WORLD AGRICULTURE and FOOD COMMODITY MARKETS BULLETIN SERVICE

FoodWorks is adding an important service to its regular consulting work. FREE!

There can be no doubt that the world is heading for a food crisis in the coming summer. Rising food prices drive more people into poverty and put brakes on the world's recovery from recession. Poor, hungry people lead to civil instability and a slower recovery means less jobs.

We need to act now!

Some of the major factors that have been pushing food price indices to their highest levels include:

Demand side

* Rising population – the world is adding 80 million people every year. Moreover, the majority of these people are in developing countries which have a limited agricultural resource base. As an aside, health programs, laudable as they are, impact more rapidly than food supply initiatives. So in countries where the population growth rate is highest, the Malthusian boundary is closer than we think.

* Rising incomes – the fastest income growth rates are also in those countries with large populations and above-average growth. Whereas the aim in the high income countries is to cut back on food consumption (we worry about obesity), a large proportion of the world’s population is moving towards increased consumption of eggs, meat and milk. All these commodities are poor converters of food adding pressure to the demand for staple foods.

* Bio-fuel – We are less concerned about bio-fuels. While the USA grew about 420 million tons of grain in 2009 and put 28 percent of that into bio-fuel, it is surely the case that without the ethanol program this amount of grain would not have been grown. It is disingenuous to take the bi-fuel grain and say “it could have fed millions of people”. Not so, without the demand for ethanol, at least a proportion wouldn’t have been grown. That said, this area of consumption represents a significant part of the demand for natural resources and has its own impact on the environment.

Supply side

* Water deficits – water is the elephant in the room. Aquifers are being depleted everywhere. Sanaa, the capital of Yemen, will soon have no water supply whatsoever. Melting glaciers in the Himalayas will first flood Pakistan (as they did last year) and then the absence of water will starve the largest irrigation system in the world.

* Climate change – however it is measured, and despite the skeptics, there seems enough evidence that the pattern of the world’s climate is changing with large dustbowls developing in Central Asia and Sub-Saharan Africa. Soil erosion and the damage to the eco-system from e.g., oil palm being grown in Indonesia also give huge cause for concern.

* Loss of land to non-farm use – as the human population grows people migrate to cities in search of jobs that are almost always more remunerative than agriculture. Mega-cities are consuming land for housing and industrial use at an enormous rate.

* Technical limits to productivity (yields) – the “Green Revolution” of the 1960s and ‘70s was based on large increases in land productivity. But the growth in yields cannot be exponential. Already many developed countries have reached the limits of what the land will yield. In the developing world yield increases, obtained at considerable cost, are frittered away because of lack of infrastructure, e.g., for storage and drying. Perhaps 40 percent of the production of food in these countries is simply wasted before it ever reaches the table.

All this has happened in the context of the public sector – national governments, multi-lateral aid agencies and the other donors – losing heart for agricultural development. Lack of investment in agriculture, its infrastructure and its skills has eroded the capability of many countries to deal with the crisis that is now on us.

With all the above in mind, FoodWorks has recognized that there are nevertheless opportunities. If governments will not or cannot act, then they should stand aside and let the private sector and the profit motive take over.

It's an urgent priority to mobilize capital and expertise and get it to work!

In this case, we at FW are developing a commodities market analysis service that not only looks at price and market trends in terms of the supply-demand balances of the major food and beverage crops, but points to related investment opportunities.

We will start with the basics of the food business, the staple crops, and focus on wheat, corn (maize) and rice. We will then add oilseeds and oils. As we progress we will include fertilizers and sugar and coffee and dairy.

We’ll do it (at least initially) free as a service to our clients and to facilitate the investment and development projects that are our bread and butter. We’ll bring to this not mere quantitative analysis, but the lengthy experience needed to see what changes in the numbers really mean on the ground with the farmers and those buying in the market.

And if you'd like to us to answer specific questions - free - by all means just email foodworks@quartermainesworld.com

Background note: FoodWorks staffers have had many years of experience of both public and private sector project work in every sector of agriculture and agribusiness. We are not academics, but people who have real world experience of how the markets work.

Tools of the Trade

I'm spurred to write this post by a recent chat I had about value chain analysis. The folk I spoke with seemed to think that a deep, formal knowledge of the subject was a prerequisite for successfully developing agriculture.

I disagreed.

Look: as a trained economist (Oxford University, Institute of Agricultural Economics which became the Oxford Department of International Development) I understand and apply ALL the formal tools from time to time during my work. These include cost-benefit analysis, financial and statistical analysis (internal rates of return,net present values, bell curves), terms of trade analysis, DRC analysis, welfare analysis etc. and so on. If you qualify as an economist you usually end up with a box of tools.

So why do people want to know which specific tools you have in your box? It's like asking your car mechanic if he understands how to use a torque wrench, or a doctor if he's familiar with a CAT scan.

There may be two answers: one is that there are so many charlatans out there, so now people worry that they'll find they've paid money and don't get results. That's fair enough. One thing you can do with FoodWorks is ask for references and you'll get them from the top people in this industry.

The other thing is that non-specialists (usually the folk that have the money - the donors and the like, the desk officers) don't understand their business. After all, they are often bureaucrats or investors. So they fall for the jargon.

"Integrated value chain analysis" (IVCA) is a real case in point. Years and years ago we used to measure marketing costs and margins. Absolutely standard, no one thought it was anything special. You just did the measurements as part of your effort to understand the market supply chain. Then IVCA came along and lo and behold, one could sell a service as a Value Chain Analyst.

What's the difference? The first kind of analysis really only captured the "horizontal" movement along the chain whereas VCA looks at the entire business system (horizontal and vertical) and tries to capture its entire value with a view to looking at its competitiveness. The "integrated" bit just makes it sound a bit more complicated in order to raise the consulting dollars.

Here's a formal definition: "The value chain is a model that describes a series of value-adding activities connecting a company’s supply side (raw materials, inbound logistics, and production processes) with its demand side (outbound logistics, marketing, and sales). By analyzing the stages of a value chain, organization’s are able to redesign their internal and external processes to improve efficiency and effectiveness." (Rayport and Sviokla 1996 - see below).

Like so many of the ideas in this area it derives from Michael Porter's work. But economists remember that Porter pretty much took the old ideas of comparative advantage in trade - basic undergraduate economics - and added a sexy overlay. The entire area of competitiveness theory opened up a whole new area of strategic planning and even more of the necessary bucks.

Now here's the thing: IVCA is indeed useful. But it's NOT magic; yes, it does require careful and systematic quantitative measurement, but that's what economist do every day of the week. And IVCA is NOT going to answer the real questions of agricultural development all on its own.

That requires EXPERIENCE and it's experience combined with knowing how to use all the formal tools in the toolbox that we at FoodWorks bring to the table. The experience to know that when all the quantitative modelling in the world tells you to make that investment, somewhere there's just that one little thing that will screw the deal, whether it's for the smallholder being stiffed by the middle-man (by the way another shibboleth of the academic world) or whether your $100 million feed mill is actually going to find the raw material at the right price. It takes "nous" as well as those tools.... just like it takes a real mechanic to fix your car.

Photo: GQB checking out a real world value chain at Karachi Fish Harbour, Pakistan.

PS. If you want to follow the literature on IVCA, here are some references (so you know we have them in our tool box):

'The Virtual Value Chain', John Sviolka and Jeremy Rayport

'A Handbook for Value Chain Research', Raphael Kaplinsky and Mike Morris, IDRC