Post on 19-Dec-2015
October 2008 Paul Braks
Food & Agribusiness Research and Advisory
Grain markets in motion
Impact of volatile commodity prices on the agri-food value chain
Who is Rabobank?
Rabobank is the largest Allfinanz financial service corporation in the Netherlands
Rabobank is an AAA rated financial institution
Rabobank has a international food & agri focus
Rabobank delivers financial solutions through a network of branches in 41 countries
2 Source: Rabobank, 2008
3
What is driving commodity prices? A whole range of factors…
Commodity price
• Agricultural land• Yield (output/ha)• Farm management• Farm input prices• Weather• Diseases
Supply factors
• Feed • Food• Biofuels• Industrial
Demand factors
• Fund activity• Exchange rates• Freight rates• Crude oil prices• Technical specifications • Market sentiment and speculation• New non-agri market entrants
Other price determining factors
• Trade Policy• Agricultural Policy• Biofuel/Energy policy• Food safety regulations (e.g. GMO)• Sustainability criteria
Policies
Source: Rabobank, 2008
Stocks are falling because consumption of grains is structurally higher than production
Global ending stocks (1,000 tonnes)
0
50,000
100,000
150,000
200,000
250,000
1996
/97
1997
/98
1998
/99
1999
/00
2000
/01
2001
/02
2002
/03
2003
/04
2004
/05
2005
/06
2006
/07
2007
/08
2008
/09f
Corn Wheat Soybean4 Source: USDA, 2008
Ongoing demand for meat, especially in emerging markets Demand from a continuous expanding biofuels industry Supply negatively affected (bad harvests) by adverse weather Policy reforms resulted in lower stocks and less price stability
Scarcity in world market has moved up prices although the current trend is downward due to the financial crisis
Financial crisis drives down prices:
Less liquidity in the financial markets and market uncertainty
Banks have a very conservative credit risk appetite
Investors have been selling commodities to reduce risk and raise cash
5 Source: Bloomberg, 2008
Long term inflation adjusted commodities price has been downward
Low real prices tell that:
Farmers were able to expand production to meet ongoing demand growth
Production could grow by means of efficiency improvements
Food has never been so cheap
6
0
50
100
150
200
250
300
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
Real pri
ce
Actual price in real terms Trend in real price
'
Source: IMF, 2008
Real wheat price trend (2006 USD/MT)
Farm input prices (crude oil & fertiliser) are also very volatile
7 Source: Bloomberg, 2008
US
D/M
T
US wheat production costs have increased by 25% due to higher fertiliser (+75%) & fuel costs (+60%) between 06/07-08/09
8 Source: Rabobank analysis based on USDA, 2008
US wheat profit margins have so far increased because grain price increase outpaces cost increase
Farmers planting decisions in 2009/10 should be followed with great care
The current fall in the grain price is much more severe than the fall in input costs
Grain markets are still tight and therefore more future grain production is needed
9 Source: Rabobank analysis based on USDA, 2008
The European food industry is facing a higher and more uncertain costs base
Food processors have the following options:
Accepting pressure on margins / push volumesInternal costs savings measuresPassing through input cost inflationStrategic actions to address the cost base (M&A)
Source: Rabobank analysis, 200810
Higher cost base cannot be passed on and therefore margins are under pressure
Source: Rabobank, 200811
0%
2%
4%
6%
8%
10%
12%
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Average EBITA margin for top 35 European food companies
Outlook
The current grains crop (2008/09) is considerably higher than last year. The good crop is especially driven by higher yields due to favourable weather and to some extent larger planted acreages
Prices of grains show a downward trend due to current situation in the financial markets. The grain markets are fundamentally still tight and therefore a future production expansion is needed
All players in the agri-food value chain continue to face volatile input and output costs, which will have an impact on profit margins
Commodity price risk management is getting more important for all players (from farmer to user) in the agri-food value chain
12 Source: Rabobank, 2008