1. MacquarieAGRICULTURAL FUNDS MANAGEMENTSEPTEMBER 2010The case forinvestmentin grains andoilseeds

2. ContentsExecutive summary01What are grains and oilseeds 03Demand side08Supply side16Where to produce 19Why invest in grains and oilseeds22The future for grains and oilseeds 24DisclaimerThis document does not constitute financial product advice and should not be relied upon as such. The information in this document is for discussion purposesonly and is not an offer or solicitation to purchase or sell any securities or financial product. None of the information in this document takes into accountany persons personal objectives, financial situation or needs and you must determine whether the information is appropriate in terms of your particularcircumstances. We recommend you obtain financial, legal and taxation advice before making any financial investment decision.The information contained in this document is strictly confidential. If you are not the intended recipient, you may not disclose or use the information in thisdocument in any way. No liability is accepted for any unauthorised use of the information contained in this document.This document is not to be distributed to any person or corporation by the recipient. Macquarie Group Limited is the owner of the copyright material in thisdocument unless otherwise specified. Macquarie Group Limited and its worldwide affiliates and subsidiaries accept no liability whatsoever for any direct,indirect, consequential or other loss arising from any use of this document and/or further communication in relation to this document.This document has been prepared based on information believed to be accurate at the time of the preparation of this document. Subsequent changes incircumstances may occur at any time and may impact the accuracy of the information in this document. Some of the information in this document and the figuresthat have been quoted, and or used within it, have yet to be confirmed and finalised and consent has not been obtained from all relevant stakeholders.It is important to note that to this extent the document may not be accurate or complete and some of the information could be subject to amendments. Anyforecasts contained in this document are predictive in character and therefore no undue reliance should be placed on the forecast information. Whilst everyeffort has been taken to ensure that the assumptions on which the forecasts are based are reasonable, the forecasts may be affected by incorrect assumptionsor by known or unknown risks and uncertainties. The actual results may differ substantially from the forecasts and some facts and opinions may changewithout notice on the basis of changing market conditions.Past performance is no indication of future performance.Other than Macquarie Bank Limited ABN 46 008 583 542 (MBL), no Macquarie Group entity mentioned in this document is an authorised deposit-takinginstitution for the purposes of the Banking Act 1959 (Cth) and their obligations do not represent deposits or other liabilities of MBL. MBL does not guarantee2 or otherwise provide assurance in respect of the obligations of the Macquarie Group entities mentioned in this document. 3. Executive summaryThe recent surge in global wheat prices driven by fears of exportshortage, coming from the drought in Russia, has served as a starkreminder of the new levels of volatility that are likely to continue to be apart of the global agricultural sector.Although food supply shocks have occurredGrains and oilseeds were historically seenthroughout history, these were mostly seen as primarily a food perhaps the worldsas a concern of the developing world. When fundamental food to be used for producinga crop failed in a major producing country, it bread, flour, pasta, oils and many other staples.was assumed that adequate supplies could beAnd while this demand continues to strengthen,sourced elsewhere. So long as there was food onglobal population growth combined with athe table, and no concern that this could change,general decline in arable farming land per capita,consumers and governments accepted supply as means that serious attention must be given toa given. how the worlds food needs can be met in the long term.Given the abundance of agricultural productionworldwide, little thought was given to assisting But the demands on grains and oilseeds gothe worlds farmers with adequate capital to well beyond food. The citizens of the worldsfund the research and development required developing nations, by far the majority of theto improve productivity, or to encourage the global population, have an increasing appetite fordevelopment of large scale agriculture toanimal protein, as a result of their rising incomesincrease efficiency. and demographic changes. As such, vast volumes of grains and oilseeds are needed toThe events of the last four years have made it feed the animals providing this protein.abundantly clear that the era of complacencytowards agriculture is over, and that the volatility In addition, demand from biofuels continuesin the sector, in terms of prices and supply, is to increase. The grains and oilseeds which arehere to stay. In no part of agriculture is this more used as feed stocks for ethanol and biodiesel arerelevant than with the grains and oilseeds sector. coming out of the food and feed chain, making supply even tighter. On top of this, the use ofFrom 2006 to 2008, the global price of most grains and oilseeds in industrial products, fromgrains and oilseeds climbed to record highs glue to furniture, continues to grow.driven by a number of different supply anddemand factors. Drought in key growing regions,While global demand for grains and oilseeds bothnew demand from biofuels, panic hoarding and increases and broadens, questions on the worldstrade restrictions by governments, and, to someability to supply this need increasingly requireextent, speculative investment, all contributed to answers.unprecedented price increases in the sector. Many of the worlds grain and oilseed producingImportantly, these events have focused the regions face environmental challenges in theirattention of governments, the media andlong term ability to produce adequate crops.consumers to agriculture, and generated an They are seeing agricultural land continuallyawareness that grains and oilseeds can no longer degraded by pollution and growing cities, whilebe taken for granted.water shortages have affected both developed and developing nations. 1 4. Executive summaryIn many areas which may have the available Through identifying parts of the world with thespace to grow crops on a large scale, factorsbest combination of factors for growing grainssuch as political instability or inadequateand oilseeds, and through establishing highlyinfrastructure make it an unviable option. The vital efficient agricultural operations, particularlyefficiency gains needed to increase grain andthrough building on the efficiencies of scale, itoilseed production are hampered by factors suchis clear that immense opportunities exist in thisas disincentivising government support programspreviously overlooked, but essential, sector.or the difficulties caused by having a multitude This paper provides an overview of what weof small landholders, rather than large efficient believe are the main grains and oilseeds that theoperators. In addition, overvalued land can world will increasingly demand, and considersprovide a further deterrent to investment. the main drivers of demand food, animal feed,In the wake of the events of 2008, and biofuel, and industrial products. The paperre-enforced by the price shocks of 2010, itwill also examine the factors limiting supply ofis clear that as demand increases, the mostthe worlds grains and oilseeds, and considereffective and efficient grain and oilseeds the specific issues impacting the major cropproducers will be in a prime position to takeproducing countries. Finally, it will look to theadvantage of this new scenario.future possibilities in this essential sector.2 5. What are grains and oilseedsWheat Over the past 50 years, global wheat productionhas continued to rise steadily, from around200 million metric tonnes in 1960 to almost700 million tonnes in 20102. The major globalproducers of wheat are the EU, China, India,the US and Russia, who account for around67 percent of global production3. Around20 percent of wheat produced is exported4.The major exporters, the US, the EU, Australia,Canada and Russia account for around75 percent of global exports5.The main importers of wheat are mostly regionswhich lack the acreage or natural resourcesrequired to grow adequate volumes or qualitiesof wheat for their requirements. Globally, demandfor wheat is fairly widespread, with no oneWheat is the main cereal grain crop for foodcountry having major market power. For example,consumption in most of the world. Wheat isthe largest five importers of wheat Egypt,also one of the oldest harvested grains, havingBrazil, the EU, Indonesia and Japan accountknown to have been grown since 10,000 BC.for only 26 percent of global wheat importsIt is thought to have originated in the NileDelta, but to have been first domesticatedbetween them6.in Turkey. In using wheat to bake bread, theWheat is grown in a number of varietals, and isearly Egyptians formed one of the earliest food often classified in different ways for example,production industries1. spring wheat vs. winter wheat, red wheat vs.Food is the primary use of wheat, as it is widely white wheat, hard wheat vs. soft wheat.utilised as flour for producing bread. WheatThe most widely grown wheat is common wheatforms a fundamental component of the diets of or bread wheat, while the second most commondeveloping countries. species, durum wheat, is used in the productionMajor global wheat producers percent of production exported 2008/09 80 70 60 50Percent 40 30 20 100-10Australia Canada United States Russia World Ave. EUChinaIndiaPakistanSource: USDA 20101 Jared Diamond, Guns, Germs and Steel2 USDA PSD3 USDA PSD4 USDA5 USDA6 USDA3 6. What are grains and oilseedsof pasta. Different varieties such as Hard RedThe major uses for barley are as an animal feedSpring, Hard Red Winter, Soft Red Winter andand for producing malt for beer production. In theHard White are often used for different varieties US, where it is grown in 27 states, over half of allof foods, including breads, biscuits, pastries andbarley grown is used as an animal feed10. Barleyother baked goods. They are also often traded is also used in a wide range of breads, soupson different exchanges. and flours, and is increasingly seen as importanthealth food.Ideal wheat production conditions vary on theregion and the climate. In some countries,Barley is a tough crop, relatively tolerant toparticularly in the developing world, increased drought and able to cope with greater levels ofusage of fertiliser has raised yields. Fertiliser salinity than wheat. It is often grown as a summerusage in the developing world has increased bycrop, or as a winter crop in warmer areas11. As25 times over the past four decades7. In places it has a short growing season, it is a relativelylike Australias southern areas, despite a relatively drought tolerant crop.low rainfall, farmers have used increased rotationAn increasing global consumption of animalcropping (planting wheat alternatively with otherprotein, particularly in developing countries, willcrops) to increase their yields.continue to be one of the main drivers of barleydemand. In addition, rapidly expanding beerBarleyproduction, particularly in the developing world,will increase the demand for malting barley.CornLike wheat, barley was one of the earliestdomestically grown crops. Early barley harvestshave been traced to the Middle and Near Eastregion, with crops having first been grown aroundCorn, known as maize in some parts of the10,000 years ago8. Today, barley is grown inworld, is a cereal grain which has been grownaround 100 countries, with the EU, Russia,since prehistoric times. Corn was thought toUkraine, Canada and Australia accounting forhave been cultivated by the Aztecs and Mayansaround three quarters of global production ofin southern Mexico, before gradually spreading150 million tonnes9 in 2009/10.through the Americas, then in the 16th centuryto Europe12.7Cropscience8Washington University in St Louis9USDA10 Barleyfacts11 McGee, Harold (1986). On Food and Cooking: The Science and Lore of the Kitchen4 12 Foodtimeline.org 7. Corn is the most widely grown crop in the world, In recent years, corn has increasingly been usedwith almost half the worlds corn produced in thefor the production of ethanol. Around 30 percentUS, and around 55 percent of global exports13. of all corn grown in the US is now used forBetween them, the US, China, Brazil, Mexico, ethanol production, more than twice the amountArgentina, India and France produce over three which is exported14.quarters of the worlds corn. SoybeansGlobal corn exports 2009/10ROTW 10% South Africa 3% Ukraine 6% Brazil 9%United States56%Argentina 16% Soybeans were known to have been cultivated in China and Korea around 5,000 years ago15, and in an example of early agronomy, they wereSource: USDA known for their ability to replenish nitrogen in theCorns ability to grow in a wide range of climates soil. Soybeans first arrived in Europe in the earlyplayed a major role in its wide geographic 1700s and in the US around 50 years later.coverage and popularity. The corn plant has aSoybeans are extremely high in protein, a factorshallow root system, and as such prefers moist which makes them an important food for bothsoil. Corn is often grown in rotation with other humans and animals. In addition to their highcrops which provide increased nitrogen to theprotein content, soybeans contain a combinationsoil, such as soybeans.of amino acids which allows the body to absorb proteins.Corn is a staple food in many parts of the world,either whole or as cornmeal. It is also processedUnlike most other grains and oilseeds, soybeansinto many forms, including popcorn and breakfast enjoy major global markets for their unprocessedcereal. In the US, by far the largest usage is for form, as well as its two byproducts soybean oilanimal feed, outstripping human consumptionand soy meal.by around 40 times. It is used for livestock inWhen processed, a soybean is broken downthe forms of forage, silage or grain. Corn is also into around 20 percent oil and 50 percent meal.used in other animal foods such as dog food andSoybean oil is used primarily as vegetablefish food. cooking oil or a food ingredient. Soy meal is used mainly for animal feed, particularly for cattle, pigs or poultry.13 USDA14 USDA15 University of Minnesota 5 8. What are grains and oilseedsGlobal soybean trade forecasts 1999 2019f 60000 40000 20000 000 metric tons 0 -20000 -40000 -60000 -8000019992000 2001 20022003 20042005 20062007 20082009 2010f 2011f 2012f 2013f 2014f 2015f 2016f 2017f 2018f 2019f Argentina Brazil China United States, Metric Units Rest of World Source: FAPRIFor human usage, soybeans are utilised in mantle in the next few years18. The same threea range of foods, including tofu, yoghurt countries also account for over 80 percent of soyand soymilk.oil exports.Globally, soybean production is quite In terms of soy meal, however, while the sameconcentrated in a small number of countries.countries account for around 90 percent ofBetween them, the US, Brazil, Argentina, Chinaexports, Argentina alone exports over half of theand India produce over 90 percent of the worldsworlds supply19. This is primarily due to exportsoybeans the first three alone account for over taxes on Argentine soybeans, aimed at protecting80 percent16. the domestic soybean processing industry.In terms of soybean trade, figures areChina is by far the largest importer of soybeanscomplicated by whether countries import whole globally, accounting for almost 60 percent ofsoybeans or byproducts. China, for example, all exports. China is also the largest importermostly imports whole soybeans, and processesof soybean oil, accounting for over a quarter ofthem domestically.global imports, almost double that of its closestrival, India20.Between them, the US, Brazil and Argentinaaccount for around 90 percent of global soybean The EU remains the worlds largest importerexports17. While the US is currently the largestof soybean meal, accounting for almost half ofexporter, it is expected that Brazil will claim thisglobal imports21.16USDA17USDA18FAPRI19USDA20USDA6 21USDA 9. Canola Like soybeans, canola can be crushed to produce oil and a meal. Canola oil is widely used in many foods and cooking processes. It is regarded as healthier cooking oil, due to being low in saturated fat and containing a relatively high level of omega-3 fatty acids22. In addition, canola oil is also used in industrial manufacturing, for products such as candles, lipstick, newspaper inks, industrial lubricants and biofuels. Canola meal is used as a high quality animal feed. In measuring global production data, canola and rapeseed are often counted together. As such, in looking at overall rapeseed production, the EU, China, Canada, India and Australia account for around 90 percent of global production. Canada is by far the largest exporter, accounting forCanola is a variety of rapeseed. While rapeseedaround 60 percent of global shipments, while theitself has been recorded for hundreds of years,EU, Japan, China and Mexico account for half ofactual canola was first bred from rapeseed inglobal imports23.Canada in the early 1970s. The name canola wasderived from "Canadian oil, low acid in 1978.Canola oil is more useable for humanconsumption than traditional rapeseed, while itsreduced levels of toxins also make it more able tobe used as an animal feed than rapeseed.22 Moi Group23 USDA 7 10. Demand side The international demand for grains and oilseeds base of 6.1 billion people, is projected to rise is increasing due to population growth, increasing to 8.3 billion by 2030 and 9.1 billion by 2050. income, changing diets and urbanisation. In many This would equate to an increase in global food ways, each of these have become interlinkedgrowth of 42 percent by 2030 and 70 percent by population growth is largely in developing 2050. In addition, by 2050, over 7.5 billion people countries, which are the same areas seeing the will be under the age of 5025. As life expectancies highest increase in relative incomes, and also continue to increase, this translates into further with the greatest shift of consumers from rural to impetus for population growth. urban areas. As a result, these are the regionsMany countries that have previously been self which are also seeing the greatest changes insufficient in their food needs will increasingly population diets, as people move from a grainneed to rely on food imports. This is particularly based diet up the scale to one with a greaterthe case for countries in the Middle East. For degree of animal protein. As result, greaterexample, Saudi Arabia at one stage grew over volumes of grains and oilseeds are required to4 million tons of wheat per year, making it at one provide feed for the animals which serve thistime the worlds sixth largest wheat exporter. new diet.However, with water shortages becoming a In addition to the increasing demand from food major issue, the country has phased out wheat and feed, the growth in biofuels productionproduction26 and will now import much of its further increases the demand for grains andgrain needs. oilseeds, particularly for ethanol derived fromPopulation growth is expected to take place corn and biodiesel derived from oilseeds.mostly in less developed countries, concentrated Finally, it is important to also be aware of the in urban areas27. The strongest growth in increasing usage of grains and oilseeds in demand is expected to be from Asian economies, industrial products. particularly China and India. It is important to examine each of these drivers Population growth remains the fundamental in more detail, and then to look at the main fourbase for growth in demand for gains and areas of grain and oilseed usage, to further realise oilseeds. While an economic slowdown may how the strong long term growth in demand forcause consumers to re-evaluate spending on grains and oilseeds is evolving. discretionary items such as clothing, cars andhousing, they will continue to buy food. Population Throughout previous economic slowdowns, Population growth is the most basic factor driving consumption of key agricultural commodities has the increase in consumption for agricultural continued to grow steadily. products. Every year, the global populationIn particular, wheat has been shown to be increases by around 80 million people24 therelatively inelastic to both income and price over a rough equivalent of adding one new Germanysustained period. Consumption figures for wheat or Ethiopia.have been largely unaffected by either the price The global population has grown substantiallyof wheat or the price of potential substitutes, over the past few decades, and from its currentsuch as corn, oats or rice. 24 CIA World Factbook 25 Justfood.com 26 New York Times827 UNFPA 11. IncomeMany developing countries have continued to maintain strong GDP growth. For example, over thecourse of the Global Financial Crisis, China and India were among the least affected countries,continuing to maintain GDP growth in 2008 of 8.7 percent and 5.7 percent respectively28.Developing world looking to strong GDP growth in 20112.5% Egypt2.0% Nigeria Australia Pakistan1.5% BangladeshIndia Population Growth Rate Brazil Mexico1.0% IranIndonesiaUSChinaCanada0.5%0.0% Japan-0.5% RussiaGermany-1.0% 0% 2%4%6%8%10%12%GDP Growth 2011Bubble size = relative populationSource: IMF, UN, CIA FactbookIn general, growth in incomes translates intoAs mentioned in the previous section, therising per capita food demand. Typically,population increase tends to be seen in urbanconsumers move up from a lower value stapleareas. The urbanisation trend will lead to a shiftfood to an alternative, such as transitioning from in dietary patterns, related to the continuedrice to wheat. In turn, as people continue toexpansion of worker incomes in the developingbecome wealthier, they move on to consumingworld and more reliance on purchased food, asproducts such as meat, fish, dairy products, and opposed to self-sufficiency.fruit and vegetables. In addition, they will also For example, a one-time increase in the urbanincrease their consumption of products such as population from 1/4 to 2/3 of the nationalvegetable oils and processed foods. For example, population of China would result in a 10 percentstudies by the American Soybean Association increase in per capita demand for meat, fish, andshow that when a developing populations family dairy products30.income rises above US$1000/year chicken entersthe diet; as it rises above US$3000/year other On current forecasts, in the Asia Pacific regionmeats enter the diet29.alone, 600 million people will move from rural to28 IMF29 Justfood.com30 IFPRI9 12. Demand side urban areas by 202031. As people move to cities,World food consumption of grains in 2010 a number of structural shifts in food demandis forecast to remain unchanged from the patterns occur: previous season, at around 193 million a wider choice of food is available in tonnes. This forecast is slightly higher thanurban marketswas anticipated at the start of the season but with improvements in production prospects, enhanced levels of infrastructure and food consumption estimates have also been revisedstorage facilities aid the greater choiceup. At the current forecast levels, global foodin foodstuffsconsumption of grains on a per capita basis is people are increasingly exposed to dietary expected to average around 28 kg, similar to thepatterns from foreign cultures previous season, with generally steady levels of consumption regionwide35. urban citizens seek foods that take less time toprepare. Feed A major component in this dietary shift is an increasing demand for animal proteins. This Ironically, as consumers globally increasingly in turn triggers a multiplier effect on grain and switch their diets from grains and oilseeds to oilseeds consumption, as these are needed toanimal protein products, overall consumption provide feed for livestock. of grains and oilseeds will increase markedly. Consumers will increase their consumption not Foodjust of meats, including beef, pork, poultry, sheep and goats, but also of milk. To provide this meat Around 41 percent of grains produced globally will require enhanced quantity and quality of feed. are for direct human consumption32. The percentage of particular grains and oilseedsGlobal meat demand 1985 2025f used for human consumption varies markedly. For example, around 70 percent of all wheat that 450 Sheep Meat is produced globally, or 450 million tonnes, is400 Poultry for food33. Demand for food wheat continues to Pork350 Beef increase in emerging markets, where populations are growing and incomes are increasing. In many300million metric tons of these markets, wheat based products are still considered a luxury item. In the higher income 250 areas of emerging markets, consumption of200 wheat based products such as bread, bakery and noodles continues to rise. 150 Cereals including rice represent 100 55-70 percent of the total calories of food50 in developing countries and 40 percent in developed countries34. 019851995 2005 2015f2025f Only a small fraction of oilseeds are consumed for food.Source: FAO, FAPRI, OECD, USDA 31 ADB 32 IFAP 33 USDA 34 IFAP10 35 FAO 13. As per capita incomes trend upwards globally, Compared to most developing nations, dairyone of the major impacts will continue to be aproducts are already an established componentrising demand for meat, as consumers find itof the Indian diet. According to some forecasts,more affordable, and as they seek new dietary dairy consumption in India could treble over thechoices. Rising per capita meat consumption next four years37. Although India is the largestis also linked to other demographic trends, producer of milk in the world, over 50 percent ofparticularly the move of people in developing production is still via the unorganised, or informalcountries from rural to urban areas, where they small scale, sector and so domestic productionare likely to earn higher wages and find exposure will be challenged to increase quickly enough toto more Western food options. In the leastmeet this growing demand.developed countries, consumers are likely toSoybean meal is one of the major sources ofsubstitute between lower-priced products within animal feed. Demand for feed has been drivena food group as their incomes change, suchby different factors in different regions. In theas from corn to wheat. However, in developing developing world, particularly China, risingcountries, consumers are more likely to switchincomes over the past few decades have seenfrom products outside subsistence foods, such steady growth in meat consumption. In mostas cereals, to meat or vegetables.parts of the world, animals raised for meat areThe relationship between per capita income andreared indoors for some or all of the year, due toconsumption of meat, dairy and vegetable oils isfactors such as a lack of available pasture land,more intense at lower income levels. As a result, or seasonally unsuitable conditions, such asit appears likely that volume growth of moreextreme cold.expensive foods will be most prominent over In developed countries, demand for animal feedthe next two decades as the major developingcan be shaped by other factors. For example,countries experience significant and sustainedas European farmers have banned the import ofincome growth across their population bases.genetically modified soybeans, they have reliedThe switch from grain based protein to meat on the import of Brazils non-GM soybeans toprotein will result in growing demand for grain meet their demands.and oilseeds, to provide feed for the animals In addition, the BSE epidemic, also known asserving the new meat needs. This demand willmad cow disease, in Britain was seen by manybe proportional, as the conversion ratios of feed as being caused by the use of animal bones into meat is not one to one and thus demand for livestock feed. Following this, European farmersgrains and oilseeds is increased more as meat sought to access a non-animal based, proteindemand increase.rich feed for livestock, with soy meal providing anThe switch across food groups is most markedexcellent alternative.in the worlds major markets. In China forexample, per capita grain consumption has Fuelfallen 40 percent over the last 15 years whileAn increasingly important factor in the demandmeat consumption has increased more thanfor grains and oilseeds has been the growth of250 percent36.biofuels. Biofuels fall primarily into two categoriesIn India meat consumption has increased ethanol and biodiesel. In many countries, the40 percent over the last 15 years, even thoughmain feed stock for producing these is corn forhalf of all Indian households are vegetarian. ethanol and vegetable oil for biodiesel. The majorFor India, however, the major driver of feedexception is Brazil, where ethanol is producedconsumption is likely to be dairy growth. from sugar.36 FAO37 Nestle 11 14. Demand side Biofuels are now mandated for use in around 41 countries38. The growth in biofuels has been due to a number of factors. Biofuels are increasingly seen as more environmentally friendly than fossil fuels, in producing lower greenhouse gas emissions. For countries seeking to reduce their dependence on imported oil, biofuels provide a domestically produced alternative. Ethanol is produced primarily from corn. Around 30 percent of all corn grown in the US is now used for ethanol feedstock39. US corn consumption categories 1999 2019f100 80US Corn Consumption 60 40 2001999 20002001 20022003 20042005 2006 20072008 2009 2010f 2011f 2012f 2013f 2014f 2015f 2106f 2017f 2018f 2019f Other (inc seed and starch) FeedExports Food (inc HFCS, glucose, etc) Ethanol Source: FAPRI Ethanol has long been used as a fuel forleast 10 percent ethanol, although there is a push automobiles the original Model T Ford could from ethanol lobby groups to have this increased be adapted to run on ethanol. Ethanol producedto 15 percent42. from other feedstocks, particularly corn In the US, the level of biofuel production is stover or woodchips, is commonly known as established under the Renewable Fuels Schedule cellulosic ethanol. (RFS). The RFS was originally put in place by the Biodiesel is largely produced from vegetableBush administration in 2007, and re-enforced by oils, particularly palm and soybean oil. Around the Obama administration in 2010. Under the 90 percent of all biodiesel in the US is produced RFS, the US commits to producing a gradually from soy oil40. Soybeans and canola bothincreasing volume of biofuels from 2008 to 2022. produce around 100 gallons of biodiesel For ethanol, this figure is set at 9 billion gallons in per acre41. 2008, rising to 36 billion gallons in 202243. Globally, the US is both the major producer and Under the legislation, the level of ethanol to be consumer of ethanol. Within the US, a Federal produced from corn was capped at 15 billion mandate stipulates that all gasoline will contain atgallons. The remainder of the ethanol was 38 www.biofuelsb2b.com 39 FAPRI 40 Farm and Ranch Guide 41 Seattle Times 42 Reuters12 43 US Environmental Protection Authority 15. forecast to be made up largely of cellulosic and the UK, while biodiesel powered planes haveethanol44. However, recent announcements already successfully flown48.from the EPA have seen forecasts for cellulosic While biodiesel usage seems set to continueethanol cut dramatically, from 100 million gallons growing, it may well be with far greater levelsto 6.5 million, due to the both the technology and of soybean oil as a feedstock than previouslythe economics of producing cellulosic ethanol used. The growth of palm oil in natural habitatsbeing well behind initial forecasts45. As a result, it continues to create controversy and it isseems increasingly likely that increased levels of foreseeable that ongoing palm oil developmentcorn will be required as feedstock to meet future will flatten or decline. As a result, it is likely thatethanol demands. biodiesel processors will seek to utilise greaterThe events of 2010 in the Gulf of Louisiana have levels of soybean oil, further raising demand foronly served to strengthen the outlook for ethanolglobal soybean supplies.in the US. On one hand, ethanols environmental Overall, it is important to remember that biofuelscredentials have only been enhanced. In addition, currently take up only around 1.5 percent ofsubsequent restrictions on drilling for oil look global grain and oilseed supplies49. However, onlikely to increase the role that ethanol will play in a global basis, this accounts for major volume ofUS energy supplies. grains and oilseeds. As a flow on, it means thatSuch a scenario would have a number of these grains and oilseeds are being removedimpacts on the grain and oilseed sector. In termsfrom other areas, particularly exports, puttingof supply, an increased amount of corn being upward pressure on export prices. For usesutilised for ethanol would draw even further such as animal feed, it means that other grainsvolumes out of US domestic and export supply,and oilseeds, such as wheat, now need to feedincreasing the competition for other grains. the gap filled by the loss of these feedstocks.Secondly, increasing biofuel demand for corn In terms of production, the result is that fewerwould likely place upward pressure on corn acres are available for growing crops for foodprices, leading to an increase in corn acreage,and feed.at the expense of other crops. This level ofcompetition, which would particularly impactUS wheat supplies, would have an impact of Industrialreducing supplies of corns competing crops. While not as well known as food, feed and fuel, the use of grains and oilseeds in industrialBiodiesel is increasingly used across a range products will play an increasing role in theof transport modes. In Europe, at present, the demand of these commodities going forward.European diesel fuel allows biodiesel to beblended at up to and including 5 percent byA number of factors are behind the push to usevolume, with moves to lift this to 10 percent46. more grains and oilseeds in industrial products.Some national standards in EU countries allowAs with biofuels, societies are increasinglybiodiesel to be distributed as a stand-alone seeking to replace petrochemical feed stocksfuel, notably in Germany, for specially adaptedwith renewable resources. In addition, newvehicles47. Progress is continuing to run trains onindustrial products need greater specifity andup to 100 percent biodiesel, particularly in the UScomplexity. Finally, the increased need to44 Ethanol.org45 Reuters46 EU47 EU48 UPI49 World Bank13 16. Demand side address environmental and community concerns heat. As such, wheat gluten can be useful for forms a growing part of product marketing. preparation of adhesives, coatings, polymers One major example is DuPonts commitment and resins, straw particle board, strengthened to source 20 percent of its products frompaper, and adhesives, such as those used on renewable sources50. postage stamps. Industrial products from grains and oilseeds come in an array of forms. An increasing Demand conclusion number of pharmaceuticals are made fromOverall, the diversity of uses for grains and crops. Biopolymers, which are used in products oilseeds will result in result in overall demand such as packaging materials, resins, adhesives,continuing to increase strongly. Fundamentally, it biolubricants, can be sourced from starches from is important to note that overall demand growth cereals and oils from oilseeds51.is not dependent on any one factor. The development of BiOH polyols has created aHypothetically, even if the world were inexplicably potentially large new market for soybeans. BiOHnot to get richer, population growth alone polyols use soy based ingredient for flexible foam would still continue to drive demand for grains used in upholstered bedding and furniture, carpetand oilseeds. Or even in the unlikely event backing and automotive seats. Increasingly theythat biofuels policies were to change in some are also being used for airport seating around countries, grain and oilseed demand for animal the world. As a soy based product, they replacefeed would still increase due to improving diets petroleum ingredients typically used in foam through rising incomes. production52 and are seen as environmentallyAnd even if the demand for grains and oilseeds responsible.to provide the feedstock for a growing range A growing number of cosmetics and sunscreen53of industrial products were to soften, then the are also using soy oil rather than petroleum strong increase for biofuels, increasingly pushed based products.by environmental concerns, would be a majorsource of growth. In addition to soybeans, wheat is also being sourced for a number of industrial uses54. Taken as a whole, the combination of these Wheat has the ability to be elastic, bind waterfactors will continue to see grains and oilseeds and form films that can be stabilised with demand climb well into the future. 50 Dupont 51 HGCA 52 Cargill 53 Sciencedaily.com14 54 Texas Wheat 17. Why China needs soybeans?It can be easy to forget how quickly the Chinese economy has changed. From the strict communisteconomy of Mao Zedong from the 1940s to the 1970s, it was not until the changes brought in byDeng Xiaoping in the 1980s that China began heading on its current path of being the worlds fastestgrowing economy. At the same time, its per capita incomes have continued to rise.While China is a major producer of many grains, it has severe limitations on the growing capabilitiesof its farmland. China has around 20 percent of the global population, yet its arable land per capitais only half of the worlds average55. Increasingly this land is being taken over by cities and otherinfrastructure, or has its growing capability limited by degradation through increasing pollutants or theloss of water to cities.China soybean imports vs meat and dairy consumption 80000Soybean balance of trade 60000Dairy Product ConsumptionMeat (non fish) consumption 40000 000 metric tons 200000-20000-40000-60000 1975/1976 1977/1978 1979/1980 1981/1982 1983/1984 1985/1986 1987/1988 1989/1990 1991/1992 1993/1994 1995/1996 1997/1998 1999/2000 2001/2002 2003*2004 2005/2006 2007/2008 2009/2010Source: USDABut at the same time as the available arable land is falling, Chinas appetite for food continues to grow.As average incomes rise in China, the desire for more meat and dairy, and the ability to afford it, alsoclimbs. China now produces around half the worlds pork, as well as 35 percent of the worlds eggs,65 percent of the worlds duck meat and 94 percent of the worlds goose meat. In addition, China isalso the worlds largest producer of farmed fish and Chinas dairy sector produced around 40 milliontonnes of milk in 2009, up almost 400 percent in a decade56.The common feature of each of these industries is the huge level of growth in demand for soybeanmeal they have created. While soybeans actually originated in China, the country has not been selfsufficient in them since the mid 1990s. As such, in 2010/11, China is forecast to import almost60 percent of the worlds soybean supplies57. To process these into soy meal and soy oil, China hasbuilt a massive soybean processing sector.With Chinas economy forecast to continue to grow strongly for the foreseeable future, hundreds ofmillions of rural Chinese are likely to cross the income threshold of around $1,000 to $2,000 at whichmeat consumption escalates58. This will only lead to increasing demand for imports of the worldssoybeans to meet soy meal demands, particularly as the country has almost no ability to open upnew land for domestic soybean production. As a result, and without taking into account increasingdemands from other major importers such as the EU and Japan, the worlds soybean exporters face apromising future.55Worldwatch Institute56FAO57FAPRI58Business Insider 15 18. Supply sideAcreage required to meet demand by 2050nutrients in the soil and salinity, or a growing level of salt in the soil. According to some estimates, 450 Requiredaround 23 percent of all useable land on earth is 400 Current now subject to degradation60. 350 As cities continue to expand across the globe, they continue to encroach out onto 300 farmland. The impact of this growth reduces million metric tons 250 the productivity of the soil, and either limits the growth of crops or prevents it altogether. Growing 200 urban areas result in increased sewage flows, 150 run-off and other forms of waste, which in turn cause environmental issues for farmland. 100 In the US alone, total farmland declined by 50 16 million acres between 2002 and 2007, 0 which followed a previous decline of 16 million Corn Rice Soybeans SugarWheat acres over the five years prior to that61.Source: Macquarie Research A major factor which will continue to inhibit agricultural productivity is the increasing scarcitySupply of water. Agriculture is the major user of water globally, accounting for around 70 percent ofWhile demand for grains and oilseeds continues water consumption62. Water availability is oneto increase, the global supply conditions for of the most fundamental ingredients towardsproducing the required volumes is hampered by a both growing grains and oilseeds and graduallynumber of factors. improving their productivity. Without reliablePerhaps the most prominent factor is the areaaccess to water, food producers cannotof land per person available for growing the implement long term projects to improve land,required crops. Between 1961 and 2007, the while food importers cannot expect a producingamount of arable land per person plummeted byregion to guarantee reliable supply.almost 50 percent, down to around 0.2 hectares Just as with arable land, the availability of waterper head59. This decline was due to several is being jeopardised by population growth,factors, including: urbanisation, rising wealth, resource consumption growing land degradation and climate change. The UN has estimated that rising impact of urbanisationby 2025, two thirds of the worlds population could be subject to water stress63. In terms climate change.of agriculture, it is estimated that the globalDegradation of arable land occurs due to agricultural sector will require around 50 percenta number of factors, including chemicalmore water by 2015, and around 100 percentcontamination, soil erosion, and depletion of themore water by 205064.59FAO60UNEP61USDA62Ozh2o.com63Nupara.com1664FAO 19. Large scale available landFlattening yieldsTo gain increasing productivity and profitability As arable land per capita continues to decline,from agricultural land, it is progressively moreincreasing importance is placed on the need forimportant to be able to build farming operationsincreasing yields from the worlds major grainwith economies of scale. It is only when farms areand oilseed crops. In the period from the 1950of an optimum size that they are able to take fullto the 1970s, global crop yields rose markedly,take advantage of such scale benefits as largeas a result of factors including selective breedingmodern machinery and advanced agriculturalof higher yielding strains of seeds and improvedtechnology. In addition, scale of an operationplant tolerance to droughts and insects. In recentallows a farm to be run more as a business, withyears, however, yield growth from most majordedicated employees devoted to functions such crops has plateaued, as the limits of developmentas finance, agronomics and overall management,with selective breeding are approached66. Whilerather than one farmer covering all bases.further improvements may require increased useIn much of the agricultural world, however, of biotechnology, and the true impacts of thisaggregating this level of scale is impossible. In continue to be under question, the significantmany developing countries, not only are farms ofopposition to biotechnology in some parts of thea small scale, but social and political pressures world may see yield growth struggle to grow.means that it would be impossible to changethis. For example, in China, average farm sizeProtectionist policiesis roughly 0.32 acres65. Any move to aggregatelarge numbers of Chinese farms would lead toLike any business, the top grain and oilseeda rise in unemployed rural workers and potentialproducers are always seeking to gain greatersocial unrest. As such, in China, as in similar efficiencies. In terms of grain producingcountries, it is highly unlikely that the current countries however, the farmers in countries whostructure will change.are provided with high levels of governmentsupport for their industries have less incentiveto become efficient, as they will always receivePolitical riska standard level of support, such as fixed pricesWhile some countries may contain excellentfor their crops. For example, in the dairy sector,productive agricultural land, the spectre ofthe production price of a litre of milk in somepolitical risk makes it an unattractive investmentheavily subsidised European countries has beentarget, and as such, unable to receive the capitalequivalent to the farm gate price of a litre of milkto help it lift productivity. For example, whilein unsubsidised Australia67. In terms of grains andZimbabwe was once known as the bread basket oilseeds, countries with strong subsidies are likelyof Africa, the current governments nationalisation to see production growth limited.projects have decimated its farming sector.Similarly, while Argentina has a rich agriculturalhistory, the record of its government inPoor infrastructureimposing tariffs and export restrictions have Regardless of how good a crop may be, it is ofserved as a deterrent for vitally neededlittle use to a potential buyer, and of little saleagricultural investment.value to the grower, if it is unable to be delivered65 UC Davis66 Agricultural and Applied Economics Association67 IFCN Dairy Report 200917 20. Supply sideto a point of sale. For this reason, in regions price rises are short term, and the market returnssuch as Africa where a great deal of transportto normal. The events of 2008, when prices forinfrastructure is in great need of modernisation, most grains and oilseeds rose to record levels,the potential increase in grain supply for use both were caused by a range of factors, with lowin neighbouring countries and on global exportstocks of global grains, the impact of a droughtmarkets is likely to be constrained for years in various major production regions, the emergingto come.demand for corn from biofuels and the roleof speculative investors all playing a part. Thesubsequent export bans and hoarding of grains,Conclusion supply makes the particularly rice, by some countries, served toshort term, demand dictates extend the price rally, though eventually pricesfell again.the long termHowever, what is important to note, is that withThe recent events in Russia, where the onseteach recent price correction, prices have normallyof a drought, and subsequent export bans on fallen to a higher level than where they started68.wheat saw the cost of wheat rise sharply globally,As a result, the prices of all grains and oilseedshave once again emphasised the impact thatcontinue on an upward trend. Ultimately, bothsupply issues can have on grain and oilseed the increasing divergence of uses for grains andprices in the short term. These supply issues,oilseeds, namely food, feed, fuel and industrial,usually caused by a weather event, are far from combined with the increasing demand fromunknown concerns over floods in Iowa or water each of these areas, will continue to ensurelogged crops in Canada for example can lead that demand for grains and oilseeds will onlyto price rises in the crop affected. Usually, these strengthen in the longer term.1868 Bloomberg 21. Where to produceIn order to determine the optimum locationage of farmers now over 6069, and with manyin which to achieve the greatest return fromfarmers still on unprofitable smaller blocks of landproducing grains and oilseeds, it is vital to takeprovided to returned soldiers after the Secondinto account a wide range of factors. To achieveWorld War, the opportunities for aggregation arethe maximum possible return from an investmentstrong. Similarly in Brazil, the changing structurein agricultural land, it is important to have a fullof the farming sector, partly brought aboutunderstanding of how a combination of these through the impact of the global financial crisis,factors may ultimately affect the profitability of thehas provided further potential for conversionoverall investment. opportunities.The following are some of the key factors thatThis is in contrast to country such as India, whereshould be considered when evaluating an the average farm is 1.4 hectares70. With overinvestment in an agricultural opportunity:50 percent of the population being farmers71, itis unlikely that we will see consolidation in theScale near term.The ability to aggregate farmland into a largeoperation is vital in achieving the benefitsForeign directof scale. This is important in farmland, as itinvestment restrictionsallows the operator to save costs throughA number of countries which have reasonableboth economies of scale, as well as improvedfarming conditions impose restrictions on thebargaining power. For example, as with any largeability to invest in this farmland. For example,business, increased bargaining power allows acountries such as Paraguay prohibit thefarm operator to negotiate lower prices for theirownership of farmland by foreigners. In Canada,inputs, such as fertilisers or seeds.while foreign ownership of farmland is permitted,By creating economies of scale, a farm operator restrictions of the scale of this investment makeis able to extract greater utilisation out of their it an unprofitable option. In the most productivefarm equipment. For example, a new tractoragricultural provinces, ownership restrictions limitused on an aggregated 3,000 hectares provides the number of hectares foreigners can own tolower machinery costs per hectare than the same 40 hectares.tractor used on a 1,000 hectare farm.In contrast, while Australia requires governmentIn addition, creating scale in a farming operationapproval for agricultural investments overallows for greater use of advanced technologies.$231 million72, no foreign investment in AustralianFor example, a larger farm will have theagriculture has been turned down.resources to implement advanced fertiliserapplication techniques, using technology whichCorporate agricultureis unaffordable for a smaller operation. Throughusing this technology, the larger farm will be able restrictionsto lower its fertiliser costs, increase its yields, and In the US, agricultural land ownership is restrictedimprove the long term environmental sustainabilityby anti-corporate farming laws in a numberof it operations. of states. These laws, which differ by State,Globally, areas which allow for building scale of generally restrict corporations and institutionalfarmland are limited. In Australia, with the averageinvestors from owning or acquiring farmland.69 ABS70 USDA71 CNN72 ABC 19 22. Where to produceStates where these laws exist include Iowa, This is compared to Brazil, which has a strongKansas, Minnesota, Nebraska, Oklahoma, Northhistory of promoting free and activity within itsDakota and South Dakota73, home to some ofdomestic farming sector.Americas most productive farmland.In Brazil, no such restrictions exist. This situation Subsidy riskallows corporate agricultural investors to utiliseIn a number of countries, the domestictheir enhanced farming and management skills, agricultural sector is supported by a range ofas well as taking advantage of their superior government subsidies. As a result of thesescale, to maximise returns for their operations.subsidies, such as guaranteed domestic prices,farming sectors in these countries have thePolitical riskpotential to fall behind non-subsidised countries,as they lack the potential to continually becomeA key component of a successful agriculturalmore efficient. Even more importantly for theoperation is being able to guarantee majorinvestor, the stability of the farming sectorcustomers a level of certainty of supply. For thisin subsidised countries is dependent on thereason, countries with a high level of political riskdecisions of the government. For example, in thepresent unattractive investment opportunities,US, which provides subsidies of around ten centsas they are more likely to impose disruptions onin the dollar to farmers74, if the government weresupply of crops. For example, while Argentinato make major changes to the countrys Farm Bill,contains reasonably yielding farmland, the actionsthis could potentially alter the viability of manyby the government in recent years in imposingfarming operations.export bans or high export tariffs on domesticallyproduced crops provides a major disincentive to In contrast, in Australia, where subsidiescustomers and a deterrent to investors. are basically negligible, investors in farmingoperations do not face the risk of a change inSimilarly, in many parts of Africa, the potential fora government program affecting the viability ofagricultural production is overshadowed by thetheir operations.specter of potential nationalisation or other formof government intervention in many countries.Producer support estimates 1986/88 vs 2006/08 80 70 60 50 Percent 40 30 20 100 New AustraliaUnited Mexico Canada TurkeyOECD EU Japan Iceland Switzerland Korea NorwayZealand States1986-882006-08 Source: OECD73 National Agricultural Law Center2074 OECD 23. Infrastructure risk of water for farmers continues to place questionmarks over the long term viability of many partsThe ability to be able to transport agriculturalof the states farming sector.produce to an export point, such as a port, isvital to maintaining a reputation for reliability ofIn an area like Brazil, however, the fact that nonesupply from a country. In a region like Africa, of its farmland requires irrigation means that it hasproblems with modern infrastructure present a successfully adopted dry farming techniques. Inmajor impediment to agricultural investment. Allhaving an ample water supply and a consistentlytoo often, crops have major difficulty in being steady rainfall, Brazil enjoys a competitivetransported from the farm to a central point, suchwater advantage.as a grain silo, and then on to a port.This is in contrast to countries such as the US,Affordable farmlandCanada or Australia, where modern road andWhile the productivity of farmland is important,rail networks link the agricultural producing it will still not equate to profitability if farmland isregions with world-leading port facilities, providing overvalued. In the US for example, farmland inmaximum opportunities to fulfill each countrysIowa, while yielding healthy levels of corn andexport requirements.soybeans, is currently selling for up to US$11,000per hectare76. This is in contrast to farmland inWater riskBrazil, where land which achieves the same yieldsThe reliable supply of water to a countrys as the US77, and which furthermore can harvestagricultural operations is a vital consideration in two crops per year, sells for up to US$3,000analysing potential areas for investment. In India, per hectare78. Similarly, some of the countriesfor example, up to 40 percent of agricultural of the Former Soviet Union offer comparativelyland is irrigated75, leading to enormous potentialwell priced land, with arable land in Russia sellingfor water scarcity. Similarly, in California, legal for between US $500 and $700 per hectareproceedings in that state to guarantee supply in 200779.75 Indian National Institute of Hydrology76 Iowa State University77 USDA78 Agrimoney79 USDA, RBS 200921 24. Why invest in grains and oilseedsInvesting in grains and oilseed producing farmsis likely to occur regularly given the nature ofprovides a number of attractive advantages.agriculture, intensified demand is likely to see continued upward pressure on prices.Exposure to diverse and fixed demand Exposure to a sector where the products Global population growth results in increasing are inelastic to price movements food demand, while rising incomes in developing countries increases the need Regardless of increases in prices, people for animal feed to fulfill the climbing animalstill need to eat, even if they switch between protein demand. On top of this, the increasingdifferent grains and oilseeds. This was production levels of biofuels, as well as the emphasised in 2008, where despite wheat use of natural ingredients in industrial products hitting record prices, consumption levels further increases the rising demand for gains remained strong. Compared to many other and oilseeds to be used as feedstocks in theseproducts, the inelastic nature of grains and processes.oilseeds means that farmers are able to pass on input increases to end consumers.Exposure to a sector where global supply increases will be limited Exposure to a sector that is a hedge against inflation As factors such as urban expansion, land degradation and climate change continue toFood price increases remain a major reduce the amount of arable land per capita,component of overall inflation. As food prices and while yield growth rates for most crops are linked closely to inflationary trends, food have slowed or plateaued, the worlds ability toproduction provides farmers with a hedge produce enough grains and oilseeds to meetagainst inflation. While in the US and Europe food accounts for around 15 percent of CPI80, demand will be severely tested. in low and middle income countries the shareExposure to a sector where supply is much higher. will continue to struggle to keep pace In addition, returns from farmland also show a with demand strong correlation with the CPI. For example, Production levels of grains and oilseedsfrom 1999 to 2009 in the US, the correlation globally are closely aligned with consumption between the NCREIF and CPI has been 0.509. levels. As such, when growing conditions in a Importantly, the return on the NCREIF was major producer are disrupted, an event whichhigher than the inflation rate each year81.80 Businessweek2281 Highquest Partners 25. Exposure to an asset that has low Exposure to a sector where only a few correlation to traditional asset classes such key areas, i.e. Australia and Brazil, provide as the equities marketthe range of factors which lead to wider profitability In contrast to the correlation between agricultural investments and inflation, Both Australia and Brazil offer a series of agriculture is largely uncorrelated withagricultural production advantages unmatched traditional asset classes. For example, fromby other countries. These include: 1999 to 2009, the correlation between the reasonably priced, highly productive NCREIF and the Dow Jones Industrial Average agricultural land was only 0.107, while with the Standard and the ability to secure farms for aggregation Poors 2005 it was just 0.17482. reliable climactic conditions for agricultureExposure to a sector where managed diversified input suppliers, as well as farmland provides the best returnsdiversified markets from agriculture unsubsidised agricultural sectors, While agricultural futures markets may offertherefore not at risk of withdrawal of liquidity, they are short term and volatile. In government support terms of equities, very few public companies low political risk and attractive FDI laws. provide exposure to actual production agriculture. An investment in agriculture provides exposure to profit from: price inflation from crops land inflation from land ownership operating margins from farming production increased value of land as it is transformed to achieve greater agricultural productivity.82 Highquest Partners23 26. The future for grains and oilseeds Globally, we believe the demand outlook for grains and oilseeds is likely to continue to strengthen. As the population continues to grow, the fixed demand for food continues to increase. At the same time, the rising demand for animal protein, particularly in the developing world, continues to increase the demand for animal feed. While some countries, such as Australia and Brazil, have available acreage to run cattle and sheep on grass, for most countries, the requirement to raise their animals in intensive feed-lotting operations means that vast quantities of grains and oilseeds are required to provide their feed. Demand for grains and oilseeds as a feedstockLooking to the future, a supply shock in one for biofuels shows no sign of abating. Ancommodity is increasingly likely to cause price increasing number of countries are promoting rises in other commodities. In terms of being domestic consumption of biofuels as not only anused as a food or feed product, a number of environmentally sensitive alternative to oil, but as grains are interchangeable for example, when a means of reducing their reliance on imported wheat prices are too high, consumers may fuels. In addition, industrial usage of grains and switch to corn. As a result, corn prices will rise as oilseeds will continue to grow, as consumers demand intensifies, with repercussions across to seek more environmentally friendly products, other substitutes. and as increasingly complex industrial productsThese price shocks then flow through the food ironically require more natural ingredients. As thevalue chain. As animal feed prices rose, the price economies of developing countries continue toof meat goes up as meat producers are forced grow strongly, the demand for these industrialto absorb higher input costs. Even the price of products will only strengthen.cotton is affected, as cotton acreage is reduced The recent events in Russia, where a severedue to farmers planting higher priced grains. drought resulted in export retractions, have onlyGlobal grain and oilseed volatility is also likely to served to emphasise the increasing volatilitysee an increase in speculative investments in soft that the world grain and oilseed markets willcommodity markets, as investors seek to take see in future years. Overall global demand andadvantage of price rises. While the impact of this supply levels of grains and oilseeds remain finelyinvestment continues to be debated, it would balanced, and any disruption to supply, such as abe nave to ignore its potential to increase soft drought in a major producing country, can have acommodity prices. sudden and major impact on prices. In 2008, the world saw record prices for a number of grains and oilseeds, and the imposition of export restrictions by countries concerned at low levels of food availability. These events are still fresh in the minds of a number of countries, so while stock levels of grains and oilseeds may currently be higher than they were in 2008, the nervousness by countries at maintaining supply has been a major contributor to current price spikes.24 27. The future for grainsAgriculturaloilseedsFor more information about Macquarie and FundsManagement, please contact:Tim Hornibrook,MAFM Executive DirectorP: +61 2 82320579F: +61 2 82329999E: tim.hornibrook@macquarie.comMacquarie Agricultural Funds ManagementMacquarie Group Limited1 Shelley Street, Sydney NSW 2000Australia 25 28. The future for grains and oilseeds26