Sunday, January 17, 2016
Gold output has peaked in this commodities cycle, according to mining industry leaders and analysts who say few big projects will reach the point of production amid falling prices.
The lack of new assets and declining output at existing mines is expected to curb gold supply, a glimmer of hope for surviving producers of the precious metal in an industry coming to terms with a rush of investment when prices were far higher.
Gold has been one of the commodities hit by the worst environment for mining in more than a decade. The price has declined more than 40 per cent from its 2011 peak, to a level where many gold miners struggle to recoup the costs of extraction.Kelvin Dushnisky, president of Barrick Gold, the world’s largest gold miner by annual output, said: “Falling grades and production levels, a lack of new discoveries, and extended project development timelines are bullish for the medium and long-term gold price outlook.”
This year some had expected gold to be under pressure from higher interest rates in the US, after the Federal Reserve began to tighten monetary policy last month.
However the gold price has risen 2.7 per cent so far in 2016, while stock markets around the world have tumbled. A controversial investment with a variety of competing theories for what determines the price, gold has provided comfort for investors who see the inert metal as a haven amid economic and political turmoil.
Miners hope limits to fresh gold supply will increase the chances of longer-term recovery.
“It is fruitless to try to predict demand dynamics for gold — I always put my faith in a recovery driven by reduction in supply and I believe we will see the first signs of impending recovery in the second half of this year,” said Vitaly Nesis, chief executive of Polymetal, a UK-listed gold miner.
According to Thomson Reuters’ GFMS metals research team, global production of gold is expected to fall 3 per cent this year, ending a seven-year period of rising output. GFMS expects gold mine production in 2015 to have risen 1 per cent to a record 3,155 tonnes.
The fourth quarter last year was in my opinion the peak quarter for fresh global mine supply. ... I think supply will drop by 15 to 20% over the next three to four years
- Vitaly Nesis, chief executive of Polymetal
The end of the gold bull market has prompted some miners to abandon growth projects, while ore grades across the industry have been falling as mines become depleted. The strike rate in finding significant deposits has also declined and most mining companies are struggling to attract investment to develop projects.
Mr Nesis said: “The fourth quarter last year was in my opinion the peak quarter for fresh global mine supply. ... I think supply will drop by 15 to 20 per cent over the next three to four years.”
Nick Holland, chief executive of Gold Fields, a South Africa-based gold miner, said the industry had abandoned a previous fixation on rising output.
“We were all talking about how production was going to increase every year. I think those days are probably gone ... you are not going to see massive production increases in the industry,” Mr Holland said.
Ross Strachan, precious metals demand manager at GFMS, said the expected output fall this year would occur “as the contribution from projects that had been commissioned in previous years fades and the pipeline for new projects is limited given the current stressed financial climate”.
Alcoa, the US aluminium group, expects global demand for the metal to grow 6 per cent this year, only slightly slower than 2015, in spite of the volatility in financial markets.
Klaus Kleinfeld, chief executive, said increased market volatility could have an impact on growth but he expected aluminium demand to keep growing, provided there was a “non-catastrophic” outcome for the world economy, as the metal continued to be substituted for other materials including steel and plastic.
Mr Kleinfeld was speaking as Alcoa reported underlying 2015 earnings per share, excluding one-off items, of 56 cents, down 39 per cent from 2014 but slightly better than analysts had expected.He also reaffirmed the company’s planned timetable for splitting its upstream commodity metal and mining operations from its downstream specialist metals business, with the separation scheduled to be completed by the end of the year.
He said the company had faced “an unbelievably difficult environment” because of the falls in the prices of both aluminium and alumina, the intermediate material used to produce the metal.
In the final quarter of 2014 Alcoa was selling every its aluminium for an average price of $2,578 per tonne. By the final quarter of last year, that average price had fallen to $1,799 per tonne, down 30 per cent over the year.
The group’s revenues were down 6 per cent for the year at $22.5bn. Alcoa’s shares, which have halved in the past year, slipped 1.4 per cent in after-hours trading.
Mr Kleinfeld said the company had been “pulling every lever we have” to sustain profitability in its upstream operations, including a series of closures at its aluminium smelting and alumina refining operations in the US and around the world, some temporary, some permanent.
The company has set a target of being in the lowest 38 per cent of world producers for aluminium production costs, and the lowest 21 per cent for alumina costs. Mr Kleinfeld said he expected that by the end of the year it would have exceeded those targets.
“Even in this environment you can see the upstream is delivering,” Mr Kleinfeld said.
The downstream operations, which serve the aerospace and automotive industries, meanwhile, have been benefiting from the strength of those markets, which is expected to continue into 2016. Alcoa forecast that the market for aluminium components would grow 8-9 per cent for aircraft and 1-4 per cent for cars.
The only conspicuous weak spot is expected to be demand for truck manufacturers, which worldwide is forecast to show somewhere between a 3 per cent decline and 1 per cent growth. The North American market for aluminium truck parts is expected to shrink by 19-23 per cent this year.
General Electric’s latest technology for boosting manufacturing productivity is a gadget that feels like it would be more at home in an amusement arcade or theme park than in an industrial laboratory. At the group’s global research centre in Niskayuna, New York, you can enjoy the sensation of flying around its steam turbine plant in Schenectady, six miles away.
A virtual reality 3D scan of the plant, accurate to every last machine tool and piece of pipework, is projected on to a screen and special glasses. Using a PlayStation-style controller, you can move around the factory floor, swooping over assembly lines or hovering over a stack of components.
The technology is just one part of a radical overhauldesigned to transform the 123-year-old group into what Jeff Immelt, chief executive since September 2001, calls a “digital industrial” company. At its core is a drive to use advances in sensors, communications and data analytics to improve performance both for itself and its customers.The system is a lot of fun to use, but the intent behind it is entirely practical: to allow GE’s engineers to work on design, layout and workflow at its plants without actually being there. If they want to move in a piece of new equipment, for example, they can use the simulation to see if it will fit. The systems for collecting and analysing manufacturing data — fitted in at least 75 of GE’s 590 plus factories — can cut costs by 15 per cent or more, say company executives.
GE’s products such as aero engines, power generation equipment, locomotives and medical scanners are being made part of the “internet of things” — intelligent connected devices that can transmit information and receive instructions — and the company is building new capabilities in software to understand and manage those machines.
The potential rewards for success are enormous for a group that has sold off large chunks of its business to refocus on its industrial operations.
“It is a major change, not only in the products, but also in the way the company operates,” says Michael Porter of Harvard Business School. “This really is going to be a game-changer for GE.”
If it fails, however, it could prove a decisive factor in hastening a further break-up of the group.
The power of the industrial internet of things is only just starting to be explored. Companies in areas from manufacturing to energy, transport, and mining collect huge volumes of data, but use only a fraction of it.
If GE can succeed in finding ways to use that information to cut its costs and raise the productivity of its products and services, it could gain a critical competitive advantage over rivals such as Siemens, Mitsubishi, United Technologies and Rolls-Royce. It also aims to create an important new source of income from cutting costs and boosting productivity for other companies, even if they are not using GE equipment.
Entering this world, however, is also bringing GE new competition. In setting itself up as a software business that can help other industrial groups reap the benefits of the internet of things, GE will be taking on Microsoft, Amazon, IBM, Oracle and SAP.
“GE is drag-racing with the best technology companies in the world,” says Frank Gillett of Forrester Research. “Kudos to them for trying, but I think they will find it harder than they think.”
In April, GE embarked on one of the most radical changes in its history, saying it would sell about 90 per cent of GE Capital, the financial services unit that just a couple of years ago provided about half the group’s $14bn earnings.
That decision was welcomed by analysts and investors — its shares, after lagging behind the wider market for most of Mr Immelt’s tenure, have risen 17 per cent in the past 12 months. The crisis of 2007—09, which forced GE to cut its dividend and lose its triple-A credit rating, convinced many of the business’s potential for disaster.
The regulation that followed, placing additional burdens on GE as a “systemically important financial institution”, meant that even in good times the returns on capital looked unattractive.
Yet while financial services might have been a dangerous artificial stimulant, there is a big question about how fast GE, can grow without them.
When Jack Welch, Mr Immelt’s predecessor, took over GE in 1981, it was viewed by many as a “GDP company”: the kind of big, boring business that grows only as fast as the gross domestic product.
To avoid that tag Mr Welch pushed into financial services and other businesses that could grow more rapidly. Without that business, GE faces the prospect of returning to GDP rates of growth.
With a market capitalisation of $250bn GE is one of the most valuable brands in the world. The group employs over 300,000 people and its most profitable sectors last year were power equipment and aviation which both contributed about $5.5bn.
The sale of most of GE’s financial services businesses means that reported earnings per share are expected to have dropped 21 per cent last year. In 2016, the slowdown in the world economy and the fall in commodity prices that has hit GE’s businesses providing equipment for oil production and mining will be a drag on growth.
Brian Langenberg, an industrial analyst who chairs the business school at Aurora University in Illinois, expects GE’s organic sales growth from now on to be in line with global GDP, forecast by the International Monetary Fund to be 3.6 per cent this year.
The industrial internet, however, offers GE a hope of escaping that uninspiring prospect. The falling cost and rising power of sensors, communications devices and data processing mean that just about any product can be made capable of sending and receiving information and commands. The internet of things is best known today for consumer applications such as fridges that can order your groceries. The more important applications, however, are likely to be in industry.
By 2025 the economic benefits of the internet of things could be $11.1tn a year, according to the McKinsey Global Institute. It estimates that about 40 per cent of those benefits could come in factories and work sites such as oilfields, with transport and urban infrastructure accounting for a further 30 per cent.
Marco Annunziata, GE’s chief economist, believes that as companies work out how to exploit the potential of the new technologies, it could unleash a new productivity revolution in industry. Since 2010 productivity in US manufacturing has stagnated, rising just 1 per cent a year compared with the annual 4 per cent growth in the previous two decades. Mr Annunziata says the industrial internet could help bring back those higher rates of growth.
“The first ICT revolution came in the 1990s: using computers as ways to gather and organise information. Now we are literally making machines more intelligent,” he says. “This tying together of the digital and the physical is something we have never seen before.”
He cites mining companies, under huge pressure to cut costs because of weak commodity prices, as an example of businesses that are keenly interested in the potential of the technology.
They already record large amounts of data — Teck Resources of Canada says it has 200 sensors on every mining truck — and if they can analyse it properly they can discover ways to improve efficiency, such as predicting more precisely when failing parts need to be replaced, reducing the time when expensive machinery sits idle.GE says that at one of its mining customers, trucks that were previously available for use 70 per cent of the time are now available 85 per cent.
Jim Heppelmann, chief executive of PTC, a software company that works with GE and other manufacturers, says that sort of boost to productivity represents a critical competitive advantage.
“If you have a 10 to 20 per cent cost advantage on a product with 3 to 5 per cent margins, you’re going to walk all over the competition,” he says.
GE executives believe it can be in the vanguard of this revolution. The company is spending $1bn a year to boost its digital capabilities, hiring 1,000 software engineers and data scientists and setting up a new data analytics centre in San Ramon, California, just across San Francisco Bay from Silicon Valley.
In the next month, it is expected to launch Predix, its software platform for managing and analysing industrial data.
“In industry, there is a lot of stuff that people don’t know how to find and don’t know how it is performing,” says Beth Comstock, who leads new business development at GE. “We can analyse how it is performing, [and] we can predict what will happen.”
That analysis will be applied to both GE products and to those made by other companies. A modern locomotive is a “rolling data centre”, as Mr Immelt puts it. By analysing that data and cross-referencing with its rail traffic management system, and sending instructions to trains, GE can squeeze out an extra mile per hour of speed for US railway operators worth $200m per year in extra profits.
Similarly, Toshiba is working on a pilot project with GE to develop an application for installing, operating and maintaining lifts.
GE expects the use of Predix to grow rapidly, with 500,000 products under management by next year. Ms Comstock argues that many customers will want GE to provide them with an integrated package of products and services to deliver specified outcomes, with data analysis a central part of the package.
So far GE is the industrial company that has made the strongest commitment to the industrial internet, although other manufacturers such as Bosch of Germany and France’s Schneider Electric have also been starting to explore it. Siemens, GE’s main European rival, has announced only tentative initiatives.
GE accepts it is facing stiff competition in data analysis from specialised software companies. It argues, however, that rivals start from a position of weakness because they do not have the same understanding of industrial machines.
“The domain knowledge for this is hard to come by. It is held by a small number of people,” says Bill Ruh, head of GE’s global software operations. “We are the best of the best, because of what we’ve done in combining physics and analytics.”
For all Mr Ruh’s confidence, grafting a world-class software business on to an industrial conglomerate is not easy.
In its attempt to rebrand itself as “the digital company that’s also an industrial company”, GE has been running adverts showing a young software engineer trying to explain his new job at the company to family and friends.
In one, his friends are unimpressed by what he does for power plants and hospitals, but enthuse over another engineer who is working on “the app where you put fruit hats on animals”.
It is funny because it is true: the gulf between the cultures of Palo Alto, California and GE’s headquarters in Fairfield, Connecticut is wide.
“They should not underestimate the challenge of reinventing themselves as a digital company,” Mr Heppelmann says. “Silicon Valley is a very special place in terms of its culture, its star system, its remuneration. That’s something GE can’t bring.”
It is not just in terms of recruitment that Silicon Valley poses a threat to GE.
“GE is in a race to capture customers before the likes of Amazon get better at meeting industrial requirements, and before customers get comfortable about using them,” says Mr Gillett.
Establishing General Electric as a leading company in the industrial internet would be a crowning achievement for Mr Immelt, who for much of his time at the top of GE has laboured in the shadow of Mr Welch. If the strategy fails, however, it will be his failure.
The arrival of its first activist investor — Nelson Peltz’s Trian Fund Management last year revealed a stake of just under 1 per cent — could also prove problematic. While broadly supportive of Mr Immelt, Trian has urged him to do more to raise profit margins, and it is clear that its amicable tone could sour.
If the costly bet on the industrial internet fails, then so will GE’s dreams of achieving growth through technological leadership. A less glamorous future of deeper cost cuts, lower levels of investment and perhaps a further break-up would await.
Today, I have been invited to speak about Globalisation 2.0. This is both timely and appropriate because we are entering a new phase in the evolution of the world economy. I will look shortly at the geopolitical and geoeconomic trends that characterise “Globalisation 2.0” — but first let’s inspect the wider historical canvas.
For 500 years the west was on the rise, culminating between the late 1970s and 2007, in Globalisation 1.0 — an age of continuing “mini-revolutions” brought about by rapid economic, political and especially technological change.
These changes — the open system of trade, information flows and the spread of technology — occurred on the terms, and in the image of, the “west”. And I am using the term “west” not geographically as it includes Japan, itself a greater moderniser since the 1868 Meiji restoration, and Australia and New Zealand. What I mean by “west” is the liberal market-based democratic values that have propelled global growth since the mid-20th century.
The end of the cold war further accelerated institutional change: the creation of the EU in 1993, and launch of the single currency in 1999; the 1994 Uruguay Round agreement on global trade liberalisation and the establishment of the World Trade Organisation; the opening of a market economy in communist China followed by entry into the WTO in 2001; and far-reaching changes in national and international laws driven by the deregulatory spirit of the Thatcher-Reagan era.
The fall of the Berlin Wall and the collapse of the Soviet Union brought about an even bigger shift. The “client states” of the world’s two superpowers — the US and the Soviet Union — were no longer hemmed in by the geopolitical constraints of the cold war and were now free to pursue their own development.
As the “winner” of the cold war, many states chose to follow the advice of the “western” model prescribed by the US-influenced global institutions: the World Bank, International Monetary Fund and WTO-led trade liberalisation — the so-called Washington consensus.
At the end of the cold war, around 1bn people counted themselves in market economies. With the rise of emerging markets and the transition in India and China that number rose to between 3bn and 4bn people — a truly seismic shift.
The progressive abandonment of controls on capital, goods, services and labour — epitomised in this period by the creation of Europe’s single market and the birth of the euro — reached its apogee in the summer of 2007. At that point world financial flows had reached 14.7 per cent of global GDP.
We find ourselves in the second half of the second decade of the 21st century at the advent of a new age
And now we find ourselves in the second half of the second decade of the 21st century at the advent of a new age: “Globalisation 2.0.” The old western-dominated Globalisation 1.0, which assumed the universality of one global culture, has passed. Today, Globalisation 2.0 means the interdependence of several identities or cultures characterised by new forms of non-western modernity.
This new era, while long in the making, was hastened by the 2008 global financial crash. Since the Great Crash, cross-border capital flows have fallen to 3.1 per cent of global gross domestic product, less than one-quarter of their pre-crisis peak. This is the result of a massive re-regulation of the banking sector marked by the repatriation of capital, curbs on proprietary trading and the ring fencing of commercial banking from investment banking. We might call this the partial “disintegration” of the financial system.
The benefits of the western-dominated “Globalisation 1.0” system over the past 30 years led to the rise of the emerging economies. The wider G20 grouping reflects their increasing weight. Yet those same countries are experiencing shocks as a result of the slowdown in China, inadequate local governance, meaningful economic reforms, and, crucially, excessive borrowing at home, both among corporates and households. Think Brazil.
Now these one-time market favourites face a period of prolonged and painful adjustment, especially those overly dependent on commodity cycles. As Robert Zoellick, former president of the World Bank and US trade representative, has remarked: some of the governments of the so-called Brics countries started to believe their own press releases.
Globalisation has made borders porous to information, foreign investment and popular culture but also to cyber crime, pollution and human trafficking
To date, we have witnessed a reappraisal but not a repudiation of globalisation. Globalisation has made borders porous to information, foreign investment and popular culture but also to cyber crime, pollution and human trafficking. Security is harder to achieve and to maintain. National governments are desperate to regain a measure of control.
So while the flow of ideas continues across borders, there are signs of a backlash — from the great firewall of China to Europe’s insistence post-Snowden on locating data storage on its own continent. The internet is not (yet) Balkanised but the age of the seamless global internet has almost certainly passed.
The rise of radical Islam marks a second significant geopolitical shift. A bloody struggle for supremacy is unfolding between Shia and Sunni Islam in a Middle East where postcolonial borders are being erased and the old autocratic order breaking down. Al-Qaeda, Isis and other terrorist groupings may not pose an existential threat to the west, but their newfound global reach poses a clear and present danger.
Finally, as I have witnessed during my visits over the past 15 years, China’s steady rise challenges the postwar order in Asia. China’s GDP has quintupled since 1990 but it is a premature superpower. The ruling Communist party is striving to create jobs, raise the quality of economic growth and preserve its own legitimacy. At the same time, and perhaps not coincidentally, China has become increasingly assertive in the Pacific, interrupting investment and trade with neighbours who stand up to its territorial claims.
China has also actively begun to reshape the postwar international economic order, which it views as skewed in favour of American and western interests. It is a rulemaker now, not just a rule-taker. The launch of the Asian Infrastructure Investment Bank is one example; but so are the Brics Bank and Beijing’s One Belt, One Road initiative for connecting western China to Central Asia, as well as the seaborne route through the West Pacific, Indian Ocean, the Gulf and on to east Africa.
Let me now turn to how I see things unfolding.
First, the Federal Reserve’s recent move to raise interest rates suggests we are finally moving from crisis management to a semblance of normality in policymaking. Mervyn King, former governor of the Bank of England, described the period after the Lehman Brothers collapse as “wartime”. By that he meant governments and central banks taking extraordinary measures such as bank nationalisation, bank recapitalisation and the launch of quantitative easing in the US, Europe and Japan.
The Fed’s interest rate hike signals, finally, that we have reached the beginning of the end of unconventional monetary policy as a means of generating economic growth.
In Europe, we see a fragile truce. The eurozone crisis has moved from acute to chronic. Greece remains in the eurozone, just. The European Central Bank, under the astute leadership of Mario Draghi, has bought time with its pledge to “do whatever it takes” to stop deflation. But the ECB’s limited QE measures have done little more than buy time for governments to take the necessary structural reforms to restore economic growth.
There is a common thread here with the US and China. The Fed’s move makes it imperative that Congress (and a new president) consider fiscal and structural measures such as tax reform and, yes, immigration reform to inject new dynamism into the US economy. At the same time, Silicon Valley and the shale gas energy revolution are showing, once again, the power of the private sector to drive growth in the US.
On China, much has been written about Beijing’s mis-steps in managing the exchange rate and intervening in the stock market. Yet the ultimate test will surely be implementation of the Communist party’s five-year plan. This recognises the central place of structural economic reform from state-owned enterprises to the labour market.
These reforms are intended to propel the shift from an investment-reliant, credit-fuelled, export-heavy, low cost manufacturing growth to one based more on consumer demand, services and environmentally friendly growth; as well as opening the capital account and the internationalisation of the renminbi. However, after the tumultuous market movements this new year and the ferocious anti-corruption campaign targeting Chinese business, I would say the game is finely balanced.
We have moved from an era...where monetary policy was doing all the work to a post-crisis era where the burden falls more on politicians to take responsibility for structural reforms to generate economic growth
To sum up: we have moved from what Claire Jones, our ECB correspondent in Frankfurt, recently described as “peak central banking”, where monetary policy was doing all the work to a post-crisis era where the burden falls more on politicians to take responsibility for structural reforms to generate economic growth.
Are they up to it? Sitting in Europe, where populists have toppled or laid siege to governments in Greece, Poland, France and Spain, the omens do not look especially good.
As for America, the improbable rise of Donald Trump may not presage the arrival of a middle-market hotelier-cum-reality TV host in the White House in November; but it does reflect how a large segment of the public feels unhinged by globalisation and spurned by the political elite.
The UK faces similar strains on inequality, but not to the same degree. The Conservative party, defying all predictions, won an absolute majority in parliament after a period of austerity. The Tory government, guided by David Cameron and his putative successor George Osborne, is radically reshaping the state, reforming the welfare system, and increasing the incentives to work. The UK is now close to full employment.
Let me turn briefly to the Japan experience. It has become fashionable to speak of two “lost decades” after the collapse of the late 1980s bubble and the onset of deflation. By this account, Japanese business failed to fully exploit the postwar economic miracle, especially in hardware manufacturing. Apart from its groundbreaking lead in robotics, it largely missed the software revolution. One Japanese diplomat told me, half jokingly, that the greatest Japanese export in the past 25 years has been cultural: Japanese cuisine. Sushi as soft power! (Well, we should add the Japanese film industry.)
In fact, historians may well pay more attention to the innate qualities of the Japanese people: discipline, hard work and resilience in adversity. These strengths helped the country to recover from not one but two devastating earthquakes and make Tokyo one of the great modern cities. They may also take note of Japan’s cleanliness, top class education, healthcare and transportation systems and its ability (unlike the US) to deliver a national strategy. And, crucially, they would remember that Japan has since the 1870s combined modernisation with the preservation of national culture.
Today, Japan faces a choice about Globalisation 2.0. How far is it ready to open up further to the rest of the world, to temper its traditional homogeneity with a willingness to exploit global networks, interact with other cultures and, yes, embrace English as the dominant language of international business?
Fewer interpreters and more women in the workforce — think of the gains in productivity!
On my last trip to Tokyo, a senior Japanese official told me that Abenomics represented the “last chance” for Japan to break out of deflation and restore its role as a front rank economic and political power.
Abenomics emphasises — alongside monetary and fiscal policy — the importance of structural economic reform such as more women in the workforce, corporate governance, improving productivity and the role of external catalysts such as the Trans-Pacific Partnership. There is evidence of success; nearly 760,000 women have entered the workforce. Many are part-time jobs and equality is a distant prospect, but this is nevertheless real progress in exploiting one of Japan’s great natural resources: women.
The reformers [will] prevail, from Beijing to Tokyo, Delhi, Brussels, London and Washington
The FT has no party political affiliation. But I would say that Abenomics — if implemented in full — could turn out to be an effective antidote to the theory of secular stagnation, which has gained currency in the west. And Japan will have a chance to showcase its economic and political power when it plays host to this year’s G7 meetings.
Ladies and Gentlemen, I have sought to sketch some of the main characteristics of Globalisation 2.0. How bullish should we be about the next 10 to 15 years?
The less benign prognosis is that the forces of resistance to Globalisation 2.0 prevail. Populists in the mould of Farage, Le Pen and Trump do not necessarily assume power but they define the political debate. The reformers are cowed. The forces of fragmentation gain ascendancy from the Middle East to Europe. Nationalism rises in China, Russia and the rest of Asia. Globalisation 2.0 starts to look like globalisation before 1914.
There is, however, a more optimistic outlook. The reformers prevail, from Beijing to Tokyo, Delhi, Brussels, London and Washington. China continues to globalise and opens its capital account — a potentially huge shift in global financial power. Japan continues to reform apace and grows closer to India, which itself, finally, becomes a big player. The shift of economic power eastward to Asia accelerates. And the west continues to play a constructive role.
We do not know what the future brings. But here’s what we do know. The new global media alliance between Nikkei and the FT is in fact an act of Globalisation 2.0. Together we will be there to tell the story. Without fear and without favour.
Saturday, January 16, 2016
Instead of a two-hour drive around the 678-hectare farm, the drone sweep takes 30 minutes. This means sorties can be made more frequently, increasing the chances of rescuing distressed sheep and, as a result, the number of deaths of lost newborns on Gardyne’s farm has halved. The drone also checks on water troughs, saving the farm more money by reducing machinery running costs.
Mr Gardyne’s hope is that drone technology will soon become advanced enough for him to monitor the rate at which his pasture grows. This would help increase lamb production, potentially boosting his income by US$200 a hectare.
Drones are just one way in which agricultural production can be taken to new heights. Others are needed if food production is to keep pace with anticipated demand in new and more sustainable ways.
The UN estimates a global increase of 2bn people to 9bn by 2050, when agricultural consumption is likely to be 60 per cent higher than it was in 2005. Feeding this growing population “while nurturing the planet will be a monumental challenge”, according to the UN’s Food and Agriculture Organisation (FAO).
The world has managed, so far, to produce enough food for its growing population — at least in theory. One in nine people still do not have enough to eat but this sad fact reflects more on social and political systems than on the global volume of food produced.
As the Rome-based FAO says: “There is more than enough food today produced to feed everyone in the world, yet close to 800m are chronically hungry. As the affordability of food largely relates to income, ensuring access to food remains one of the key pillars of food security and the wider anti-poverty agenda.”
The challenge now is to grow more food on existing farms because the area of new land suitable for agricultural cultivation is limited. The amount of land cultivated for arable crops expanded by 14 per cent between 1961 and 2007, but there will only be another 10 per cent of new land available in the next 40 years, according to figures from the FAO and Rabobank, a Dutch co-operative lender.
Over the past 40 years, yields from crops increased by 77 per cent, boosted by the widescale application of nitrogen, potassium and phosphate fertilisers. But the FAO estimates that yields will need to increase by a similar proportion in the next 40 years — a daunting task without another technological leap. “Intensification, higher yields and more intensive use of land, needs to contribute 90 per cent of the growth in global crop production to 2050,” an FAO report claimed.
The same goes for meat production. The FAO forecasts higher numbers of cattle, pigs and poultry in 2050, but also expects each animal to be bigger than today in order to meet demand for livestock and dairy production. This leap is being demanded at a time when, at least in the developed world, consumers are increasingly questioning intensive farming and demanding more local and natural food.
Environmental activists such as Greenpeace are opposed to genetic modification and are lobbying for more research into different types of biotechnology application. “Growing of diverse ‘smart’ crop varieties that are capable of producing more with less will be critical to achieve increases in crop yield within a framework of ecological agriculture,” Greenpeace says, highlighting the potential of so-called “marker-assisted selection” or “smart breeding”. Instead of genetic engineering, this process makes use of conventional genetic breeding to build new crop varieties.
There is more than enough food today produced to feed everyone in the world, yet close to 800m are chronically hungry
As Pat Juskiw, a plant breeder with the Field Crop Development Centre in Alberta, Canada, explains: “The whole idea of genomics and marker-assisted selection is amazing. We will not be cutting and slicing genes to make GMOs, but the new technology will help us find gene combinations that naturally occur.”
Such research requires funding and the amount of investment into the agri-technology sector is on the rise with start-up investment increasing from $500m in 2010 to $4.2bn last year, according to AgFunder, the online investment site.
But the banking group, which specialises in financing in this area, says there is a need for much more investment, especially in areas such as big data, which it believes play an important role in improving agricultural efficiency. For farmers, the use of big data would involve feeding information into a single database. Algorithms would then be applied to create products and methods to improve productivity.
Justin Sherrard, global strategist for food and agribusiness research at Rabobank, says there are large gains to be made from the application of big data by retailers as well as farmers. “We need more investment to boost production from farm to fork — from farming to traders, processors and distributors,” he says.
The whole idea of genomics and marker-assisted selection is amazing. We will not be cutting and slicing genes to make GMOs, but finding gene combinations that naturally occur
Retailers, in particular, already have access to customer data via loyalty cards, which they can process to cut down on food waste. For years, Walmart in the US has been analysing the shopping patterns of its customers against weather data and has found useful correlations: people eat more steak when the weather is warm and windy, for example, but not when it rains. The most popular temperature for eating berries is when the weather is under 27 degrees centigrade with low winds. Analysing such seemingly mundane patterns means the retailer can tailor its orders from producers to meet customer demand, while also reducing waste.
But how can the world’s poorest farmers, the 2.5bn who depend on farming for a subsistence livelihood, gain access to this kind of investment and innovation? Bain, a consultancy, points out that micro-drip irrigation systems, drought-resistant hybrid seeds and asset-backed microloans can completely change the livelihood of farmers with less than two hectares of land who earn less than $4 a day.
In a report part-funded by the Bill & Melinda Gates Foundation, Bain highlighted the importance of entrepreneurial private sector companies that often invest when government and traditional aid agencies have fallen short, based on research in south Asia and Sub-Saharan Africa.
The situation of subsistence farmers in the developing world is poles apart from technologically-advanced businesses such as the farm in New Zealand where Mr Gardyne now has a list of 400 applications for drone technology. But the inspiration for innovative ideas can come from unlikely sources. The idea for applying drones to farming, for instance, came to Mr Gardyne from a television programme about the war in Afghanistan.
“I was watching the documentary with my son Mark and we were looking at how unmanned aerial systems were being operated for military purposes. It got us thinking how we could use such technology on our farm,” Mr Gardyne says.