Mafm the case for investment in grains and oilseeds

1. Macquarie
AGRICULTURAL FUNDS MANAGEMENT
SEPTEMBER 2010
The case for
investment
in grains and
oilseeds

2. Contents
Executive summary 01
What are grains and oilseeds 03
Demand side 08
Supply side 16
Where to produce 19
Why invest in grains and oilseeds 22
The future for grains and oilseeds 24
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3. Executive summary
The recent surge in global wheat prices driven by fears of export
shortage, coming from the drought in Russia, has served as a stark
reminder of the new levels of volatility that are likely to continue to be a
part of the global agricultural sector.
Although food supply shocks have occurred Grains and oilseeds were historically seen
throughout history, these were mostly seen as primarily a food – perhaps the world’s
as a concern of the developing world. When fundamental food – to be used for producing
a crop failed in a major producing country, it bread, flour, pasta, oils and many other staples.
was assumed that adequate supplies could be And while this demand continues to strengthen,
sourced elsewhere. So long as there was food on global population growth combined with a
the table, and no concern that this could change, general decline in arable farming land per capita,
consumers and governments accepted supply as means that serious attention must be given to
a given. how the world’s food needs can be met in the
long term.
Given the abundance of agricultural production
worldwide, little thought was given to assisting But the demands on grains and oilseeds go
the world’s farmers with adequate capital to well beyond food. The citizens of the world’s
fund the research and development required developing nations, by far the majority of the
to improve productivity, or to encourage the global population, have an increasing appetite for
development of large scale agriculture to animal protein, as a result of their rising incomes
increase efficiency. and demographic changes. As such, vast
volumes of grains and oilseeds are needed to
The events of the last four years have made it
feed the animals providing this protein.
abundantly clear that the era of complacency
towards agriculture is over, and that the volatility In addition, demand from biofuels continues
in the sector, in terms of prices and supply, is to increase. The grains and oilseeds which are
here to stay. In no part of agriculture is this more used as feed stocks for ethanol and biodiesel are
relevant than with the grains and oilseeds sector. coming out of the food and feed chain, making
supply even tighter. On top of this, the use of
From 2006 to 2008, the global price of most
grains and oilseeds in industrial products, from
grains and oilseeds climbed to record highs
glue to furniture, continues to grow.
driven by a number of different supply and
demand factors. Drought in key growing regions, While global demand for grains and oilseeds both
new demand from biofuels, panic hoarding and increases and broadens, questions on the world’s
trade restrictions by governments, and, to some ability to supply this need increasingly require
extent, speculative investment, all contributed to answers.
unprecedented price increases in the sector.
Many of the world’s grain and oilseed producing
Importantly, these events have focused the regions face environmental challenges in their
attention of governments, the media and long term ability to produce adequate crops.
consumers to agriculture, and generated an They are seeing agricultural land continually
awareness that grains and oilseeds can no longer degraded by pollution and growing cities, while
be taken for granted. water shortages have affected both developed
and developing nations.
1

4. Executive summary
In many areas which may have the available Through identifying parts of the world with the
space to grow crops on a large scale, factors best combination of factors for growing grains
such as political instability or inadequate and oilseeds, and through establishing highly
infrastructure make it an unviable option. The vital efficient agricultural operations, particularly
efficiency gains needed to increase grain and through building on the efficiencies of scale, it
oilseed production are hampered by factors such is clear that immense opportunities exist in this
as disincentivising government support programs previously overlooked, but essential, sector.
or the difficulties caused by having a multitude
This paper provides an overview of what we
of small landholders, rather than large efficient
believe are the main grains and oilseeds that the
operators. In addition, overvalued land can
world will increasingly demand, and considers
provide a further deterrent to investment.
the main drivers of demand– food, animal feed,
In the wake of the events of 2008, and biofuel, and industrial products. The paper
re-enforced by the price shocks of 2010, it will also examine the factors limiting supply of
is clear that as demand increases, the most the world’s grains and oilseeds, and consider
effective and efficient grain and oilseeds the specific issues impacting the major crop
producers will be in a prime position to take producing countries. Finally, it will look to the
advantage of this new scenario. future possibilities in this essential sector.
2

5. What are grains and oilseeds
Wheat Over the past 50 years, global wheat production
has continued to rise steadily, from around
200 million metric tonnes in 1960 to almost
700 million tonnes in 20102. The major global
producers of wheat are the EU, China, India,
the US and Russia, who account for around
67 percent of global production3. Around
20 percent of wheat produced is exported4.
The major exporters, the US, the EU, Australia,
Canada and Russia account for around
75 percent of global exports5.
The main importers of wheat are mostly regions
which lack the acreage or natural resources
required to grow adequate volumes or qualities
of wheat for their requirements. Globally, demand
for wheat is fairly widespread, with no one
Wheat is the main cereal grain crop for food
country having major market power. For example,
consumption in most of the world. Wheat is
the largest five importers of wheat – Egypt,
also one of the oldest harvested grains, having
Brazil, the EU, Indonesia and Japan – account
known to have been grown since 10,000 BC.
for only 26 percent of global wheat imports
It is thought to have originated in the Nile
Delta, but to have been first domesticated between them6.
in Turkey. In using wheat to bake bread, the Wheat is grown in a number of varietals, and is
early Egyptians formed one of the earliest food often classified in different ways – for example,
production industries1. spring wheat vs. winter wheat, red wheat vs.
Food is the primary use of wheat, as it is widely white wheat, hard wheat vs. soft wheat.
utilised as flour for producing bread. Wheat The most widely grown wheat is common wheat
forms a fundamental component of the diets of or bread wheat, while the second most common
developing countries. species, durum wheat, is used in the production
Major global wheat producers – percent of production exported 2008/09
80
70
60
50
Percent
40
30
20
10
0
-10
Australia Canada United States Russia World Ave. EU China India Pakistan
Source: USDA 2010
1 Jared Diamond, Guns, Germs and Steel
2 USDA PSD
3 USDA PSD
4 USDA
5 USDA
6 USDA 3

6. What are grains and oilseeds
of pasta. Different varieties such as Hard Red The major uses for barley are as an animal feed
Spring, Hard Red Winter, Soft Red Winter and and for producing malt for beer production. In the
Hard White are often used for different varieties US, where it is grown in 27 states, over half of all
of foods, including breads, biscuits, pastries and barley grown is used as an animal feed10. Barley
other baked goods. They are also often traded is also used in a wide range of breads, soups
on different exchanges. and flours, and is increasingly seen as important
health food.
Ideal wheat production conditions vary on the
region and the climate. In some countries, Barley is a tough crop, relatively tolerant to
particularly in the developing world, increased drought and able to cope with greater levels of
usage of fertiliser has raised yields. Fertiliser salinity than wheat. It is often grown as a summer
usage in the developing world has increased by crop, or as a winter crop in warmer areas11. As
25 times over the past four decades7. In places it has a short growing season, it is a relatively
like Australia’s southern areas, despite a relatively drought tolerant crop.
low rainfall, farmers have used increased rotation
An increasing global consumption of animal
cropping (planting wheat alternatively with other
protein, particularly in developing countries, will
crops) to increase their yields.
continue to be one of the main drivers of barley
demand. In addition, rapidly expanding beer
Barley production, particularly in the developing world,
will increase the demand for malting barley.
Corn
Like wheat, barley was one of the earliest
domestically grown crops. Early barley harvests
have been traced to the Middle and Near East
region, with crops having first been grown around
Corn, known as maize in some parts of the
10,000 years ago8. Today, barley is grown in
world, is a cereal grain which has been grown
around 100 countries, with the EU, Russia,
since prehistoric times. Corn was thought to
Ukraine, Canada and Australia accounting for
have been cultivated by the Aztecs and Mayans
around three quarters of global production of
in southern Mexico, before gradually spreading
150 million tonnes9 in 2009/10.
through the Americas, then in the 16th century
to Europe12.
7 Cropscience
8 Washington University in St Louis
9 USDA
10 Barleyfacts
11 McGee, Harold (1986). On Food and Cooking: The Science and Lore of the Kitchen
4 12 Foodtimeline.org

7. Corn is the most widely grown crop in the world, In recent years, corn has increasingly been used
with almost half the world’s corn produced in the for the production of ethanol. Around 30 percent
US, and around 55 percent of global exports13. of all corn grown in the US is now used for
Between them, the US, China, Brazil, Mexico, ethanol production, more than twice the amount
Argentina, India and France produce over three which is exported14.
quarters of the world’s corn.
Soybeans
Global corn exports 2009/10
ROTW 10%
South Africa 3%
Ukraine 6%
Brazil 9% United States
56%
Argentina 16%
Soybeans were known to have been cultivated
in China and Korea around 5,000 years ago15,
and in an example of early agronomy, they were
Source: USDA
known for their ability to replenish nitrogen in the
Corn’s ability to grow in a wide range of climates soil. Soybeans first arrived in Europe in the early
played a major role in its wide geographic 1700s and in the US around 50 years later.
coverage and popularity. The corn plant has a Soybeans are extremely high in protein, a factor
shallow root system, and as such prefers moist which makes them an important food for both
soil. Corn is often grown in rotation with other humans and animals. In addition to their high
crops which provide increased nitrogen to the protein content, soybeans contain a combination
soil, such as soybeans. of amino acids which allows the body to
absorb proteins.
Corn is a staple food in many parts of the world,
either whole or as cornmeal. It is also processed Unlike most other grains and oilseeds, soybeans
into many forms, including popcorn and breakfast enjoy major global markets for their unprocessed
cereal. In the US, by far the largest usage is for form, as well as its two byproducts – soybean oil
animal feed, outstripping human consumption and soy meal.
by around 40 times. It is used for livestock in When processed, a soybean is broken down
the forms of forage, silage or grain. Corn is also into around 20 percent oil and 50 percent meal.
used in other animal foods such as dog food and Soybean oil is used primarily as vegetable
fish food. cooking oil or a food ingredient. Soy meal is used
mainly for animal feed, particularly for cattle, pigs
or poultry.
13 USDA
14 USDA
15 University of Minnesota 5

8. What are grains and oilseeds
Global soybean trade forecasts 1999 – 2019f
60000
40000
20000
000 metric tons
0
-20000
-40000
-60000
-80000
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010f
2011f
2012f
2013f
2014f
2015f
2016f
2017f
2018f
2019f
Argentina Brazil
China United States, Metric Units
Rest of World
Source: FAPRI
For human usage, soybeans are utilised in mantle in the next few years18. The same three
a range of foods, including tofu, yoghurt countries also account for over 80 percent of soy
and soymilk. oil exports.
Globally, soybean production is quite In terms of soy meal, however, while the same
concentrated in a small number of countries. countries account for around 90 percent of
Between them, the US, Brazil, Argentina, China exports, Argentina alone exports over half of the
and India produce over 90 percent of the world’s world’s supply19. This is primarily due to export
soybeans – the first three alone account for over taxes on Argentine soybeans, aimed at protecting
80 percent16. the domestic soybean processing industry.
In terms of soybean trade, figures are China is by far the largest importer of soybeans
complicated by whether countries import whole globally, accounting for almost 60 percent of
soybeans or byproducts. China, for example, all exports. China is also the largest importer
mostly imports whole soybeans, and processes of soybean oil, accounting for over a quarter of
them domestically. global imports, almost double that of its closest
rival, India20.
Between them, the US, Brazil and Argentina
account for around 90 percent of global soybean The EU remains the world’s largest importer
exports17. While the US is currently the largest of soybean meal, accounting for almost half of
exporter, it is expected that Brazil will claim this global imports21.
16 USDA
17 USDA
18 FAPRI
19 USDA
20 USDA
6 21 USDA

9. Canola Like soybeans, canola can be crushed to
produce oil and a meal. Canola oil is widely
used in many foods and cooking processes. It is
regarded as “healthier” cooking oil, due to being
low in saturated fat and containing a relatively
high level of omega-3 fatty acids22. In addition,
canola oil is also used in industrial manufacturing,
for products such as candles, lipstick, newspaper
inks, industrial lubricants and biofuels. Canola
meal is used as a high quality animal feed.
In measuring global production data, canola and
rapeseed are often counted together. As such, in
looking at overall rapeseed production, the EU,
China, Canada, India and Australia account for
around 90 percent of global production. Canada
is by far the largest exporter, accounting for
Canola is a variety of rapeseed. While rapeseed around 60 percent of global shipments, while the
itself has been recorded for hundreds of years, EU, Japan, China and Mexico account for half of
actual canola was first bred from rapeseed in global imports23.
Canada in the early 1970s. The name canola was
derived from "Canadian oil, low acid” in 1978.
Canola oil is more useable for human
consumption than traditional rapeseed, while its
reduced levels of toxins also make it more able to
be used as an animal feed than rapeseed.
22 Moi Group
23 USDA 7

10. Demand side
The international demand for grains and oilseeds base of 6.1 billion people, is projected to rise
is increasing due to population growth, increasing to 8.3 billion by 2030 and 9.1 billion by 2050.
income, changing diets and urbanisation. In many This would equate to an increase in global food
ways, each of these have become interlinked growth of 42 percent by 2030 and 70 percent by
– population growth is largely in developing 2050. In addition, by 2050, over 7.5 billion people
countries, which are the same areas seeing the will be under the age of 5025. As life expectancies
highest increase in relative incomes, and also continue to increase, this translates into further
with the greatest shift of consumers from rural to impetus for population growth.
urban areas. As a result, these are the regions
Many countries that have previously been self
which are also seeing the greatest changes in
sufficient in their food needs will increasingly
population diets, as people move from a grain
need to rely on food imports. This is particularly
based diet up the scale to one with a greater
the case for countries in the Middle East. For
degree of animal protein. As result, greater
example, Saudi Arabia at one stage grew over
volumes of grains and oilseeds are required to
4 million tons of wheat per year, making it at one
provide feed for the animals which serve this
time the world’s sixth largest wheat exporter.
new diet.
However, with water shortages becoming a
In addition to the increasing demand from food major issue, the country has phased out wheat
and feed, the growth in biofuels production production26 and will now import much of its
further increases the demand for grains and grain needs.
oilseeds, particularly for ethanol derived from Population growth is expected to take place
corn and biodiesel derived from oilseeds. mostly in less developed countries, concentrated
Finally, it is important to also be aware of the in urban areas27. The strongest growth in
increasing usage of grains and oilseeds in demand is expected to be from Asian economies,
industrial products. particularly China and India.
It is important to examine each of these drivers Population growth remains the fundamental
in more detail, and then to look at the main four base for growth in demand for gains and
areas of grain and oilseed usage, to further realise oilseeds. While an economic slowdown may
how the strong long term growth in demand for cause consumers to re-evaluate spending on
grains and oilseeds is evolving. discretionary items such as clothing, cars and
housing, they will continue to buy food.
Population Throughout previous economic slowdowns,
Population growth is the most basic factor driving consumption of key agricultural commodities has
the increase in consumption for agricultural continued to grow steadily.
products. Every year, the global population
In particular, wheat has been shown to be
increases by around 80 million people24 – the
relatively inelastic to both income and price over a
rough equivalent of adding one new Germany
sustained period. Consumption figures for wheat
or Ethiopia.
have been largely unaffected by either the price
The global population has grown substantially of wheat or the price of potential substitutes,
over the past few decades, and from its current such as corn, oats or rice.
24 CIA World Factbook
25 Justfood.com
26 New York Times
8 27 UNFPA

11. Income
Many developing countries have continued to maintain strong GDP growth. For example, over the
course of the Global Financial Crisis, China and India were among the least affected countries,
continuing to maintain GDP growth in 2008 of 8.7 percent and 5.7 percent respectively28.
Developing world looking to strong GDP growth in 2011
2.5%
Egypt
2.0% Nigeria
Australia Pakistan
1.5%
Bangladesh India
Population Growth Rate
Brazil
Mexico
1.0% Iran Indonesia
US
China
Canada
0.5%
0.0%
Japan
-0.5% Russia
Germany
-1.0%
0% 2% 4% 6% 8% 10% 12%
GDP Growth 2011 Bubble size = relative population
Source: IMF, UN, CIA Factbook
In general, growth in incomes translates into As mentioned in the previous section, the
rising per capita food demand. Typically, population increase tends to be seen in urban
consumers move up from a lower value staple areas. The urbanisation trend will lead to a shift
food to an alternative, such as transitioning from in dietary patterns, related to the continued
rice to wheat. In turn, as people continue to expansion of worker incomes in the developing
become wealthier, they move on to consuming world and more reliance on purchased food, as
products such as meat, fish, dairy products, and opposed to self-sufficiency.
fruit and vegetables. In addition, they will also
For example, a one-time increase in the urban
increase their consumption of products such as
population from 1/4 to 2/3 of the national
vegetable oils and processed foods. For example,
population of China would result in a 10 percent
studies by the American Soybean Association
increase in per capita demand for meat, fish, and
show that when a developing population's family
dairy products30.
income rises above US$1000/year chicken enters
the diet; as it rises above US$3000/year other On current forecasts, in the Asia Pacific region
meats enter the diet29. alone, 600 million people will move from rural to
28 IMF
29 Justfood.com
30 IFPRI 9

12. Demand side
urban areas by 202031. As people move to cities, World food consumption of grains in 2010
a number of structural shifts in food demand is forecast to remain unchanged from the
patterns occur: previous season, at around 193 million
■ a wider choice of food is available in tonnes. This forecast is slightly higher than
urban markets was anticipated at the start of the season but
with improvements in production prospects,
■ enhanced levels of infrastructure and food consumption estimates have also been revised
storage facilities aid the greater choice up. At the current forecast levels, global food
in foodstuffs consumption of grains on a per capita basis is
■ people are increasingly exposed to dietary expected to average around 28 kg, similar to the
patterns from foreign cultures previous season, with generally steady levels of
consumption regionwide35.
■ urban citizens seek foods that take less time to
prepare.
Feed
A major component in this dietary shift is an
increasing demand for animal proteins. This Ironically, as consumers globally increasingly
in turn triggers a multiplier effect on grain and switch their diets from grains and oilseeds to
oilseeds consumption, as these are needed to animal protein products, overall consumption
provide feed for livestock. of grains and oilseeds will increase markedly.
Consumers will increase their consumption not
Food just of meats, including beef, pork, poultry, sheep
and goats, but also of milk. To provide this meat
Around 41 percent of grains produced globally will require enhanced quantity and quality of feed.
are for direct human consumption32.
The percentage of particular grains and oilseeds Global meat demand 1985 – 2025f
used for human consumption varies markedly.
For example, around 70 percent of all wheat that 450
■ Sheep Meat
is produced globally, or 450 million tonnes, is 400 ■ Poultry
for food33. Demand for food wheat continues to ■ Pork
350 ■ Beef
increase in emerging markets, where populations
are growing and incomes are increasing. In many 300
million metric tons
of these markets, wheat based products are still
considered a luxury item. In the higher income 250
areas of emerging markets, consumption of 200
wheat based products such as bread, bakery
and noodles continues to rise. 150
Cereals – including rice – represent 100
55-70 percent of the total calories of food 50
in developing countries and 40 percent in
developed countries34. 0
1985 1995 2005 2015f 2025f
Only a small fraction of oilseeds are consumed
for food. Source: FAO, FAPRI, OECD, USDA
31 ADB
32 IFAP
33 USDA
34 IFAP
10 35 FAO

13. As per capita incomes trend upwards globally, Compared to most developing nations, dairy
one of the major impacts will continue to be a products are already an established component
rising demand for meat, as consumers find it of the Indian diet. According to some forecasts,
more affordable, and as they seek new dietary dairy consumption in India could treble over the
choices. Rising per capita meat consumption next four years37. Although India is the largest
is also linked to other demographic trends, producer of milk in the world, over 50 percent of
particularly the move of people in developing production is still via the unorganised, or informal
countries from rural to urban areas, where they small scale, sector and so domestic production
are likely to earn higher wages and find exposure will be challenged to increase quickly enough to
to more “Western” food options. In the least meet this growing demand.
developed countries, consumers are likely to Soybean meal is one of the major sources of
substitute between lower-priced products within animal feed. Demand for feed has been driven
a food group as their incomes change, such by different factors in different regions. In the
as from corn to wheat. However, in developing developing world, particularly China, rising
countries, consumers are more likely to switch incomes over the past few decades have seen
from products outside subsistence foods, such steady growth in meat consumption. In most
as cereals, to meat or vegetables. parts of the world, animals raised for meat are
The relationship between per capita income and reared indoors for some or all of the year, due to
consumption of meat, dairy and vegetable oils is factors such as a lack of available pasture land,
more intense at lower income levels. As a result, or seasonally unsuitable conditions, such as
it appears likely that volume growth of more extreme cold.
expensive foods will be most prominent over In developed countries, demand for animal feed
the next two decades as the major developing can be shaped by other factors. For example,
countries experience significant and sustained as European farmers have banned the import of
income growth across their population bases. genetically modified soybeans, they have relied
The switch from grain based protein to meat on the import of Brazil’s non-GM soybeans to
protein will result in growing demand for grain meet their demands.
and oilseeds, to provide feed for the animals In addition, the BSE epidemic, also known as
serving the new meat needs. This demand will mad cow disease, in Britain was seen by many
be proportional, as the conversion ratios of feed as being caused by the use of animal bones in
to meat is not one to one and thus demand for livestock feed. Following this, European farmers
grains and oilseeds is increased more as meat sought to access a non-animal based, protein
demand increase. rich feed for livestock, with soy meal providing an
The switch across food groups is most marked excellent alternative.
in the world’s major markets. In China for
example, per capita grain consumption has Fuel
fallen 40 percent over the last 15 years while
An increasingly important factor in the demand
meat consumption has increased more than
for grains and oilseeds has been the growth of
250 percent36.
biofuels. Biofuels fall primarily into two categories
In India meat consumption has increased – ethanol and biodiesel. In many countries, the
40 percent over the last 15 years, even though main feed stock for producing these is corn for
half of all Indian households are vegetarian. ethanol and vegetable oil for biodiesel. The major
For India, however, the major driver of feed exception is Brazil, where ethanol is produced
consumption is likely to be dairy growth. from sugar.
36 FAO
37 Nestle 11

14. Demand side
Biofuels are now mandated for use in around 41 countries38. The growth in biofuels has been due to
a number of factors. Biofuels are increasingly seen as more environmentally friendly than fossil fuels,
in producing lower greenhouse gas emissions. For countries seeking to reduce their dependence on
imported oil, biofuels provide a domestically produced alternative.
Ethanol is produced primarily from corn. Around 30 percent of all corn grown in the US is now used
for ethanol feedstock39.
US corn consumption categories 1999 – 2019f
100
80
US Corn Consumption
60
40
20
0
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010f
2011f
2012f
2013f
2014f
2015f
2106f
2017f
2018f
2019f
Other (inc seed and starch) Feed Exports
Food (inc HFCS, glucose, etc) Ethanol
Source: FAPRI
Ethanol has long been used as a fuel for least 10 percent ethanol, although there is a push
automobiles – the original Model T Ford could from ethanol lobby groups to have this increased
be adapted to run on ethanol. Ethanol produced to 15 percent42.
from other feedstocks, particularly corn
In the US, the level of biofuel production is
stover or woodchips, is commonly known as
established under the Renewable Fuels Schedule
cellulosic ethanol.
(RFS). The RFS was originally put in place by the
Biodiesel is largely produced from vegetable Bush administration in 2007, and re-enforced by
oils, particularly palm and soybean oil. Around the Obama administration in 2010. Under the
90 percent of all biodiesel in the US is produced RFS, the US commits to producing a gradually
from soy oil40. Soybeans and canola both increasing volume of biofuels from 2008 to 2022.
produce around 100 gallons of biodiesel For ethanol, this figure is set at 9 billion gallons in
per acre41. 2008, rising to 36 billion gallons in 202243.
Globally, the US is both the major producer and Under the legislation, the level of ethanol to be
consumer of ethanol. Within the US, a Federal produced from corn was capped at 15 billion
mandate stipulates that all gasoline will contain at gallons. The remainder of the ethanol was
38 www.biofuelsb2b.com
39 FAPRI
40 Farm and Ranch Guide
41 Seattle Times
42 Reuters
12 43 US Environmental Protection Authority

15. forecast to be made up largely of cellulosic and the UK, while biodiesel powered planes have
ethanol44. However, recent announcements already successfully flown48.
from the EPA have seen forecasts for cellulosic
While biodiesel usage seems set to continue
ethanol cut dramatically, from 100 million gallons
growing, it may well be with far greater levels
to 6.5 million, due to the both the technology and
of soybean oil as a feedstock than previously
the economics of producing cellulosic ethanol
used. The growth of palm oil in natural habitats
being well behind initial forecasts45. As a result, it
continues to create controversy and it is
seems increasingly likely that increased levels of
foreseeable that ongoing palm oil development
corn will be required as feedstock to meet future
will flatten or decline. As a result, it is likely that
ethanol demands.
biodiesel processors will seek to utilise greater
The events of 2010 in the Gulf of Louisiana have levels of soybean oil, further raising demand for
only served to strengthen the outlook for ethanol global soybean supplies.
in the US. On one hand, ethanol’s environmental
Overall, it is important to remember that biofuels
credentials have only been enhanced. In addition,
currently take up only around 1.5 percent of
subsequent restrictions on drilling for oil look
global grain and oilseed supplies49. However, on
likely to increase the role that ethanol will play in
a global basis, this accounts for major volume of
US energy supplies.
grains and oilseeds. As a flow on, it means that
Such a scenario would have a number of these grains and oilseeds are being removed
impacts on the grain and oilseed sector. In terms from other areas, particularly exports, putting
of supply, an increased amount of corn being upward pressure on export prices. For uses
utilised for ethanol would draw even further such as animal feed, it means that other grains
volumes out of US domestic and export supply, and oilseeds, such as wheat, now need to feed
increasing the competition for other grains. the gap filled by the loss of these feedstocks.
Secondly, increasing biofuel demand for corn In terms of production, the result is that fewer
would likely place upward pressure on corn acres are available for growing crops for food
prices, leading to an increase in corn acreage, and feed.
at the expense of other crops. This level of
competition, which would particularly impact
US wheat supplies, would have an impact of
Industrial
reducing supplies of corn’s competing crops. While not as well known as food, feed and
fuel, the use of grains and oilseeds in industrial
Biodiesel is increasingly used across a range
products will play an increasing role in the
of transport modes. In Europe, at present, the
demand of these commodities going forward.
European diesel fuel allows biodiesel to be
blended at up to and including 5 percent by A number of factors are behind the push to use
volume, with moves to lift this to 10 percent46. more grains and oilseeds in industrial products.
Some national standards in EU countries allow As with biofuels, societies are increasingly
biodiesel to be distributed as a stand-alone seeking to replace petrochemical feed stocks
fuel, notably in Germany, for specially adapted with renewable resources. In addition, new
vehicles47. Progress is continuing to run trains on industrial products need greater specifity and
up to 100 percent biodiesel, particularly in the US complexity. Finally, the increased need to
44 Ethanol.org
45 Reuters
46 EU
47 EU
48 UPI
49 World Bank 13

16. Demand side
address environmental and community concerns heat. As such, wheat gluten can be useful for
forms a growing part of product marketing. preparation of adhesives, coatings, polymers
One major example is DuPont’s commitment and resins, straw particle board, strengthened
to source 20 percent of its products from paper, and adhesives, such as those used on
renewable sources50. postage stamps.
Industrial products from grains and oilseeds
come in an array of forms. An increasing Demand conclusion
number of pharmaceuticals are made from Overall, the diversity of uses for grains and
crops. Biopolymers, which are used in products oilseeds will result in result in overall demand
such as packaging materials, resins, adhesives, continuing to increase strongly. Fundamentally, it
biolubricants, can be sourced from starches from is important to note that overall demand growth
cereals and oils from oilseeds51. is not dependent on any one factor.
The development of BiOH polyols has created a Hypothetically, even if the world were inexplicably
potentially large new market for soybeans. BiOH not to get richer, population growth alone
polyols use soy based ingredient for flexible foam would still continue to drive demand for grains
used in upholstered bedding and furniture, carpet and oilseeds. Or even in the unlikely event
backing and automotive seats. Increasingly they that biofuels policies were to change in some
are also being used for airport seating around countries, grain and oilseed demand for animal
the world. As a soy based product, they replace feed would still increase due to improving diets
petroleum ingredients typically used in foam through rising incomes.
production52 and are seen as environmentally
And even if the demand for grains and oilseeds
responsible.
to provide the feedstock for a growing range
A growing number of cosmetics and sunscreen53 of industrial products were to soften, then the
are also using soy oil rather than petroleum strong increase for biofuels, increasingly pushed
based products. by environmental concerns, would be a major
source of growth.
In addition to soybeans, wheat is also being
sourced for a number of industrial uses54. Taken as a whole, the combination of these
Wheat has the ability to be elastic, bind water factors will continue to see grains and oilseeds
and form films that can be stabilised with demand climb well into the future.
50 Dupont
51 HGCA
52 Cargill
53 Sciencedaily.com
14 54 Texas Wheat

17. Why China needs soybeans?
It can be easy to forget how quickly the Chinese economy has changed. From the strict communist
economy of Mao Zedong from the 1940s to the 1970s, it was not until the changes brought in by
Deng Xiaoping in the 1980s that China began heading on its current path of being the world’s fastest
growing economy. At the same time, its per capita incomes have continued to rise.
While China is a major producer of many grains, it has severe limitations on the growing capabilities
of its farmland. China has around 20 percent of the global population, yet its arable land per capita
is only half of the world’s average55. Increasingly this land is being taken over by cities and other
infrastructure, or has its growing capability limited by degradation through increasing pollutants or the
loss of water to cities.
China soybean imports vs meat and dairy consumption
80000
Soybean balance of trade
60000 Dairy Product Consumption
Meat (non fish) consumption
40000
000 metric tons
20000
0
-20000
-40000
-60000
1975/1976
1977/1978
1979/1980
1981/1982
1983/1984
1985/1986
1987/1988
1989/1990
1991/1992
1993/1994
1995/1996
1997/1998
1999/2000
2001/2002
2003*2004
2005/2006
2007/2008
2009/2010
Source: USDA
But at the same time as the available arable land is falling, China’s appetite for food continues to grow.
As average incomes rise in China, the desire for more meat and dairy, and the ability to afford it, also
climbs. China now produces around half the world’s pork, as well as 35 percent of the world’s eggs,
65 percent of the world’s duck meat and 94 percent of the world’s goose meat. In addition, China is
also the world’s largest producer of farmed fish and China’s dairy sector produced around 40 million
tonnes of milk in 2009, up almost 400 percent in a decade56.
The common feature of each of these industries is the huge level of growth in demand for soybean
meal they have created. While soybeans actually originated in China, the country has not been self
sufficient in them since the mid 1990s. As such, in 2010/11, China is forecast to import almost
60 percent of the world’s soybean supplies57. To process these into soy meal and soy oil, China has
built a massive soybean processing sector.
With China’s economy forecast to continue to grow strongly for the foreseeable future, hundreds of
millions of rural Chinese are likely to cross the income threshold of around $1,000 to $2,000 at which
meat consumption escalates58. This will only lead to increasing demand for imports of the world’s
soybeans to meet soy meal demands, particularly as the country has almost no ability to open up
new land for domestic soybean production. As a result, and without taking into account increasing
demands from other major importers such as the EU and Japan, the world’s soybean exporters face a
promising future.
55 Worldwatch Institute
56 FAO
57 FAPRI
58 Business Insider 15

18. Supply side
Acreage required to meet demand by 2050 nutrients in the soil and salinity, or a growing level
of salt in the soil. According to some estimates,
450
■ Required around 23 percent of all useable land on earth is
400 ■ Current now subject to degradation60.
350 As cities continue to expand across the
globe, they continue to encroach out onto
300
farmland. The impact of this growth reduces
million metric tons
250 the productivity of the soil, and either limits the
growth of crops or prevents it altogether. Growing
200
urban areas result in increased sewage flows,
150 run-off and other forms of waste, which in turn
cause environmental issues for farmland.
100
In the US alone, total farmland declined by
50
16 million acres between 2002 and 2007,
0 which followed a previous decline of 16 million
Corn Rice Soybeans Sugar Wheat
acres over the five years prior to that61.
Source: Macquarie Research A major factor which will continue to inhibit
agricultural productivity is the increasing scarcity
Supply of water. Agriculture is the major user of water
globally, accounting for around 70 percent of
While demand for grains and oilseeds continues
water consumption62. Water availability is one
to increase, the global supply conditions for
of the most fundamental ingredients towards
producing the required volumes is hampered by a
both growing grains and oilseeds and gradually
number of factors.
improving their productivity. Without reliable
Perhaps the most prominent factor is the area access to water, food producers cannot
of land per person available for growing the implement long term projects to improve land,
required crops. Between 1961 and 2007, the while food importers cannot expect a producing
amount of arable land per person plummeted by region to guarantee reliable supply.
almost 50 percent, down to around 0.2 hectares
Just as with arable land, the availability of water
per head59. This decline was due to several
is being jeopardised by population growth,
factors, including:
urbanisation, rising wealth, resource consumption
■ growing land degradation and climate change. The UN has estimated that
■ rising impact of urbanisation by 2025, two thirds of the world’s population
could be subject to water stress63. In terms
■ climate change. of agriculture, it is estimated that the global
Degradation of arable land occurs due to agricultural sector will require around 50 percent
a number of factors, including chemical more water by 2015, and around 100 percent
contamination, soil erosion, and depletion of the more water by 205064.
59 FAO
60 UNEP
61 USDA
62 Ozh2o.com
63 Nupara.com
16 64 FAO

19. Large scale available land Flattening yields
To gain increasing productivity and profitability As arable land per capita continues to decline,
from agricultural land, it is progressively more increasing importance is placed on the need for
important to be able to build farming operations increasing yields from the world’s major grain
with economies of scale. It is only when farms are and oilseed crops. In the period from the 1950
of an optimum size that they are able to take full to the 1970s, global crop yields rose markedly,
take advantage of such scale benefits as large as a result of factors including selective breeding
modern machinery and advanced agricultural of higher yielding strains of seeds and improved
technology. In addition, scale of an operation plant tolerance to droughts and insects. In recent
allows a farm to be run more as a business, with years, however, yield growth from most major
dedicated employees devoted to functions such crops has plateaued, as the limits of development
as finance, agronomics and overall management, with selective breeding are approached66. While
rather than one farmer covering all bases. further improvements may require increased use
In much of the agricultural world, however, of biotechnology, and the true impacts of this
aggregating this level of scale is impossible. In continue to be under question, the significant
many developing countries, not only are farms of opposition to biotechnology in some parts of the
a small scale, but social and political pressures world may see yield growth struggle to grow.
means that it would be impossible to change
this. For example, in China, average farm size Protectionist policies
is roughly 0.32 acres65. Any move to aggregate
large numbers of Chinese farms would lead to Like any business, the top grain and oilseed
a rise in unemployed rural workers and potential producers are always seeking to gain greater
social unrest. As such, in China, as in similar efficiencies. In terms of grain producing
countries, it is highly unlikely that the current countries however, the farmers in countries who
structure will change. are provided with high levels of government
support for their industries have less incentive
to become efficient, as they will always receive
Political risk a standard level of support, such as fixed prices
While some countries may contain excellent for their crops. For example, in the dairy sector,
productive agricultural land, the spectre of the production price of a litre of milk in some
political risk makes it an unattractive investment heavily subsidised European countries has been
target, and as such, unable to receive the capital equivalent to the farm gate price of a litre of milk
to help it lift productivity. For example, while in unsubsidised Australia67. In terms of grains and
Zimbabwe was once known as the bread basket oilseeds, countries with strong subsidies are likely
of Africa, the current government’s nationalisation to see production growth limited.
projects have decimated its farming sector.
Similarly, while Argentina has a rich agricultural
history, the record of its government in
Poor infrastructure
imposing tariffs and export restrictions have Regardless of how good a crop may be, it is of
served as a deterrent for vitally needed little use to a potential buyer, and of little sale
agricultural investment. value to the grower, if it is unable to be delivered
65 UC Davis
66 Agricultural and Applied Economics Association
67 IFCN Dairy Report 2009 17

20. Supply side
to a point of sale. For this reason, in regions price rises are short term, and the market returns
such as Africa where a great deal of transport to normal. The events of 2008, when prices for
infrastructure is in great need of modernisation, most grains and oilseeds rose to record levels,
the potential increase in grain supply for use both were caused by a range of factors, with low
in neighbouring countries and on global export stocks of global grains, the impact of a drought
markets is likely to be constrained for years in various major production regions, the emerging
to come. demand for corn from biofuels and the role
of speculative investors all playing a part. The
subsequent export bans and hoarding of grains,
Conclusion – supply makes the particularly rice, by some countries, served to
short term, demand dictates extend the price rally, though eventually prices
fell again.
the long term
However, what is important to note, is that with
The recent events in Russia, where the onset each recent price correction, prices have normally
of a drought, and subsequent export bans on fallen to a higher level than where they started68.
wheat saw the cost of wheat rise sharply globally, As a result, the prices of all grains and oilseeds
have once again emphasised the impact that continue on an upward trend. Ultimately, both
supply issues can have on grain and oilseed the increasing divergence of uses for grains and
prices in the short term. These supply issues, oilseeds, namely food, feed, fuel and industrial,
usually caused by a weather event, are far from combined with the increasing demand from
unknown – concerns over floods in Iowa or water each of these areas, will continue to ensure
logged crops in Canada for example can lead that demand for grains and oilseeds will only
to price rises in the crop affected. Usually, these strengthen in the longer term.
18 68 Bloomberg

21. Where to produce
In order to determine the optimum location age of farmers now over 6069, and with many
in which to achieve the greatest return from farmers still on unprofitable smaller blocks of land
producing grains and oilseeds, it is vital to take provided to returned soldiers after the Second
into account a wide range of factors. To achieve World War, the opportunities for aggregation are
the maximum possible return from an investment strong. Similarly in Brazil, the changing structure
in agricultural land, it is important to have a full of the farming sector, partly brought about
understanding of how a combination of these through the impact of the global financial crisis,
factors may ultimately affect the profitability of the has provided further potential for conversion
overall investment. opportunities.
The following are some of the key factors that This is in contrast to country such as India, where
should be considered when evaluating an the average farm is 1.4 hectares70. With over
investment in an agricultural opportunity: 50 percent of the population being farmers71, it
is unlikely that we will see consolidation in the
Scale near term.
The ability to aggregate farmland into a large
operation is vital in achieving the benefits
Foreign direct
of scale. This is important in farmland, as it investment restrictions
allows the operator to save costs through
A number of countries which have reasonable
both economies of scale, as well as improved
farming conditions impose restrictions on the
bargaining power. For example, as with any large
ability to invest in this farmland. For example,
business, increased bargaining power allows a
countries such as Paraguay prohibit the
farm operator to negotiate lower prices for their
ownership of farmland by foreigners. In Canada,
inputs, such as fertilisers or seeds.
while foreign ownership of farmland is permitted,
By creating economies of scale, a farm operator restrictions of the scale of this investment make
is able to extract greater utilisation out of their it an unprofitable option. In the most productive
farm equipment. For example, a new tractor agricultural provinces, ownership restrictions limit
used on an aggregated 3,000 hectares provides the number of hectares foreigners can own to
lower machinery costs per hectare than the same 40 hectares.
tractor used on a 1,000 hectare farm.
In contrast, while Australia requires government
In addition, creating scale in a farming operation approval for agricultural investments over
allows for greater use of advanced technologies. $231 million72, no foreign investment in Australian
For example, a larger farm will have the agriculture has been turned down.
resources to implement advanced fertiliser
application techniques, using technology which Corporate agriculture
is unaffordable for a smaller operation. Through
using this technology, the larger farm will be able restrictions
to lower its fertiliser costs, increase its yields, and In the US, agricultural land ownership is restricted
improve the long term environmental sustainability by anti-corporate farming laws in a number
of it operations. of states. These laws, which differ by State,
Globally, areas which allow for building scale of generally restrict corporations and institutional
farmland are limited. In Australia, with the average investors from owning or acquiring farmland.
69 ABS
70 USDA
71 CNN
72 ABC 19

22. Where to produce
States where these laws exist include Iowa, This is compared to Brazil, which has a strong
Kansas, Minnesota, Nebraska, Oklahoma, North history of promoting free and activity within its
Dakota and South Dakota73, home to some of domestic farming sector.
America’s most productive farmland.
In Brazil, no such restrictions exist. This situation Subsidy risk
allows corporate agricultural investors to utilise In a number of countries, the domestic
their enhanced farming and management skills, agricultural sector is supported by a range of
as well as taking advantage of their superior government subsidies. As a result of these
scale, to maximise returns for their operations. subsidies, such as guaranteed domestic prices,
farming sectors in these countries have the
Political risk potential to fall behind non-subsidised countries,
as they lack the potential to continually become
A key component of a successful agricultural
more efficient. Even more importantly for the
operation is being able to guarantee major
investor, the stability of the farming sector
customers a level of certainty of supply. For this
in subsidised countries is dependent on the
reason, countries with a high level of political risk
decisions of the government. For example, in the
present unattractive investment opportunities,
US, which provides subsidies of around ten cents
as they are more likely to impose disruptions on
in the dollar to farmers74, if the government were
supply of crops. For example, while Argentina
to make major changes to the country’s Farm Bill,
contains reasonably yielding farmland, the actions
this could potentially alter the viability of many
by the government in recent years in imposing
farming operations.
export bans or high export tariffs on domestically
produced crops provides a major disincentive to In contrast, in Australia, where subsidies
customers and a deterrent to investors. are basically negligible, investors in farming
operations do not face the risk of a change in
Similarly, in many parts of Africa, the potential for
a government program affecting the viability of
agricultural production is overshadowed by the
their operations.
specter of potential nationalisation or other form
of government intervention in many countries.
Producer support estimates 1986/88 vs 2006/08
80
70
60
50
Percent
40
30
20
10
0
New Australia United Mexico Canada Turkey OECD EU Japan Iceland Switzerland Korea Norway
Zealand States
1986-88 2006-08
Source: OECD
73 National Agricultural Law Center
20 74 OECD

23. Infrastructure risk of water for farmers continues to place question
marks over the long term viability of many parts
The ability to be able to transport agricultural of the state’s farming sector.
produce to an export point, such as a port, is
vital to maintaining a reputation for reliability of In an area like Brazil, however, the fact that none
supply from a country. In a region like Africa, of its farmland requires irrigation means that it has
problems with modern infrastructure present a successfully adopted dry farming techniques. In
major impediment to agricultural investment. All having an ample water supply and a consistently
too often, crops have major difficulty in being steady rainfall, Brazil enjoys a competitive
transported from the farm to a central point, such water advantage.
as a grain silo, and then on to a port.
This is in contrast to countries such as the US, Affordable farmland
Canada or Australia, where modern road and While the productivity of farmland is important,
rail networks link the agricultural producing it will still not equate to profitability if farmland is
regions with world-leading port facilities, providing overvalued. In the US for example, farmland in
maximum opportunities to fulfill each country’s
Iowa, while yielding healthy levels of corn and
export requirements.
soybeans, is currently selling for up to US$11,000
per hectare76. This is in contrast to farmland in
Water risk Brazil, where land which achieves the same yields
The reliable supply of water to a country’s as the US77, and which furthermore can harvest
agricultural operations is a vital consideration in two crops per year, sells for up to US$3,000
analysing potential areas for investment. In India, per hectare78. Similarly, some of the countries
for example, up to 40 percent of agricultural of the Former Soviet Union offer comparatively
land is irrigated75, leading to enormous potential well priced land, with arable land in Russia selling
for water scarcity. Similarly, in California, legal for between US $500 and $700 per hectare
proceedings in that state to guarantee supply in 200779.
75 Indian National Institute of Hydrology
76 Iowa State University
77 USDA
78 Agrimoney
79 USDA, RBS 2009 21

24. Why invest in grains and oilseeds
Investing in grains and oilseed producing farms is likely to occur regularly given the nature of
provides a number of attractive advantages. agriculture, intensified demand is likely to see
continued upward pressure on prices.
■ Exposure to diverse and fixed demand
■ Exposure to a sector where the products
Global population growth results in increasing
are inelastic to price movements
food demand, while rising incomes in
developing countries increases the need Regardless of increases in prices, people
for animal feed to fulfill the climbing animal still need to eat, even if they switch between
protein demand. On top of this, the increasing different grains and oilseeds. This was
production levels of biofuels, as well as the emphasised in 2008, where despite wheat
use of natural ingredients in industrial products hitting record prices, consumption levels
further increases the rising demand for gains remained strong. Compared to many other
and oilseeds to be used as feedstocks in these products, the inelastic nature of grains and
processes. oilseeds means that farmers are able to pass
on input increases to end consumers.
■ Exposure to a sector where global supply
increases will be limited ■ Exposure to a sector that is a hedge
against inflation
As factors such as urban expansion, land
degradation and climate change continue to Food price increases remain a major
reduce the amount of arable land per capita, component of overall inflation. As food prices
and while yield growth rates for most crops are linked closely to inflationary trends, food
have slowed or plateaued, the world’s ability to production provides farmers with a hedge
produce enough grains and oilseeds to meet against inflation. While in the US and Europe
food accounts for around 15 percent of CPI80,
demand will be severely tested.
in low and middle income countries the share
■ Exposure to a sector where supply is much higher.
will continue to struggle to keep pace
In addition, returns from farmland also show a
with demand
strong correlation with the CPI. For example,
Production levels of grains and oilseeds from 1999 to 2009 in the US, the correlation
globally are closely aligned with consumption between the NCREIF and CPI has been 0.509.
levels. As such, when growing conditions in a Importantly, the return on the NCREIF was
major producer are disrupted, an event which higher than the inflation rate each year81.
80 Businessweek
22 81 Highquest Partners

25. ■ Exposure to an asset that has low ■ Exposure to a sector where only a few
correlation to traditional asset classes such key areas, i.e. Australia and Brazil, provide
as the equities market the range of factors which lead to wider
profitability
In contrast to the correlation between
agricultural investments and inflation, Both Australia and Brazil offer a series of
agriculture is largely uncorrelated with agricultural production advantages unmatched
traditional asset classes. For example, from by other countries. These include:
1999 to 2009, the correlation between the
– reasonably priced, highly productive
NCREIF and the Dow Jones Industrial Average
agricultural land
was only 0.107, while with the Standard and
– the ability to secure farms for aggregation
Poors 2005 it was just 0.17482.
– reliable climactic conditions for agriculture
■ Exposure to a sector where managed – diversified input suppliers, as well as
farmland provides the best returns diversified markets
from agriculture
– unsubsidised agricultural sectors,
While agricultural futures markets may offer therefore not at risk of withdrawal of
liquidity, they are short term and volatile. In government support
terms of equities, very few public companies – low political risk and attractive FDI laws.
provide exposure to actual production
agriculture. An investment in agriculture
provides exposure to profit from:
– price inflation from crops
– land inflation from land ownership
– operating margins from farming production
– increased value of land as it is transformed
to achieve greater agricultural productivity.
82 Highquest Partners 23