Friday, October 15, 2010

Food As an Asset Class

In her Australian Age article today ( Food for more thought) Jo Chandler talks about her trip to Malawi in October 2005 when she saw the desperate famine and the awful spectacle of western aid agencies having to ask village elders to choose who should receive the limited food aid available.  She then contrasts this with Malawi in 2010.  The country is now a net exporter of food to its neighbours after the president introduced a program to subsidise fertiliser and seed and encourage a drive to self sufficiency.

Chandler talks about the emerging food crisis and the consequence of limited investment in agriculture research and development compared to the need.  She quotes the director-general of the UN Food and Agriculture Organisation Jacques Diouf.

 "More than 70 per cent of the extremely poor live in rural parts of developing countries, and those areas need investment in seeds and fertiliser, and better access to markets, to reduce hunger. Developed countries promised to invest $22 billion in aid to agriculture from 2009 to 2011,  but so far only $425 million has been spent. Movement is in the right direction, but the pace needs to be accelerated".

And she quotes from the Australian director of Oxfam Australia. 

''We have seen the results of decades of immediate interventions without long-term planning, and it has not helped people in developing countries to have sustainable access to enough food. What we need is a long-term response that invests in small farmers who feed their families and communities, that helps farmers adapt to the impact of climate change, and that provides sustainable ways to use the land and water resources we have.''

The  UK based Financial Times today (Friday 15 October) contained a  special supplement titled "World Food" which profiles the emerging food production crisis in the world.  Reference is made to the recent decision by the  Bill and Melinda Gates to now focus on agricultural research and development as part of its new focus on food security.  There is also reference to the the bid by BHP Billiton, the world's largest mining group - for the Canadian fertiliser company PotashCorp.  

And in Australia - there is a race by Canadian agribusiness companies to win control of the Australian grain sector - with Viterra of Canada acquiring control of the Australian wheat and barley exporter ABB and the more recent bid by the Canadian fertiliser company Agrium for control of the former Australian Government owned grain exporter AWB Limited.  

All this  "food crisis stuff" is attracting  serious attention from  the world's financial press.  What is it telling us?  That perceptions are shifting about food production assets as an asset class - and that food itself is now becoming a strategic lever  as the world starts to realise it  needs to re-scope the capital base around food production technology and infrastructure - within the new constraints of the post GFC  liquidity and capital rationing,  declining sustainable fresh water sources,  limited arable land availability and the impact of volatile climate change.  

The challenge is in three parts:

1. To equip the rural poor around the world to feed themselves (using the Malawi model).

2. To provide sufficient food to the world's city based populations.

3. To understand how and where the global investment community should place capital into food production assets (following the lead by BHP with it's potash play).

I prefer to be optimistic about these challenges.  What an opportunity for the innovative use of capital and for fresh thinking!

Tuesday, October 5, 2010

Look to the East for Liquidity

We continue to see the impact from the  collapse of liquidity and erosion of value in the old world economies  flowing from the global financial crisis of 2007 and 2008.   The Wharton School of the University of Pennsylvania recently reported ( In Search of Capital ) that during 2009 angel investing in the USA in start ups declined a further 8.3% to $17.6 billion - following an earlier massive  drop of 26.2% in 2008.  This didn't really overcome the positive news that because deals were slightly smaller in size last year there was actually a 3% increase in the total number of firms that got financing.  If the US stops funding entrepreneurial activity there is something seriously wrong.

In June we saw Dave Kansas pose the question Did China Save Your Retirement in his Wall Street Journal article - proposing that unless the Chinese let their yuan appreciate against the US dollar US retirement savings were under severe threat - and expressing some relief that there appeared to be some signs that China appeared to making moves to loosen controls on their currency.  More recently we have seen the US legislature approve new laws empowering the administration to take punitive action against the Chinese unless they relax their currency controls.  I won't hold my breath.  Why should/would they?

To me the best indicators of what is happening is to watch where the private bankers and investment bankers are going with staff, infrastructure and to source capital.  And it's not Europe or North America. It's India and China.  Look at the example of Lombard Odier Darier Hentsch, the small and venerable old boutique Swiss private bank - which is boosting its Hong Kong team.  At the time it made this announcement in September it criticised it's larger private banking rivals also rushing to China stating that the days of product pushing are over and the future of private banking is "where the client is still the focus".  "The deleveraging that has occurred following the global financial crisis in 2008 has resulted in a structural change in the market.  It is not a cyclical change".

I am excited by this.  As an Australian living in our island at the bottom of Asia I am living right in the middle of the largest global power shift since the war.

What opportunity there lies for the brave and the agile!