The main drivers behind agriculture

This rationale has not changed in more than three decades and underpins an enthusiasm for investing in agriculture that is not always rewarded by superior returns.

It starts with the UN projection of 9.6bn people in 2050 and identifies three broad trends: more young consumers, more diversity, and more people to feed. However, the data suggests that farmers have been keeping pace with demand and that the structural challenge is easing.

World population growth is slowing, rising about 0.8 per cent a year to 2050, to meet the projection. This compares with an annual growth rate of 1.2 per cent in 2001-10 (World Bank) and the 1.6 per cent average for the past 40 years.

Growth will be concentrated in those developing countries where there are large cohorts of young consumers who demand more and more processed (i.e. less healthy) food. China is already consuming at 85 per cent of the advanced economy rate so has limited scope for further growth. Africa and the Middle East are projected to have the strongest growth in food demand, according to the US Department of Agriculture, but geopolitics means the growth trajectory is unlikely to be smooth.

Food consumption is particularly responsive to income growth in developing countries, with movement away from staple foods and toward more diversified diets. As incomes rise from low to middle levels, more is consumed (and wasted). In developed countries, consumption has levelled off and the example from Japan suggests it should decline with population ageing. This also applies to those emerging economies with ageing demographics, including China.

Another source of demand for agricultural commodities has been as feedstock for biofuels, particularly corn and sugar for ethanol. By 2050, the International Energy Agency wants biofuels to account for more than a quarter of global transportation fuels. The main impact from the shift in production – 40 per cent of US production and 15 per cent of global production – has now worked through the system. Enthusiasm for ethanol has also waned; production peaked in 2011.

As far as supply of agricultural commodities is concerned, the only basic foodstuff where inventory levels are particularly low is soybeans and only in the US. Global inventory levels for wheat, corn and soybeans are all healthily above 25-year median levels.

The main drivers of agriculture are cyclical rather than structural. The part played by investors through investing in commodity indices to diversify portfolio risk exacerbated price rises and stresses in certain agricultural markets. That interest has receded for the time being, reinforced by falling commodity prices as cyclical influences

Frances Hudson, global thematic strategist, Standard Life Investments

IN NUMBERS

9.6bn

UN projected population of the world by 2050

85%

China’s food consumption rate as a percentage of advanced economies

2011

The year in which production of ethanol, used in biofuels, peaked

0.8%

Estimated growth rate per year of the world population