While risk management is always on the top of management agendas, not least since the massive commodity spikes experienced in 2007/8, Rabobank’s strategists reckon it is about to become even more important.
“You can only steer through the hills, valleys and curves when you can see them coming,” said strategist David Nelson. “And we’ve found it’s going to be a bumpy ride.”
The main factors behind the volatility bumps are expected to originate from emerging markets of China, Brazil, India and Russia.
Fasting one’s seatbelt during that ride will mean rebalancing operating portfolios, said Nelson. He said that the cost of being wrong in risk predictions has gone up, and can lead to regional imbalances or being too slow to establish global and regional networks for production, distribution and trading.
But the flip side, according to Nelson, is that the benefit of correct predictions has gone up too.
BRICs away!
Nelson predicts that this year’s drought will impact grain exports from the arable-rich Black Sea region for at least a year – and probably more. Tight supplies are being compounded by international demand and Russia’s switch to self-sufficient chicken and pork production.
Nor is it just grains that are at stake. There will be a knock-on effect for animal proteins due to the high costs of grain for use in feed. Nelson expects protein trade patterns to shift and big meat exporters to face problems unless alternative markets are found.
China, meanwhile, will import serious amounts of corn for the first time in 15 years this year to feed a need for tens of millions of tonnes as it shifts towards more industrialised meat production. This industrialisation, which requires diet standardisation, is driven by food safety and efficiency needs, as well as fast growing food retail and food service sectors.
As for India, it is “shifting from a soymeal exporter to an importer over the next few years, which represents about a six million ton swing,” Nelson said. It is moving from a low base, however, so the world impact will be small.
It is worth bearing in mind, however, that exports of Indian beef (buffalo) are growing fast, at about 6.5 per cent a year. The low cost of beef is making it price competitive with chicken in the Middle Eastern and Asian markets.
Finally Brazil has two big blots on an otherwise sunny agricultural outlook: currency and infrastructure. The poor infrastructure means transportation of produce to port is extremely expensive – and while efforts are being made to improve the infrastructure, these are far slower than the development of agriculture.
Rabobank FAR’s new report is called Looking for Delta: Tectonic Shifts Towards Higher and More Volatile Agricultural Markets.