AGRI-FOOD THOUGHTS(13 April 2010)

While out this week shopping at your favorite food store, do something for one of your
grandchildren. Use that fancy cell phone to take a few pictures of those food stores. Be sure to get
several of the store front with people entering. With those pictures you may be able to convince your
disbelieving descendants that a time did exist when grocery stores did not have armed guards.

Each day brings the world one day closer to global Agri-Food inadequacy. On one side demand
around the world continues to rise as the number of people increases and higher incomes allow those
in China and India to buy food on world markets. As we have written many times, China has
demonstrated that hunger is not a problem of inadequate Agri-Food. Hunger can be cured by higher
incomes that allow consumers to simply buy Agri-Food in world markets. Such is the approach being
implemented in China, and they may have the money to outbid many.

325 18.75%

18.50%
300

18.25%

275
18.00%

250 17.75%
2006 2007 2008 2009 2010 2011

% World
Production, Consumption,
Right Left

In our first chart above is plotted, using the green line and the left axis, China’s consumption of three
of the most important grains. Shown is the sum of the corn, wheat, and soybeans consumed by
people of China. Light green line is a linear regression, and the tight fit around that trend line should
be noted. Historical data for this chart comes from the USDA, and that data was used to project 2011
values.

In the five years of the chart, China’s consumption of these grains will experience an increase of 40
million tons, or about 15%. To help put that quantity in perspective, the increase is greater than
the total production of corn, wheat, and soybeans by Canada. Where will the world get another
Canada with which to feed China over the next five years? And then, we will need another to feed
India in the five years that then follow after.

Red line in that chart, using the right axis, is the percentage of the world’s production of corn,
soybeans, and wheat consumed by China. In the Agri-Food price crazy year of 2008 that percentage
reached 18.6%. 2009 was, according to the USDA, a great global crop year, and the ratio fell. USDA
is now forecasting second year of good luck in the farm fields, and the ratio is expected to fall
slightly again. In 2011, the USDA’s black hat of forecasts will probably be out of rabbits, and the
ratio will rise back to 18.3%. The forecast difference between China’s share of global consumption
of these three grains will be 0.3% shy of the 2008 level, when Agri-Food prices went up
dramatically. And finally, note that China has about 20% of the world’s population. What happens
to Agri-Food prices when, not if, they get their fair share?

In the past decade the world got lucky as the increased production of Argentinian and Brazilian
farmers prevented the world from being either hungrier or paying more for the Agri-Food. In that
decade those farmers increased the acreage growing soybeans or corn by about 15 million acres, or
by about a third. In the past five years, the increased production of soybeans by Argentina and
Brazil represented about 65% of the increase in global soybean production. In case you are
wondering why that matters, every meal you consume every day includes some vegetable oil, one
likely made from soybeans.

70%

60%

50%

40%

30%
1992 1996 2000 2004 2008 2012

ARGENTINA
+ BRAZIL

So much for history, what about the future? The above chart helps to understand the limits of Agri-
Food. In the early 1990s, Brazil and Argentina used less than 40% of their combined arable land to
produce corn and soybeans. In recent years, almost 70% of the arable land in those two nations
was dedicated to producing corn and soybeans. A quite reasonable assumption is that those two
nations will need to grow something besides corn and soybeans. Limits to growth in Agri-Food do
exist, and they are measured in acres.

China will feed the nation in the years ahead as it will be generating the income with which to buy
the necessary Agri-Food. However, the world does not have another Brazil and Argentina with which
to keep Agri-Food prices from rising. And then in a few years, India will be in global Agri-Food
markets buying also as incomes rise in that nation. Whether or not Agri-Food prices in the future
will be higher is no longer a relevant question. Rather, how high will Agri-Food prices rise and how
will the rest of the world afford the higher prices?

Agri-Food prices, as we have reported many times in these articles, have risen at a rate far faster than
the return produced by equity markets. Even with Gold, your portfolio may not be adequate to feed
your family in the coming years. To help investors understand the returns generated by Agri-Food
commodities, we recently released our quarterly report on the topic, Agri-Food Commodities: An
Investment Alternative. You may read that report at this link:
: http://www.agrifoodvalueview.com/files/Agri-Food_Commodites_An_Investment_Alternative_2010_April.pdf

AGRI-FOOD THOUGHTS is from Ned W. Schmidt,CFA,CEBS, publisher of The Agri-Food Value

View, a monthly exploration of the Agri-Food grand cycle being created by China, India, and Eco-
energy. To contract Ned or to learn more, use this link: www.agrifoodvalueview.com