Since 2007, high and volatile food prices have become a depressingly regular feature of the global landscape, wrecking millions of lives. A report by the World Bank in April found that 44 million people had been pushed into poverty during the past year thanks to higher food prices.
The reasons for the price surges are varied but can be boiled down to a simple demand-supply imbalance. Thanks to a rapidly rising and increasingly wealthy population, demand for food is growing at 2% a year. Supply, conversely, is increasing at only 1%, with arable land and water shortages, a fall-off in investment in infrastructure, and poor productivity heading an overwhelming list of challenges that need to be overcome.
Radical action is required if the situation is not to worsen. In 2009, the UN forecast that an additional $83 billion of net investment would be needed in primary agricultural services every year for the following 40 years if the likely global population in 2050 are to have enough food. And even more billions are needed to improve the infrastructure necessary to get food from the ground to the marketplace.
It’s hard to overstate just how difficult meeting these targets will be.
To have any chance, the private sector must play a decisive role, not least the banking industry. As providers of money and risk capital, banks can help finance the whole agricultural value chain – from the farmer to the producer, to the distributor to the retailer.
The opportunity cuts across all business lines, with structured lending, trade and infrastructure finance and commodities trading being the most prominent. With commodity markets becoming ever more volatile, many banks have invested heavily in their agriculture trading desks over the past few years. Finding solutions to mitigate food-price risks for both producers and consumers, be they corporates or sovereigns, is now central to banks’ risk management strategies in a way they weren’t even five years ago when prices were still relatively stable.
Banks’ advisory businesses could become busier too, especially in counselling import-dependent governments on purchasing overseas land in their quest to secure food.
It’s a sensitive area and the example in Madagascar in 2009 when the government was overthrown after agreeing to sell land to Korean chaebol Daewoo – a decision that was later revoked – still resonates.
Yet foreign investment is sorely needed, especially in Africa, for developing land and upgrading the logistics and infrastructure necessary to make it productive. Few investors, apart from governments in the Middle East and Asia, have the resources or the time to adopt a land-to-consumer approach, which if successful would contribute to the development of commercial agriculture on a sustainable basis.
The sensitivity around advising investors on foreign land purchases sums up one of the biggest challenges facing banks: making money without being seen to exploit the most crucial resource of all.
That sensitivity is most apparent in the financial commodity markets. The accusation that speculation, trading and unstable food prices are all inextricably linked has long been part of the financial markets’ landscape. And while the argument might be overdone – surging food prices are largely the result of global trends – undoubtedly financial players have played their part in exacerbating volatility. Commodity index funds have seen a 50-fold increase in investments since 2000. As a recent UN report argues, the sheer volume of money pouring into the sector has had a negative effect on both producers and consumers, yet investors and banks have prospered from the trades. Tighter position limits seem a sensible reform to ease short-term price pressures.
Most bankers are cognizant of their responsibilities. The last thing they want is a PR disaster by becoming involved in a piece of business that contributes to the food crisis. And yet banks are in the business of making money.
Can they be agents for good and profit from food at the same time? Yes, and it’s essential that they continue to do so. For without their loans, without their risk-management skills, without their ability to help producers raise capital, the food crisis will get worse, with the world panicking about actual shortages and not just prices.
The challenge is daunting enough.
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