Analysis & Reviews

Agriculture - Properous Ever After

Agriculture: A Prosperous Ever After?

There is much talk about food security, agriculture and climate change lately with a series of publications since late November by the Chinese government, the FAO, HSBC and just recently the World Economic Forum (WEF) in Davos. Moreover, the No.1 Document issued in early Feb, returns the spotlight to agriculture. Besides food, property and weather are always popular topics of conversation during Chinese New Year. So to kick off the Year of the Dragon, I thought I should address them too … how the weather could affect our food;  how our food could affect property prices and finally the all-important question – can we continue to eat prosperously ever after?

Weather & our food

Whenever there is talk of climate change, there is talk about how agriculture will be affected. Obviously, rising temperatures, unpredictable precipitation leading to droughts and floods all affect agricultural yields.  But then there is the less obvious question of emissions from agriculture. Not just gaseous emissions like carbon caused in part by the expansion of agricultural land use, nitrogen oxides from transport related to production and delivery, but also water polluting emissions from fertiliser and pesticide usage. The 12th Five-Year Plan (FYP) introduced six new water pollution targets – ammonium nitrate and five related to heavy metals on top of chemical oxygen demand identified in previous plans. These new targets will no doubt impact agriculture and fertiliser use in the future.

Yes, agriculture will be challenged by changing weather patterns. Indeed, HSBC released a report in early January titled “Agriculture: Double trouble” explaining just that. Of the G20 countries, HSBC ranks India and China as the no.1 and no.2 countries most vulnerable to climate change. Whilst the contribution of agriculture to global GDP is only 3%, agriculture represents 17.6% and 10.7% of GDP for India and China respectively. Moreover, the sector employs around 1 billion people globally, representing 35% of the global labour force. That means a disruption in agriculture is more than economics, it could undermine food security and social stability. China’s Second National Assessment Report on Climate Change issued in November 2011, concurs. It states that future climate change may further affect the existing food production system, as an increase of 2.5 oC in global temperature could lower food production of up to 20% in China.

On average, during the growing season, yields decrease 10% for every 1oC of temperature gain above the optimum. With rising greenhouse gases (GHG), most experts believe it will be difficult to keep temperature rises to within 2oC by the end of the century, culminating in a vicious cycle; agriculture alone accounts for over 13% of global greenhouse gas emissions and together with land use change and deforestation, this number could be as high as 30%.

Indeed, the recent WEF pow-wow in Davos, recognized the water-food-energy nexus in their Global Risk 2011 Report, pointing in particular to food security as one of the three important clusters of risks that emerged in 2011.

“Water security, food security and energy security are chronic impediments to economic growth and social stability. [The diagram below] shows their interrelatedness: food production requires water and energy; water extraction and distribution requires energy; and energy production requires water. Food prices are also highly sensitive to the cost of energy inputs through fertilizers, irrigation, transport and processing.”

The bad news does not stop here.

India and China are also top producers of many key crops – 50% of rice and cotton, 28% of wheat, 32% of potatoes and 11% of soya1.

Note from the charts that China is also a significant producer of key meats – it is the No.1 producer of pig and sheep meats globally.

India and China are already water-stressed and with rising temperatures, more water will be required. Any disruptions in agriculture caused by weather or water risks will not just be contained within the two countries; they will have pricing, trade and policy implications for everyone else around the world. (In Hong Kong over 90% of all our meats come from the mainland2)

And that is just the weather … what about the land to grow the food?


Finite fertile land

China’s land size is comparable to that of the US and Canada appears to be faring well in its endowment of arable land with a 15% share compared to the US’s 17% and Canada’s mere 4.5%, but not as blessed as India with 48%.

However, on a per capita basis, it is a different story…

China only has 1.1km2 of arable land per capita compared to India’s 1.4km2. India and China’s arable land bounty dwarfs in comparison to the USA and Canada’s  5.6km2 and 14.0km2 per capita respectively.

In 2008, China had to make this 1.1km2 per person work to produce agricultural produce which contributed 10.7% to its GDP whereas agriculture only accounts for 1.2% USA’s and 1.6% of Canada’s GDP, making China much more sensitive to shifts in agriculture than the US or Canada.


Enter water resources

To add to land scarcity, the majority of China’s arable land lies in the more water scarce northern parts of China. Neither fertile land nor water resources are fungible across provinces and some fare better than others.

Food security is definitely in the forefront, with the top four farmers representing 30% of China’s total agricultural output value falling below the Water Poverty Mark.3 (See “Top 4 Farmers” in the Big Picture for more on this).

So to summarise so far:

  • China has less arable land than the US and India;
  • China is the #1 producer of many agricultural products from key crops to key meats;
  • China’s top 4 farmers have similar water resources to the Middle East; and
  • China after India is the #2 country most vulnerable to climate change, of the G20 countries.

Not exactly a great position … Should we be worried about the prospects of China eating prosperously every after?


Rising demand for food

Demand for food has been rising and is expected to continue to rise with China focused on shoring up domestic consumption and raising living standards. An increasing urbanization trend also lends support to this rise.

Over the last 10 years (2000-2009), the total output value of Agriculture has grown by 250%. Total animal husbandry output value has almost tripled (at 2.8x) taking up 33% of the pie compared to 29% ten years ago as the Chinese move toward a meat-based diet.


Potential strategies to ensure a prosperous ever after

With rising demand for food, limited land and water resources, we turn to technology. Technology will be the main driver of strategies to ensure food security and a prosperous ever after. Improved yields through better application of fertiliser, increasing crop per drop and genetically modified seeds are examples of this.

Indeed the 2012 No.1 Document’s focus on agriculture and technology confirms the same. The government clearly indicate its support by committing to finance agricultural, scientific and technological innovation to encourage sustained agricultural growth. However, not all strategies are technology related …

Fertiliser fuelled growth

Since over the last 20 years, irrigated land has only grown by 25%, farm output growth of 60% can largely be attributed to to fertilizer use. The use of chemical fertilizers grew by 67% in the same period.

According to the No. 1 Document, China will increase its irrigated land area by 2.7 million hectares by 2015, but is that enough? Or will China still be reliant on fertilizer to fuel growth? Many analysts believe reliance on fertiliser will continue and have bullish calls on fertiliser stocks.

Potential industry consolidation also makes the fertiliser industry attractive. Currently, urea represents around 65% of nitrogenous fertiliser production4 and industry experts expect the ~150 enterprises in 2010 to consolidate to around 30 something and then to around 10 large-scale producers in the near future.

Word of caution: New ammonium nitrate emission limits in the 12th Five-Year Plan.

Increasing crop per drop

Putting the New Vision for Agriculture into Action: A Transformation Is Happening”, a report prepared in by WEF in collaboration with McKinsey & Company cites increasing agricultural water productivity (“crop per drop”) as a key driver in realizing the goals of the New Vision. Crop per drop can be achieved through “improved efficiency of water application and net water gains through crop yield enhancement (both in irrigated and rain-fed lands). This implies both the need to capture greater water efficiencies from rain-fed and irrigated land (i.e., “green” and “blue water”), and a need to improve crop yields to minimize cultivated land area requiring irrigation.” (see how different amounts of water are required to grow the same crop in different countries in Big Picture: Virtual Water Content).This can be done via a combination of improved fertilizer balance, integrated pest management, better drainage, plant breeding and intercropping practices.

GM crops

Will limited land and water resources finally push genetically modified (GM) crops to centre stage? Europe may still say no but China’s 12th Five Year Plan has a whole new Strategic Emerging Industry (SEI) dedicated to this – Bio-technology

“Bio-technology : Foster biological breeding, actively promote green agricultural products and further the development of biological agriculture. Further the development, demonstration and application of key technologies used in biological manufacture”  State Council

Import water through importing food

Going forward, given intensifying competition for water resources from industrial and municipal use, thanks to a more affluent population, China may have to import water through food. It is more efficient to import water through food especially when an 8 oz steak has 17 bathtubs full of water embedded in it.

There is currently no major agriculture import partner with China at the moment. For more on competition for water resources and its potential to cause trade shifts see “Food for Thought” or my opinion in the South China Morning Post.

Land grab

Land grab is another strategy. Already, Chinese companies are buying up large tracts of farmland in Papua New Guinea in anticipation of increased demand for food. So with scarce arable land and water resources, it is not hard to see that food will affect property prices going forward.


More than food

Agriculture is more than just food – it is also clothing and with 50% of cotton coming from India and China, textile production will be affected; as could leather production.

Global clothing companies are just starting to focus on this. For example, Puma executed its first environmental audit last year. With cotton contributing 90% of natural fibres used in the global textile industry, any water risk in China/India will add to price volatility. Indeed, droughts in China affected cotton crops and prices rose over 50% in 2010/2011, causing H&M to announce a 20% fall in profits in the first nine months of 2011 and GAP to slash profit forecasts by 22%5. High cotton prices has also led to higher synthetic prices pushing prices of base chemicals up.


Enough land & water to feed the world?

Land and water resources and the way they are used are central to the challenge of improving food security across the world. With the world population at 7 billion and expected to grow to 9 billion by 2050, do we have enough land and water to feed (or clothe) the world?
The recently published (Dec 2011) “State of the World’s Land and Water Resources for Food & Agriculture” (SOLAW) by FAO states that agricultural production growth has to rise faster than population growth, so as to not only to feed the impoverished but also to satisfy an increasingly affluent population. To support the additional 2 billion people, an additional 1 billion tonnes of cereals and 200 million extra tonnes of livestock products will need to be produced every year. Can we manage this? Do we have enough land and water resources for the future? As it is, 14%, or 1 billion people, are still undernourished today – 58% or 578 million of whom live in Asia.
“Land and water use in agriculture is caught in a policy trap. On one hand agricultural policies have been effective in responding to increasing demand but on the other hand they have resulted in a set of unintended consequences, including over-application of fertilizer and pesticides and depleted groundwater storage. Equally, water policies have driven expansion of water supply and storage, but in some water-short areas, this has created excess demand and ‘constructed’ scarcity. Low tariffs for irrigation water services have also encouraged its inefficient use.” SOLAW Dec 2011



Enter the dragon

With 20% of the global population and as a key agricultural player, China’s water and land management policies have a global impact. Already, China’s capacity to continue to grow food to satisfy domestic consumption, is constrained by:

  • competition for water and land by industry and municipal use;
  • limited arable land; and
  • water scarcity

As demand for food grows, demand for water grows. The Chinese government is ahead of the game on this with a target improvement in water efficiency in rural irrigation of 55% by 2015. It is also imposing a per annum total water consumption cap of 670 billion m3 by 2020 and is setting aside RMB4 trillion for water projects over the same period. The government similarly hopes to build effective flood control and drought relief systems by 2020 and has indicated that water tariffs will rise. The No.1 Document’s focus on agriculture and technology further highlights concerns over sustained agricultural growth.

Agriculture is of paramount importance to China and has been the topic of the No.1 Document with the exception of 2011 when it was replaced by water. Does this mean agriculture is less important? Quite the contrary, the Chinese government is just trying to ensure that the most important raw material for agriculture, water,is secure. Maybe in the Year of the Water Dragon, it’s time we follow China’s move and swim upstream to the source – it is not about food, property or the weather, the focus should be on water because without it, the rest is naught. No wonder that the Chinese equate water with riches and abundances … revert to basics and we should be able to live a prosperous ever after.


Recent key agriculture & food security reports for further reading

Nov 2011

Second National Assessment Report on Climate Change

Ministry of Science and Technology, China Meteorological Administration and Chinese Academy of Sciences (CAS) with the help of Ministry of Foreign Affairs, National Development and Reform Commission, Ministry of Environmental Protection, Ministry of Education, Ministry of Agriculture, Ministry of Water Resources, State Forestry Administration, State Oceanic Administration and National Natural Science Foundation of China

Dec 2011

State of the World’s Land and Water Resources for Food & Agriculture

FAO

Jan 2012

Agriculture: Double trouble

HSBC

Feb 2012

Putting the New Vision for Agriculture into Action: A Transformation Is Happening

World Economic Forum, McKinsey & Co

1FAOSTAT 2008
2Hong Kong’s Food and Health Bureau
3National Bureau of Statistics of China, China Statistical Yearbook 2010
4 CNCIC, 2010
5Financial Times, Water torture will keep markets volatile, Steven Bullock, Head of supply chain research, Trucost


Debra Tan

About Debra Tan

Debra heads the China Water Risk team. She was tasked with taking The Asia Water Project pilot to the next level and was responsible for the direction and build out of China Water Risk portal for ADM Capital Foundation. Debra started her career in finance, spending over a decade as a chartered accountant and investment banker. She has lived and worked in Beijing, HK, KL, London, New York and Singapore. Debra left banking to explore her creative side. She has since pursued her interest in photography and within a year had her first solo exhibition sponsored by a global bank. She also ran and organized hands-on philanthropic and luxury holidays for a small but global private members travel network and applied her auditing, financing and photography skills in the field for various charitable organizations and foundations. Debra believes that we can all make a difference, if only we see the ‘big picture’.

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