Advances in the field
Agricultural cycles are in many ways like a traditional capital cycle – swinging between overinvested (resulting in surplus) to underinvested (resulting in deficit). But there is the added complexity of an unknown variable: the weather.
Bad rains or drought can affect production during deficits. Good weather can help production during periods of surplus. Both exacerbate supply and demand dynamics, making for more extreme pricing relative to other commodities.
The impact of climate change on regional weather patterns could further stress agricultural cycles. Extreme heat or wet weather could make already-volatile markets even more so. In our view, swathes of traditional agriculturally productive land risk becoming less productive (see chart below) or being lost entirely. As temperatures rise, required yields increase from remaining farmed lands to avoid excessive food price inflation.
Studies suggest that key farming regions and major crops will see yield declines with global warming. For example, the US (which represents c.40% of global corn production) has been estimated to see a 7% yield loss with each degree Celsius of local warming, without effective adaptation strategies.
The needed increase in yield will likely be facilitated by greater application of yield improving technologies. This includes crop science and fertilizers, but also improved irrigation and machinery. These requirements will often be region and crop-specific, alleviating for example, the issues of water in India or nutrient content in soils in the US “corn belt”.
The views and opinions contained herein are those of Schroders’ investment teams and/or Economics Group, and do not necessarily represent Schroder Investment Management North America Inc.’s house views. These views are subject to change. This information is intended to be for information purposes only and it is not intended as promotional material in any respect.