Well.... partly, yes of course. But they are also highly dependent on the cost of energy. So the fact that crude oil prices are shooting up with the collapse of OPEC talks to increase production has strong implications for our industries.
The above-mentioned basic natural factors are key to cultivating crops. Drought years particularly impact agricultural supplies and the current worry is that water shortages in North America and China will drive prices further up. At the same time, however, energy costs impact directly on fertilizer prices and the cost of running tractors, harvesters and other farm machinery. Increased diesel oil prices for pump irrigation, cultivation and harvesting and post-harvest handling reduce farmer's margins quite sharply much quicker than farm-gate prices can properly adjust. Lower margins mean less supply in a market where demand has been increasing.
Food prices are probably even more linked to energy costs than on-farm costs. Energy is used from the moment e.g., cooling systems are used to take out field heat from fruits and vegetables or in the drying of grain. Perishables have to be transported in refrigerated trucks which typically use more gas than regular transport. Bulk commodities are shipped internationally in oil-burning freighters, raw food materials are processed in energy intensive factories and packaged in plastics for sale in supermarkets that use electricity often generated from oil-burning power stations. So every link in the farm-to-fork value chain uses energy.
The chart (calculated from World Bank data) shows the clear relationship between food and energy (fertilizer is not shown because it is almost identical to the energy line).
So where does the present crude oil price hike (Brent Crude at $118/barrel at the time of writing and maybe going higher) leave the food industries already facing what we believe to be a crisis? There's a chance that some of the speculative surge in food prices may be taken out of the market in the short-term as traders expect more crude price hikes, but by far the greatest impact will be on processed and shipped foodstuffs in the developed country markets. These are the most highly processed and packaged products produced by farmers who are mostly capital intensive.
The good news is for smallholders in developed countries who use labour rather than capital and whose energy footprint is smaller. To the extent that they can use local fertilizers and their own backs and hands, the market price hikes may leave them unscathed; indeed they may find a better market price for their products relative to their own costs of production. But they'll still be hurt by marketing cost increases.
Equally farmers growing bio-fuel may find themselves in a seller's market. Bio-fuels only make sense when the base price of crude is high and there is an argument that crude oil prices need to remain high to encourage alternative energies to be developed and used. That's a difficult one because we recognize that land used for bio-fuel is not available for food production.
In addition, the developing countries will also face higher milling costs (e.g., for rice) and the storage and shipment of staple foods. Urban dwellers will almost certainly face higher food costs wherever they live, and that's bad news for the poor.
What should agribusiness do? Energy efficiency is clearly the key and any large-scale food processor would be a fool not to have hedged his or her energy costs and looked at the technical aspects of using raw material wastes as a fuel source and re-cycling energy use (e.g., managing the heat dispersal systems). We'd also be looking at alternative energy supplies based on a long-term analysis of crude prices. Now is a good time also to be thinking of those bio-fuels and how to build using them into an integrated energy supply and utilisation strategy that includes one's carbon footprint and credits to be gained from reducing it.
If you'd like FoodWorks to help design an integrated energy strategy for your agribusiness, then contact us via that link to our company web site. We have an experienced team that can look holistically at your entire value space and provide technical and management solutions.
