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Africa-Brazil-China axis key for world agriculture

A new report says that Africa will play a key role in the future of food security

 Following the inflation spike that swept the globe in 2008, caused by a sudden jump in food prices, the renewed argument over food security can typically be distilled into two opposing views: how can government intervention prevent a tragedy? Or how can free markets resolve the issue?

The world’s population topped seven billion in November 2011 and is continuing to rise so how the planet will feed itself is clearly a real problem. At the same time, the advent of biofuels, which now account for some two-fifths of grain demand, has made grain a strategic product. However, grain was already heading in that direction as countries increasingly struggle to produce enough food to feed their own populations. Food is already half way to becoming the new oil and those countries that produce a surplus will exercise the resource nationalism over grain and soybeans in the same way that hydrocarbon producers have leveraged influence through oil supplies.

The danger is not immediate but it is clear and present, and solutions will probably involve a combination of clever thinking, some planning, a lot of cooperation and a bit of luck. Markets, too, will have a major role to play.

While the developed world has little space left to expand food production, most of the increases in the global supply will come from the emerging markets. Eastern Europe and South America are two areas blessed with large swathes of untouched fertile land where yields are less than half those in the developed world.

The BRICs dominate equity investors’ attention, but it is the Brazil-Africa-China (BAC) axis that is key for agriculture: in the last four decades, Brazil accounted for the majority of new food production and Africa’s huge potential has barely been tapped, whereas China is defining the rise in demand.

Africa has the potential to become the breadbasket of the world. Its main asset is the vast amount of undeveloped fertile land, a 600mn hectare band that sweeps across the entire continent known as the Guinea Savannah, which by itself could feed the world’s next generation.

According to the UN Food and Agriculture Organisation, Sub-Saharan Africa consists of 2.3bn hectares of land, of which nearly one billion hectares is suitable for rain-fed crop production. Of this one billion hectares, some 421mn hectares is described as “very” suitable for crop production, which means the attainable yield in these lands is 80 to 100 per cent of the maximum theoretical yield. However, in 2005 only a quarter of the productive land was actually being exploited, according to the FAO.

Africa’s own rapid development has already begun to pull more resources into its developing agricultural sector. Rapid urbanisation and growing industrialisation has already put pressure on the continent’s ability to feed its own and it is already running a structural food deficit of US$30bn a year. The industrialisation of African agriculture is inevitable; the structures that will come to dominate the African agricultural landscape will be the equivalent to the industry that transformed the Chinese economy throughout the 1980s and 1990s.

Africa has a lot to learn from Brazil’s experience, as the two countries have much in common. The breadth of Brazil’s topography, geography and climate is broadly similar to many parts of Africa, and the potential of the Guinea Savannah is similar to that of Brazil’s Cerrado region, the agro-success story of the last century. Brazil’s successful economic reforms and effective government support encouraged private capital to invest in agricultural, transforming Brazil into a global force in the agro-sector.

China is the other half of the equation that describes the state of the world’s food markets. Economic prosperity is changing dietary demands in the world’s most populous country, which is having an impact that can be seen in the prices of food on the shelves of every shop in the world.

While Beijing has concentrated its efforts on boosting yields of wheat and rice, which are strategic products, it has almost entirely given up any ambition to produce the strategically less important soybeans, relying instead almost entirely on imports. Brazil has stepped into the breach and annual exports of soybeans have doubled from 15mn tonnes to 30mn tonnes over the last decade, much of it going to China.

The immediate problem of growing enough food to feed everyone has been met, but as food becomes an increasingly strategic product, governments are becoming more uncomfortable with sourcing supplies from one destination. The desire to diversify sources of supply will only push more investment toward Africa, which can act in concert with Brazil to supply China – and indeed everyone else – with the basic agricultural inputs.

The development of agriculture is being led by the emerging markets, but the consumption and potential for new sources of agricultural products is also very much an emerging market story. The BAC axis is likely to play the dominant role in the new geopolitical agro-balance and Africa must open up to international trade in agricultural products if the planet wishes to avoid food scares. It really is that simple.

 

Article sourced from Renaissance Asset Managers (UK) Limited
www.renasset.com


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