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Boiling frogs and refrigeration

The UK has just had the wettest summer for 100 years. In contrast the US has experienced scorching temperatures and the worst drought in over 50 years, withering crops and prompting headlines of a new global food crisis.

As a result, the US Department of Agriculture has slashed its estimate of the size of the domestic corn harvest by more than a quarter since its first estimates in May and corn and soybean prices have reacted by rising sharply.

But are the consequences of the poor harvest in the US as significant as the raft of other, more subtle and long-term trends affecting the global food chain?

The Victorians had a metaphor for slow moving trends: the ‘boiling frog’.

If a frog is placed in hot water, the theory goes, it will immediately jump out. But if it is placed in cold water and then slowly heated, it will not recognise the danger and will ultimately be boiled.

The idea captures the way often struggle to recognise or react to very gradual changes in their environment.

For the global food chain, the first gradual change – the first frog if you will – is the steady increase in the world population.

In 2011, the global population passed 7 billion for the first time, doubling the figure for 1970. This continues to grow by about 70m each year, and is forecast to reach 9.3bn by 2050.

Most of this growth comes from large developing countries such as India and Nigeria. China’s population – though very big at over 1.3 billion – is not growing due to the ‘one child’ policy.

The second frog is the gradual improvement in incomes and living standards across the world. This increase in wealth allows an improvement in diet: meat and fish are consumed more regularly, new fruits and vegetables are introduced into the diet, demand for processed and branded food rises and eating out at restaurants becomes more popular.

In this process the value of the food economy increases but more volume of food is also required. Producing a kilogram of pork in a modern piggery in China, for example, requires feed of about four kilograms of soybeans and other grains.

There are also boiling frog trends affecting the supply of food. Although the details of climate change are still disputed, there is increasingly little doubt that heatwaves are much more common than they used to be. Monsoon and other rainfall patterns are changing, and the average temperature is rising.

Anecdotally, farmers around the world relate stories of how growing conditions have changed in a generation.

Meanwhile, land itself is in short supply and changes in land use have also gone under the radar. According to the UN Food and Agriculture Organisation, the UK has lost around 15 per cent of its arable land since 1970.

These boiling frog trends, gradually building demand for food and constraining supply, provide an inauspicious background to the current US drought.

While the yield of the US corn harvest this year is expected to be the lowest since 1995/96, the huge scale of plantings means that the total harvest volume is in fact still forecast to be the 8thlargest on record.

Crucially, relatively little US corn goes to feed people directly: over 80 per cent is used for animal feed or biofuels (like ethanol), for example.

The spike in prices has led to expectations that demand from most users will fall, but ironically there is little flexibility for demand to be cut back in ethanol production, as under the US government’s renewable fuel policies there is a mandated minimum level of ethanol that must be blended with gasoline. Over the last year, 4.5 billion bushels of corn were processed into ethanol under this programme; to give an idea of scale, that corn could have fed an estimated 140 million people for a year.

So a drought-affected corn harvest in the US may not be as bad as it first sounds. But what if a major drought hit elsewhere?

Rice and wheat are both more widely consumed than corn as a staple foodstuff, and a severe extended supply disruption in China or India – the number 1 and 2 producers of both commodities – would be much more concerning from a food security point of view (between them they produce more than three times as much wheat as the US).

Most emerging countries experience high wastage in the food production process but encouragingly, some of these losses are gradually diminishing due to the introduction of better farming techniques and the gradual improvement in the infrastructure for handling, transporting and storing grains.

In India it is estimated that up to 19 million tonnes of grain are currently stored in the open, exposed to sun and monsoon rains, and at risk of rotting. As better infrastructure and storage allow losses to be reduced and better farming and irrigation techniques improve productivity, the risk profile diminishes but a drought outside the US remains a critical threat to food security.

This brings us finally to the fridge.

The gradual improvement in emerging market infrastructure is not just a matter of new roads, railways and ports: new electricity supplies can have the most remarkable impact.

A fridge requires a stable electricity supply and makes an enormous difference to how much and what kinds of food people buy. It allows a consumer to store perishable items, and to succumb to the luxury temptations of meats, dairy products and fizzy drinks.

It opens up a huge new world of choice and a whole new world of potential sales and profits for the supermarkets and suppliers of packaged, chilled and prepared foods.

The Chinese government’s 2009 programme to provide rural subsidies for domestic appliances led to refrigerator ownership in rural areas rising from 30.2 per cent to 61.3 per cent by the end of 2011

In Africa, electricity grids in several countries like Ghana are stabilising and fridge sales are rising, this is allowing supermarkets like South Africa’s Shoprite to open new stores and access new consumers. In short, a proliferation of basic fridges automatically multiplies the economic value of the food chain many times over.

So while the prices of basic food crops will rise and fall every year depending on the weather, boiling frog trends point to a more substantial and long-lasting economic change in the food chain, the increasing value of the food being sold as diets change.

Henry Boucher is the deputy chief investment officer at Sarasin & Partners and manager of the Sarasin AgriSar fund



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