Directions International, where he is also the editor of FDI's Weekly Global Report.

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