Food Security 2/2

Today, we will look at Part 2 of our Food Security blog, as part of our series on Food and Finance.

Today I will focus more on the financial part and how financing needs to change its focus, so we can truly have food security around the world. 

When we study the story of Joseph and his plans for food security in Egypt, we see several nodes within the supply chain where financing could play a part in increasing food security. From these, we will tease out some lessons that is applicable as we work to create global food security. These can be categorized under the following 4 categories.

1. Agriculture
2. Transportation
3. Storage
4. Marketing and Distribution

Agriculture

Agricultural productivity remains extremely crucial to global food security. I plan to do a very extensive series on the various aspects of investing in agriculture, specifically investing in farmland, but in this blog, I will focus on a few key issues.

Firstly, we will look at demand. Various figures have suggested that as a whole, we will need to increase our agricultural output by 60% by 2050, because of several factors of which the most important is a growing world population.

The complicating factor is, we must increase agricultural output while we are losing arable land to the average annual rate of about 10 million hectares per year. While some of it is lost to development, others are simply lost because of unsustainable farming practices.

The huge demand for food, makes investing in farmland and agriculture a very attractive prospect indeed, but like every other investment, professional management is key to a long and profitable investment.

In the story of Joseph it was said, that the land produced massive harvests over the first seven years, therefore, it stands to reason that they paid attention to farming practices that will give the highest yield, as they only had a seven years window to amass as much food as they could.

In my opinion, the most effective way to preserve the soil and sustain high productivity levels, is crop rotation, whereby farmers rotate the crops that are planted because each crop has a different effect on the soil, as they all add and subtract different minerals from the soil.

The challenge of implementing crop rotation in the scale, necessary for to preserve the soil and sustain high productivity is financialization, which is the process by which agriculture has become completely linked to the financial markets, and farmers take signals from the financial markets on what to plant, not based on what the soil needs, but what crops will they be able to sell for the highest price by the next harvest.

Farming must be done within a sustainable balanced system, such a system, depending on the location, will include permanent crops - like fruit trees, row crops - like vegetables, grain, as well as some elements of animal husbandry, which will add profitability and will also give manure which reduces the need for fertilizers.

Another element is good water management and soil irrigation, which we will discuss in a later blog.

This must also be done within a local community development model that integrates generations of family into agribusiness and strengthens local institutions and infrastructure like schools, hospital, roads, churches and civil society. 

This is not the popular view that many prospective agricultural investors want to hear, because many subject themselves to financial models like standard DCF and IRR, which does not take into account many of the factors necessary to assess a profitable investment, let alone an investment in agriculture.

Allied to this is the climate change benefits, research has shown that land and forest resources managed correctly can deliver up to 37% of cost effective CO2 mitigation needed up to 2030. In other words, only with correct land management systems can we hope to realize the full potential of agriculture and significant reduction in CO2 emissions.

There are only two ways nations can continue to increase their output of precious agricultural goods without converting the valuable ecosystems critical to meeting their climate change commitments. The first is by exploiting already converted but abandoned land, while the second is by increasing the intensity of production on currently used land. Both of these approaches require significant capital investment and the payback periods are often long.

The short term need for yield and returns inevitably causes many investors to make mistakes which they live to regret later. Agriculture needs to be classed and assessed, like a 30 years fixed rate bond, because maturities would typically be 7-30 years reflecting the timescale that investments in sustainable land development might take to fully realize.

Longer term agriculture and climate change mitigation bonds are very useful for patient investors, like family offices, pension funds and insurance companies. Especially when for the most part, they are uncorrelated to the rest of the financial markets, but for them to work well, the key is management, management and management; prudent land management.

This type of strategic long term financing that includes an attractive yearly coupon and a long maturity is exactly what the agriculture industry needs to prosper. 

Transportation

Transportation was a key element of Joseph’s plan, because the food needed to be transported from the farm to the local storage facility.

This is a key aspect of investment in agriculture, because transporting products safely to avoid wastage is extremely important. Studies have shown, that 14% of total global agricultural produce is lost, because of wastage, this amount higher in Sub Saharan Africa, where it could reach up to 40% in some places.

Storage 

This is linked with transportation to avoid wastage, but good storage facilities, a prudent agricultural storage and produce preservation policy, will give the farmer the flexibility of when to sell the produce for the best prices and will also allow the farmer to utilize crop rotation much more effectively.

Good storage practices can also include various basic food transformation process, such as cleaning, packing and freezing when necessary.

Within all of these supply chain nodes, there are opportunities for investors to get involved with various types of financial instruments, but as I said earlier, it must be part of a complete system.

Marketing and Distribution

Within the framework of the ‘Joseph food security model’, a key part would have been the marketing and distribution network. It is important to note, that when we speak about marketing, it is more than advertising as many people assume, but marketing encompasses all of the business operations and supply chain, from production all the way to the point it reaches the customer’s hands.

Most investors that buy agricultural land or farms, do not tend to think of marketing and distribution, but the food supply chain of today includes traceability standards, the demand for organic produce, safety of the products (which are increasing all the time), and much more.

All of these standards start with the land and agricultural production. Questions needs to be raised, such as: whether pesticides will be used, what fertilizers will be used, how the harvest will be handled and preserved etc. 

These and many more questions need to be answered before agricultural production, but they can only be answered based on the specific marketing strategy, i.e. is it organic or conventional, local or international market, and if international, what are the export requirements.

Investors, that choose organic production, will have higher upfront costs and lower yield, but will benefit from higher sales prices. They can also boost profitability, if they create vertically integrated food value chain systems, which is basically a ‘farm to fork’ approach, and they can compete and achieve greater economies of scale and profitability, even their lower yield and more specialized and sustainable agricultural production methods.

These are examples of some of the considerations that makes marketing and distribution a key consideration for agricultural producers and investors.

Conclusion
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This concludes our initial discussion on the ‘Joseph Food Security Model’. I will be doing much more extensive work on this model in the future, both in writing and in courses, where I teach about food investing. 

However, it is worth noting, that there is a huge gap between the past models of investing in farmland and the present and future models. 

In the past, the food market was very homogenous, therefore no consideration was given to issues of marketing, distribution, sustainability, suitability, and in some cases – safety. However, at this present time and increasingly in the future, these considerations will be paramount, especially in the agricultural production phase, as the food market has become highly fragmented as food needs are changing with lifestyle choices, like increasing and decreasing meat and dairy consumption in different parts of the world. At the same time, increasing veganism, traceability requirements, increased rates of food allergies, climate change concerns and a whole host of other challenges that are emerging within the framework of an increasing global world population and rising demand for food.
To further develop the themes we have begun, in the following blogs, I will start another topic, which is investing in farmland and agriculture.

For food investors, I will quote Charles Dickens from the book ‘a tale of two cities’.

“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to Heaven, we were all going direct the other way – in short, the period was so far like the present period, that some of its noisiest authorities insisted on its being received, for good or for evil, in the superlative degree of comparison only”.

Happy Reading!
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