Swing factors that will lead to more volatile agri markets

The swing factors that will lead to more volatile agri markets

Over the next three to five years, agribusiness companies are likely to face increased market volatility and higher prices, according to the new Rabobank Food and Agribusiness Research and Advisory (FAR) report: Looking for Delta: Tectonic Shifts Toward Higher and More Volatile Agricultural Markets.

While this will present challenges, as risk management and positioning become even more important, the report predicts that more volatile market conditions will also create opportunities for farmers and agribusinesses – and not just of a trading and market-positioning nature.

Rabobank FAR general manager for Australia and New Zealand Justin Sherrard says the focus of global food production and consumption has shifted in recent times to the major emerging economies: China, India, Brazil and Russia, in particular.

“As major agri-commodity exporters, Australia and New Zealand need to position themselves in the global distribution and trading networks that will service the new demand and play to their competitive strengths against other countries that are targeting the same opportunities,” Mr Sherrard says.

The FAR report outlines and quantifies the ‘delta’ forces that are currently playing out in world agricultural markets, with a focus on global grains and oilseeds and protein markets. It identifies the key swing factors that, over the next few years, are likely to move these markets to higher, more volatile price levels than have been seen in the past.

“There are certainly opportunities for Australian and New Zealand farmers and agribusinesses among these developments, which may not yet be fully appreciated by the marketplace,” Mr Sherrard says. “But, it’s going to be a bumpy ride with ongoing volatility and discontinuities with supply and demand, caused by evolving food retail and foodservice industries, unilateral trade decisions, and as ever, the weather.”

Co-author of the report, Rabobank FAR global strategist David Nelson, who is based in Chicago, says that with slow world economic growth and food demand shifting east, companies will need to rebalance their operating portfolios or risk having regional imbalances. More importantly, they risk being left behind in the establishment of global production, distribution and trading networks. Mr Nelson spearheaded the report and focuses on the global grains, oilseed and protein markets.

Below are some highlights from the report.

Black Sea region: Drought setbacks

Structurally, the Black Sea region has become the primary incremental producer of world grain due to its available arable land, according to the Rabobank report. However, the poor environment and unreliable weather will continue to cause global grain prices to trend higher and with more volatility. Media Release December 16, 2010 2

Mr Sherrard says growing international demand, and Russia’s move towards self-sufficiency in poultry and ultimately pork production, is further contributing to tighter grain supplies in the region.

“Given the stimulus of higher prices, the Black Sea region has tremendous further potential for increased grain production,” Mr Sherrard says. “However, the 2010 drought will severely impact grain exports from the Black Sea region for at least one year and probably several more, which will create opportunities for grain, beef and sheepmeat and dairy exporters in Australia and New Zealand.”

China: New swing factor

Profound shifts appear to be underway in terms of China’s ability to become self-sufficient in key feed grains, which will have significant implications for the industry globally according to the Rabobank report.

China’s need for feed grains is likely to accelerate with its plans to rapidly industrialise meat production, which inherently reduces feed input flexibility and shifts animal diets toward standard rations that are typically dominated by corn or feed-grade wheat. When considered in the context of net growth in China’s soybean imports over the past decade, the order of magnitude of China’s potential need for corn imports is enormous – in the tens of millions of tonnes annually.

The report suggests it looks increasingly likely that this demand may come much sooner than many had previously thought. While the industrialisation policies are partly driven by food safety concerns and partly by the need for efficiency, there are also overriding market forces, such as the natural evolution in food retailing and foodservice that take place as economies mature.

“The changes in global grains markets signaled by these new dynamics suggest new opportunities for Australian grain farmers and agribusinesses,” Mr Sherrard says.

India: An emerging swing factor

India will impact the world protein market quite significantly in years to come, according to the Rabobank report.

Mr Sherrard says what might be least appreciated by the world’s protein players is the large and growing role of India’s beef (buffalo) exports in global meat markets – the fourth largest exporter of beef in the world.

“The large volume of beef being exported from India makes it an important factor in considering the global protein situation,” he says. “The low cost of this product makes it especially attractive in Middle Eastern and Asian markets, where the product competes on price with chicken.Media Release December 16, 2010 3

“These markets are also of interest to Australian and New Zealand beef and sheepmeat exporters, and our industries will need to keep playing to their competitive strengths to maintain market share or shift to alternative markets that are more focused on food safety and quality.”

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The report also shows that, on top of India’s beef exports, the growth of the country’s dairy and poultry sectors is affecting the supply and demand for feed ingredients, particularly for soymeal, barley, and corn more broadly.

“We see India shifting from a soymeal exporter to an importer over the next few years, which represents about a six million tonne swing,” Mr Sherrard says. “While this growth in soymeal consumption is high in percentage terms, the starting base is quite low and the impact on world tonnage will be somewhat small.”

Brazil: Challenges ahead

With ample and reliable rainfall, supportive industry leaders and government, and plenty of untapped land potential, the future looks bright for agriculture in Brazil, according to the Rabobank report. However, the report highlights two big challenges on the horizon that may affect the profitability of future growth prospects – currency and infrastructure.

“While currency appreciation is reducing the country’s relative advantages, Brazil’s infrastructure weakness has been magnified by growing production,” Mr Sherrard says. “While infrastructure is improving, it is coming at a slow pace – slower than agricultural output is growing. Improvement in Brazilian infrastructure could eventually unlock a vast quantity of productive land and crop output.”

Finally, Mr Sherrard says, “The question is which commodities will Brazil look to expand in and which can it export at competitive prices – given the infrastructure bottlenecks, it may prove more profitable in the near-term for Brazil to shift its perspective from exporting grains to exporting animal proteins”.

Rabobank Australia & New Zealand is a part of the international Rabobank Group, the world’s leading specialist in food and agribusiness banking. Rabobank has more than 110 years’ experience providing customised banking and finance solutions to businesses involved in all aspects of food and agribusiness. Rabobank is structured as a cooperative and operates in 48 countries, servicing the needs of more than nine million clients worldwide through a network of more than 1600 offices and branches. Rabobank Australia & New Zealand is one of Australasia’s leading rural lenders and a significant provider of business and corporate banking and financial services to the region’s food and agribusiness sector. The bank has 85 branches throughout Australia and New Zealand.

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