A precarious situation worsens
Food security was already precarious before the pandemic. The World Economic Forum (WEF) expects demand for food in 2050 will be 60 percent greater than it is today, partly due to an increase in population, but mostly because of a shift toward more meat- and dairy-intensive diets as a significant portion of the global population is lifted out of poverty.
Pandemic-related labor shortages and Russia’s invasion of Ukraine have aggravated the situation by both curtailing food supply and pushing up energy prices even further.
The UN Food and Agriculture Organization’s (FAO) Food Price Index, which tracks developments in global agricultural commodity markets, reached 159 points in April 2022, eclipsing the previous record high of 138 recorded in 2011. In effect, the index suggests that food prices are now 75 percent above their pre-pandemic level.
Over the past three cycles, food prices doubled in just over three years
UN Food and Agriculture Organization’s Food Price Index
Line chart showing the UN Food and Agricultural Organisation's World Food Price Index since 1990, and highlights the current trend of rising food prices alongside the three previous up cycles: 1993 to 1996 (33 months, 36% increase); 2002 to 2008 (70 months, 162% increase); and, 2009 to 2011 (23 months, 64% increase). In the 22 months since the start of the COVID-19 pandemic in 2019, food prices have increased 75%. Russia's invasion of Ukraine has helped drive prices higher.
Source - RBC Wealth Management, Bloomberg; monthly data through 4/30/22
The Russia-Ukraine war is upending global food supplies in several ways. Due to the invasion’s timing, at the end of winter, planting and harvesting seasons have been severely disrupted. The FAO estimates that 20 percent to 30 percent of sunflower grains and corn will not be planted or harvested. Importantly, Russia has cut off much of Ukraine’s Black Sea access, blocking its exports. Moreover, sanctions against Russia are restricting its own agricultural commodity exports.
Alarmed by the surge in prices, food protectionism is on the rise. More than 16 countries now impose restrictions on their food exports, up from three since the invasion, according to the International Food Policy Research Institute. Most recently, India, the world’s second-largest wheat producer, banned exports of the commodity citing higher local wheat prices. Its priority is alleviating the hunger crisis facing a large swath of the domestic population.
The war has also aggravated the disruption in energy markets, driving prices higher and, in turn, pushing up food prices. About one-third of food costs are energy-related, according to our national research correspondent. Farm machinery requires fuel to function, while the manufacture of fertilizers is an energy-intensive process. Norwegian fertilizer company Yara temporarily curbed production in France and Italy due to high gas prices in March. High fertilizer prices may crimp agricultural output if farmers calculate that prices are too high and thus decide to reduce usage.
Moreover, transportation and packaging costs are being impacted, with 20 percent of fiber-based packaging and 35 percent of glass packaging costs influenced by energy prices, according to our national research correspondent.
Steeper costs of agricultural products affect other aspects of the food production chain. Corn, for instance, is a key ingredient in animal feed so livestock producers are being pressured as well.
Higher for longer
It is not unusual for food prices to be elevated for many months. The past three up-cycles lasted between 23 and 70 months. The current one, at 23 months, should be on the long side, in our view, given the pervasive supply headwinds. Moreover, energy prices are also likely to remain elevated for several months. Michael Tran, commodity strategist at RBC Capital Markets, LLC, expects oil prices to flirt with the $100/barrel (bbl) level until at least the end of 2023. His conclusion is based on an analysis of 22 of the world’s most influential ports, suggesting that global port congestion is worsening and becoming more widespread, while freight prices remain high and marine fuel prices and insurance costs are on the rise.
Overall, the FAO forecasts that the international prices of the commodities with important Ukrainian and Russian export shares could climb by another eight percent to 22 percent over the period 2022–23 compared to their elevated 2021 levels.
Even when the Russia-Ukraine conflict is ultimately resolved and the pandemic finally ends, the need to feed a growing world population will likely contribute to keep food prices high given increasingly difficult growing conditions. According to the WEF, 40 percent of the world’s landmass is currently arid, and rising temperatures will transform more of it into desert. It estimates that at current rates, the amount of food grown today will only feed half of the world population by 2050. Moreover, according to the Intergovernmental Panel on Climate Change, water stress will become more acute in many agricultural areas by 2025 due to greater water use and higher temperatures.
Geopolitically driven food security
Some countries, such as China, strive for food security to free themselves from dependence on other nations and potential strategic vulnerabilities. To this end, the Chinese government has focused on bulking up its agricultural commodities reserves over the past five years. The country, home to just under 20 percent of the world’s population, now holds about two-thirds of the world’s corn reserves, and more than half of its rice and wheat, according to the U.S. Department of Agriculture (USDA).
China is also investing in agricultural research and development (R&D). At a recent visit to a seed laboratory in Sanya, Hainan province, Chinese President Xi Jinping said food security would only be achieved when seed resources were tightly held in Chinese hands. He aims for China’s seed sources to be independent and controllable, and for technologies related to the seed industry to be self-reliant. Minister of Agriculture and Rural Affairs Tang Renjian reiterated this call, saying that “seeds are the ‘computer chips’ of agriculture, and cultivated land is the ‘lifeblood’ of food production.”
The seed lab, covering 240,000 square meters, or some 45 football fields, was established for China to independently cultivate seed varieties with improved performance. It focuses on both R&D and industrialization. Located in the most southern point in China, Sanya’s tropical climate enables crop varieties to breed up to three generations in a year.
The food security imperative
The impact of higher food prices will be felt unevenly around the world. Lower-income countries and communities where food can swallow up as much as two-thirds of household income will suffer most, according to the World Bank, particularly if they depend on grain imports, such as the Middle East and Africa. Egypt, for instance, receives 80 percent of its wheat imports from Ukraine and Russia.
Overall, the UN World Food Programme estimates that 690 million people worldwide go to bed on an empty stomach daily, with over 44 million on the brink of famine.
Food insecurity is not just the preserve of developing nations. Household budgets in developed economies also feel the pinch of higher food costs.
In the UK, the number of households cutting back on food or missing meals now affects one in seven homes as price rises are cutting into the nutrition quality for the country’s poorest people, according to research by the Food Foundation, a UK charity, and the London School of Hygiene & Tropical Medicine. The Food Foundation expects this problem to become more acute.
In December 2021, a report by four large Canadian universities suggested a family of four in Canada could expect to spend an extra CA$966 on food in 2022, a five percent to seven percent increase over the previous year. With food prices increasing even more than expected due to the Kremlin’s aggression toward Ukraine, we believe this estimate may prove too conservative, intensifying concerns about how food insecurity will affect lower-income Canadians.
Unfortunately, there is no quick fix to ensure food security. Releasing grain reserves, when possible, can help in an emergency, but building resilience in a sustainable fashion is really what is needed, in our opinion.
Mitigating food insecurity usually requires focusing on localized measures depending on the challenges, such as enhancing the sustainable management of resources through efficient irrigation systems or soil conservation. Or the focus can be on improving distribution channels if those are determined to be the main impediment to food security. For instance, New York City’s 10-year food plan (released in 2021) called for improving the integration of the Hunts Point Food Distribution Center, often dubbed “New York City’s Refrigerator,” with other food distribution channels in the city. The initiative aims to adapt Hunts Point, established more than 50 years ago, to the modern needs of New York City’s food system.
The WEF suggests that improving food security requires agricultural sectors to become more productive. Forging public-private partnerships can also help, as can favoring crops produced locally.
The stakes couldn’t be higher, in our view, as the risks of failing, beyond increased malnutrition and hunger, could spur further mass migration, loss of government support, and conflict. The Arab Spring uprisings in the Middle East in 2011 were partly triggered by spiraling food prices. Also, the poor showing in the UK of the ruling Conservative Party in the recent local elections was widely attributed to the cost of living crisis in the country, including crippling food inflation.
We believe AgriTech, or technological solutions that can increase crop yields while reducing environmental stress, has an important role to play in improving food security. We covered many of these solutions in our 2021 AgriTech report, including gene technology, precision farming, controlled environment farming, and supply chain efficiencies.
Gene technology: Gene editing vs. genetically modified organisms
As we explained in last year’s AgriTech report, genetically modified (GM) crops have faced widespread consumer resistance over the years despite being higher-yielding, more tolerant of both drought and heavy rain, and displaying greater resilience to pests and diseases. That is partly because GM crops were designed to help farmers grow the crop with little thought about benefits to the end consumer.
More recently, gene editing technology has emphasized consumer needs. In 2021, Sicilian Rouge tomatoes went on sale in Japan. They are genetically edited to contain as much as five times the normal amount of GABA, a nutrient that promotes relaxation and lowers blood pressure. Sicilian Rouge tomatoes are one of the first genetically edited foods made available to the public. Other countries will likely follow suit. The USDA has confirmed that these tomatoes will not be regulated in the same manner as conventional genetically modified crops.
Gene editing technology involves altering an organism’s existing DNA, while earlier forms of genetic modification tended to add DNA from other organisms. Foods produced via gene editing are often not subject to the same regulations as other genetically modified crops, as many changes introduced by gene editing also occur naturally.
The UK, now that is it free of EU laws and regulations aimed at shunning genetically modified organisms, is adopting a more positive attitude toward GM foods. The UK Parliament passed a law in January 2022 to reduce the time and cost of gene editing trials in the country.
As this new generation of GM foods with additional health benefits evolves, we would expect their popularity to increase.
Precision farming equipment manufacturers
Precision farming refers to various techniques and tools increasingly in use that enable farmers to optimize crop productivity. An interesting development in Europe could further underpin the adoption of precision farming equipment as the EU is looking into relaxing its “at rest” rules.
Put in place in 1988, these rules require farmers to leave a portion of their land free from intensive production to foster healthy biodiversity after years of intense agriculture use. Increasing the amount of agricultural land would be a welcome outcome given that such land as a percentage of the total land area hasn’t expanded since the early 1990s, according to the World Bank.
Despite 30 years of population growth, agricultural land area remains stable
Agricultural land as a percentage of total land area
The line chart shows the global amount of agricultural land as a percentage of total land area between 1992 and 2018. Over that period, the percentage varied between roughly 36.75% and 37.25%, or by slightly more than 0.5%. After a brief increase in the 1990s, the percentage of land devoted to agriculture declined, and as of 2018 was approximately the same as it had been in 1992.
Source - World Bank; data through 2018
As the number of mouths to feed increases, so too does the demand for fertilizer. Potash is a popular fertilizer that improves plant durability and resistance to drought (by encouraging water retention), disease, weeds, parasites, and cold weather.
We believe potash producers appear to be in a good position to gain market share from fertilizer producers affected by higher gas feedstock prices. Canada is particularly well positioned, in our view, as Saskatchewan hosts the world’s largest potash deposits though only a fraction is currently tapped. Moreover, sanctions against Russia and its ally Belarus, which together account for 40 percent of global potash production and exports, means other potash producers must step up.
A marathon, not a sprint
Global food security, already severely challenged by climate change, has become even more precarious following Russia’s invasion of Ukraine. Sadly, there are no quick fixes. Countries with low agricultural capabilities, both in the developed and the developing world, are likely to struggle the most.
Technological solutions will likely play an increasingly important role in ensuring more people are fed despite increasingly difficult conditions. We see several areas where investors can find investable ideas in which growth prospects are driven by the search for food security, as indicated in the table below.
AgriTech can enhance food security
Strategies and solutions to improve food security
Increase yields on agricultural lands
Controlled environment farming
Supply chain efficiencies