The global food business is increasingly complex, with new players, new linkages, and cause-and-effect reactions that impact food supply and prices, says Paul Roberts, journalist and author of The End of Food.
Growers need to be aware of event chains (events that occur continents away but have a chain reaction that impacts their business) and have a better understanding of what’s behind new complexities, if they are to be successful and profitable for the long term, Roberts said.
For example, the root cause of last year’s revolutionary wave of demonstrations in the Arab world was not longstanding political tensions or new social media, he said, but historically high food prices.
Roberts, who lives in Leavenworth, Washington, shared insights from The End of Food (published in 2008) during the keynote address at the Northwest Cherry Institute meeting held in January in Yakima, Washington. In the book, Roberts critically examines the economics of the modern food system. It follows a similar book he wrote in 2004, The End of Oil.
While many factors are involved in the price of food, Roberts reminded growers that the rising cost of crude oil is one of the biggest. He pointed out that since 2004, agricultural transportation costs have more than doubled, and he forecast that diesel prices will rise to an average of $3.83 per gallon in 2012 and $3.94 a gallon in 2013.
“What does $5-a-gallon diesel mean for your business model?” he asked growers in the room. “We have a food system that was built around the oil business of the 1960s when crude oil prices were $30 a barrel. The minimum now is $105 per barrel. That’s the new reality.”
The drivers behind rising oil prices are complex, and include factors like politics, geology, fewer and smaller oil discoveries, more regulations, higher costs to retrieve, higher costs to prevent spills, and Wall Street speculation.
But high oil costs have also meant government intervention. The actions of the federal government to encourage alternative energy and to subsidize ethanol production from corn has had a ripple effect on agriculture. Growers are converting other crops and fallow land to corn fields. Because corn is a heavy user of nitrogen, fertilizer supplies are tight, and costs have skyrocketed. Feed costs for livestock and dairy cows are at an all-time high, helping to increase consumer prices of meat and milk products. And, as Midwest farmland values rise, so, too, does investment in farming from outside sources.
The rise of the middle class in China has also contributed to higher food costs, Roberts said. The Chinese, in upgrading their diets, have become carnivorous, increasing their per-capita meat eating to more than 50 pounds in 2008, up from 20 pounds per person in 1985.
A trend disheartening to Roberts is the aging of America’s farmers. The U.S. Department of Agriculture has estimated that one-third of all farmland owners have fewer than 15 years of remaining life expectancy, and Roberts believes that because few farm children are returning to the farm, most of this land will be sold on the open market, with wide-ranging consequences.
Investors tend to go for the fastest return and are less concerned about consequences in their hunt for the quickest return, he contended. “Short-termism” affects the way that companies and producers focus, and they are more willing to take on high-risk ventures and have less patience and willingness to stick with something.
From the 1930s to 1960s, Roberts noted, the average holding period for stocks and bonds was nine years. As technology made trading faster, the holding period diminished to less than a year in 2010. “Today, with the high speed of trading in nanoseconds, the average holding period is four months.”
The loss of patience within the business community has also impacted support for research and development, including agriculture, he said. Total public and private funding of research and development in agriculture as a percentage of the country’s gross domestic product began to flatten in the 1980s and has been in decline since 2000, while, at the same time, other countries are spending more as a part of their gross domestic product.
“If anything, the need for R & D is going up because of complexities of the market,” he said. “We need to do R & D for a lot of things, like labor efficiency and productivity, fuel efficiency and transportation, and climate mitigation.”
Though he’s no fan of the oil business, Roberts suggested that the oil industry be considered as a business role model for its long-term commitment. The oil industry places emphasis on R & D and makes long-term commitments to getting oil out of the ground. Short term perspectives lead to simplistic analyses.
“The oil industry focuses intently on its core competencies of producing oil,” he explained. “It ignores the noise and doesn’t pay attention to speculators or politics, and places huge emphasis on R & D. It makes long-term commitments to projects, projects that take seven to fifteen years to get oil out of the ground.”
He believes that a short-term perspective leads to shallow understanding of complicated issues, simplistic analysis, and makes it hard for businesses to make the right decisions.
“You need to know where you are in the event chain and know your time frame or perspective,” he told the cherry growers, acknowledging that they already have a long-term commitment by growing perennial crops. “But even you feel short-term pressure to get the fast return. That’s the challenge in going forward—balancing the short- and long-term objectives.”