An independent professional's take on the latest news and trends in global financial markets

Brazilian farmland

I have been persuaded for some time by the strength of the argument that the world is experiencing a secular bull market in commodities. Early on in my  career as a business journalist I was assigned to covering the energy markets for The Times and The Economist. It was on my beat, in 1986, that oil prices collapsed within a year from $30 a barrel to $10 a barrel, making a mockery of those who had argued – as many did in the 1970s – that the world would never see cheap oil again.

It brought home to me the fact that commodities of all kinds are prone to long  cycles, in which, just as the Bible says, long periods of plenty are followed by long periods of famine, and vice versa. There is a ready explanation for this, in that lead times in developing new sources of supply for many commodities are long. While higher prices do lead eventually to overcapacity and innovation, and price falls eventually to shortages and complacency, it takes a lot longer than it should for supply and demand to respond to these price signals.

This is one of several reasons why, four years ago, I decided to become a founding shareholder in a private company called Agrifirma, founded by Jim Slater and Ian Watson, for which we have subsequently raised $190m in equity capital. The company’s strategy is to buy uncleared scrubland in Brazil and convert it into productive arable land. In Aguust 2011, in return for an investment of $80m, we struck a deal with one of Brazil’s leading private equity groups to divide our land holdings into two separate companies, Genagro Ltd and Agrifirma Brasil. Together these two entitities own some 69,000 hectares of land in Western Bahia and may buy more.

Of this total some 6,000 hectares are already fully developed, producing soybeans, corn, coffee and cotton, and a further 15,000 hectares are in the process of transformation, using technology devised by Embrapa, the Brazilian agricultural research institute. A licence to develop further hectares is expected in 2012. (We do not operate anywhere near the rainforest, incidentally, and employ sustainable farming methods). You can find out more from the Genagro and Agrifirma websites. The Spectator recently published an article recounting how I came to be involved in this exciting new venture.

In that article I concluded:

Government bureaucrats and food rioters, however well-intentioned, cannot will into existence all the extra land and productivity which is needed to solve the world’s looming food crisis.  The private sector will have to provide a good deal of the capital, management and technology that are needed, and absorb the attendant risks. In any event, whatever the eventual financial returns from our endeavour prove to be, doing your bit to feed the world is a far more satisfying way to invest than, say, indulging the habits of tobacco addicts, picking up the bill for oil disasters or lending money to near-bankrupt governments.

My opinion on that score has not changed. The long term cyclical upswing in many commodity prices that we have experienced since the turn of the 21st century is well advanced but is probably not yet over. It will, on past historical experience, take a further five years or even more before it has finally run its course and the global imbalance between supply and demand has been fully eliminated by new investment, technological breakthroughs and sensible government policies to encourage the development of new supplies. Agriculture is just one part of this bigger picture.

Written by Jonathan Davis

February 21, 2011 at 5:23 PM