Several aspects of the agricultural sector are in a state of flux. Wind and weather patterns may transition from a strong El Niño to La Niña by late 2016, while environmental concerns from greenhouse gases, to contamination, to soil erosion and water stress cast long shadows.
The past 14 months have seen record global average temperatures, indicating that predicting future climate conditions for agriculture will get more difficult. Agricultural machinery and methods seem to be on the brink of far-reaching changes thanks to drone technology, self-driving and automation.
At the same time investor interest in commodities, including agriculture, has perked up, reflecting improved price momentum and a lower opportunity cost for investing against a low-to-negative interest rate backdrop. Hedging strategies can also add stability, mitigating food pricing shocks.
Weather patterns are changing, with implications for harvests. By mid-2016 warm Pacific Ocean conditions associated with El Niño had faded and the cooler ocean La Niña phase is widely predicted. With the caveat that the effects from these changes are irregular and vary from cycle to cycle, generally they suggest higher grain prices.
Previous episodes of La Niña have been linked to summer heatwaves and poor grain and soyabean crop yields in North America. If that ensues, the high inventory levels in wheat and corn would diminish, while soyabean demand is expected to outpace supply this year and next.
There is also upward pricing pressure in the medium term from rising energy, fertiliser and chemical costs. These operations are exposed to water risks, requiring large amounts to process grain, and particularly corn and soya.
This risk factor is increasing in importance, especially in the US, China and southern Europe, where water-stressed regional stakeholders may get into conflict with agricultural operations over water resources.
A key exemplar is California, which is facing significant long-term shortages of water due to intense drought conditions over several years.
Technology is also at an interesting juncture. The basic design of tractors and agricultural machinery has barely changed in 80 years, although they have become more powerful. Progress in automation is moving on from hands-free, to autonomous and unmanned, using sensors and satellite technology and allowing a single operator to control multiple machines.
Drones, too, are being deployed to detect and treat outbreaks of pests and diseases and target the application of fertilisers. This will increase operating efficiency and reduce the quantities of chemicals used. The latter is a meaningful benefit, given the extent that agriculture contributes to pollution and greenhouse gas emissions.
In related sectors the demand for fertilisers, weedkillers and pesticides is linked to the prices of agricultural commodities. Two years of low prices has tightened margins and reduced spending on these products. Fertiliser demand is likely to be boosted by subsidies in India and Sub-Saharan Africa, as well as by increasing land areas in Latin America and Asia.
