Increased uncertainty will continue to pound investment opportunities in the Food & Agriculture value chain over the next couple of years, potentially depressing food supplies and dealing a blow to the sector’s efforts to meet world food requirements, a new report says.

The present market situation, characterized by low stocks for the important grains, could pave the way for an increase in agricultural commodity prices once the situation normalizes, according to the report released by Rabobank.

Factors influencing buffer capacity deterioration and the outlook of many players in the Food & Agriculture value chain include the commodity boom, the subsequent sudden decline in commodity prices, the boom in farm-input prices, increased price volatility and a wave of highly leveraged consolidation deals. These factors as well as a financially tightened credit system have left several Food & Agriculture companies exposed to higher risk profiles.

Demand for food to rise

The report, which explores the impact of the 2008 financial crisis on Food & Agribusiness Markets and companies, says demand for food is expected to maintain growth momentum led by long-term drivers that are less affected by the financial crisis.

“With long-term demand drivers, such as a growing world population, changing diets and increasing biofuel production in a time of low stock levels for the important grains such as corn and wheat still in place, a rise in prices of agricultural commodities is possible as soon as the situation normalizes,” says report author Harry Smit of the Food & Agribusiness Research and Advisory.

Opportunities exist

Companies, especially those boasting a strong balance sheet and willing to strengthen their strategic position, could make the best out of the emerging opportunities. For instance, they could strengthen their sourcing strategy, says Smit.

“The increased overall uncertainty will negatively impact investments in the food and agriculture value chain over the next couple of years and may have a depressing effect on food supply, which will make it even more challenging to meet the future world food requirements,” says Smit.

Overview by sector

“Dairy farmers, except those that have been hit in one way or another by the melamine crisis, are relatively well off at the moment, as dairy prices boomed in line with commodity prices,” says Smit.

Revealing little correlation with commodity markets or economic development in general, fruits and vegetables markets cannot expect an easy ride in 2009. Sugar markets, which are independent of commodity prices and short-term economic developments, also fall in this category. The sugar sector along with the coffee and cocoa industries could slow down a bit due to the financial crisis, the report points out.

Meat and poultry producers also have been battered by high feed costs, severely reducing their margins.

Meanwhile, production is expected to decrease in cotton markets. “Cotton prices have declined sharply due to oversupply, aggravated by the economic slowdown, which affects the textile industry heavily. Cotton production is expected to decline as a result,” says Smit.

With fertiliser being purchased closer to actual application, peak demand may be seen in early 2009. This would put pressure on distribution networks and potentially ignite upward price volatility, he adds.

Source: Rabobank