by Garreth Bloor

Adapt, don't die

Climate change and the profit opportunities in futures trading

We need to adapt to the elements of climate change in order to ensure greater yields of our crops

With an increasing population and growing incomes across the emerging markets, trading agricultural futures are noteworthy to investors. While climate change is seemingly tough to tackle with global action in light of recent summits in Durban and Rio, how does the uncertainty ensure contracting at today’s set prices and yield tomorrow’s profits?

For a start, the climate change reality requires two important distinctions, one of which lessens the seeming uncertainty of a variable as uncontrollable as future weather conditions.

Investors should consider the scientific variable of climate adaptation when mitigation (or prevention) efforts to avoid climate change have failed – witness the lack of global consensus. Fundamentally however, not all cases of a failure to prevent climate change mean anticipated threats to agriculture are realised in the future.

Adaptation measures are efforts that accommodate climate change effects and do not assume prevention (or mitigation) as likely – thus affecting yields in agricultural commodities, in favour of today’s sellers and tomorrow’s buyers, assuming adaptation measures provide better than expected results.

Increasing attention is being focused on adaptation measures already, with increasing support from governments, NGOs and business. When the world’s local governments at the coalface of food security and farming gathered for a pre-COP17 meeting, the theme was clearly purely adaptation.

Adaptation to climate change is the “adjustment in natural or human systems in response to actual or expected climatic stimuli or their effects, which moderates harm or exploits beneficial opportunities,” as defined by the inter-governmental panel on climate change.

Chinese media outlet,, quotes Judith Rodin, the president of Rockefeller Foundation, as having said that fighting the effects of climate change could provide an opportunity for increasing investments into the agricultural, financial and medical sectors in a way that generates economic growth.

Investors should assess adaptation measures along coastlines as well as performances of good governance on the environment.

Several measures protecting coastlines mean that even assuming climate change is not mitigated, there is no reason to believe agricultural potential is lost when adaptation-based approaches are being applied.

Techniques for developing Genetically Modified Organisms (GMOs) broaden opportunities for crop improvement. While their research shows there is increasing adoption of GM crops globally, trade issues remain with European countries not accepting GMOs while many NGOs remain critical of the genetic modification as an adaptation measure in dealing with food security and climate change. Yields in agriculture are also tied to cattle – and livestock where demand may be set to rise.

Investment guru Doug Casey says there is such a thing as a cattle cycle, and “all over the world, cattle are in liquidation”. Worldwide, cattle herds are being slaughtered, and that’s depressing the prices”.

In his regular investor newsletter, Casey points out that even as prices are being depressed by all the selling, counter-intuitively, cattle herds are collapsing. That means the number of cattle and the price of cattle is going down at the same time.

He adds that sooner or later demand will pick up, coinciding with rising income levels in China and across the emerging markets, meaning a strong demand for more beef – in addition to the traditional consumers.

Mike Norton-Griffiths, Senior Research Fellow of the World Agroforestry Centre in Nairobi, Kenya says there is a glaring oversight in the World Economic Forum report, Realising a New Vision for Agriculture when it comes to the importance of property rights. “I personally cannot think of any other intervention in the agricultural sector which can more than double economic productivity within a 10-year time span along with significant environmental gains.

“The fact is that secure tenure and property rights change land-user perspectives away from resource mining and towards investment in sustainable resource use, and it is only when land rights are secure that the cycle of poverty can be broken,” the report says. Investors can track the property rights index through the Index of Economic Freedom, which also rates regulatory environments – an important variable with regard to the ease of setting up partnerships.

The likelihood of longer term investments in adaptation by the private sector can be measured against the levels of property protection according to trends observed by the economists working on the Index of the past four decades.

The trends are looking good for investors. Izak Strauss, Executive Director and Chief Investment Officer of Agri-Vie, a private equity investment fund focused on food and agribusiness in sub-Sahara Africa, says governments have improved the operating environment for business.

Investors observing the intersection of private and public behaviour, understanding the motivations of policy makers and their interests are particularly important.

Economist James McGill Buchanan Jr argued in his Nobel Prize winning work that the logic underlying government action remains distinct from private sector prerogatives given the short time horizon in politics and the absence of the direct pricing mechanisms that control business decisions.

The government remains a critical variable in policies affecting agricultural futures, but with the markets being freer with protections for investors, technology remains an important competitive advantage for those who are navigating what is an easier regulatory environment and thus a more competitive marketplace.




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Issue 46


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