Magazine article The RMA Journal

Agricultural Sector Outlook Is Positive: Experts from Rabobank Say Rising Demand Is Good News for Agriculture, despite the Economic Crisis and Setbacks in Certain Commodities

Magazine article The RMA Journal

Agricultural Sector Outlook Is Positive: Experts from Rabobank Say Rising Demand Is Good News for Agriculture, despite the Economic Crisis and Setbacks in Certain Commodities

Article excerpt

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VOLATILITY IN SUPPLY and demand and resulting price fluctuations present continuing challenges to lenders extending credit to the agricultural sector. Experts from Rabobank surveyed agricultural industry and credit issues in a recent RMA audioconference.

Despite the faltering economy, Rabobank's Michael Whitehead believes the long-term outlook for the agricultural sector is positive.

"There may be a lot of issues in agriculture right now, there may be volatility in prices, but the demand continues to be strong," said Whitehead, executive director of Rabobank's Food and Agribusiness Research and Advisory Group. He said the large and growing populations of the BRIC countries (Brazil, Russia, India, and China), especially India and China, are fueling food demand.

"The Chinese appetite for red meat and other meats continues to grow strongly on the back of increasing populations and particularly increasing incomes," Whitehead said, adding that he sees the "resource grab" as a looming issue in agriculture.

"The amount of land available for permanent crops has plateaued worldwide and the amount of land available per person continues to fall as the population goes up," Whitehead said. "As the world's governments and populations look for food security, we see strong investment globally in all areas of the value chain for agriculture--from the production level through infrastructure, processing, and retail."

Economic Impact on Food and Agriculture

In addition to rising demand, other factors led to a spike in commodity prices in 2008. Among them were speculative investment in commodities and real or perceived commodity shortages.

"We saw panic and skyrocketing food prices and food shortages as governments, companies, and populations sought to build up their stores and their certainty of food," Whitehead said.

"We saw rice prices rise in 2008, a great example of market psychology. The world wasn't going to run out of rice, but this fear pushed rice up to record price levels."

The demand for corn used in the manufacture of ethanol affected not only prices for that product, but also prices for other commodities as farmers cut back on those crops to free up land for corn.

After reaching record-high levels, agricultural prices tailed off at the end of 2008. Whitehead blames the credit crisis and the ensuing panic for much of the drop-off. Other food and agriculture trends described by Rabobank experts include the following:

* The food and agricultural markets have an underlying strength that other markets don't share because people need to eat. "What we're seeing, though, is the steak-to-sausage principle," Whitehead said. "People are moving from more expensive chocolates to cheaper chocolates, from boutique beers to cheaper beers." The growth of so-called lifestyle foods such as organic products also slowed as people chose less expensive alternatives.

* The stronger dollar has reduced U.S. exports of crops such as wheat and cotton. On the other hand, credit issues could reduce fertilizer use in other countries, which means less competition for U.S. farmers in the global grain markets.

* Future volatility in supply has the potential to drive food prices higher than is the case for more stable commodities. Other factors affecting agricultural prices are shown in the figure below.

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Individual Sectors

Highlights of an extended discussion of specific agricultural sectors included the following:

* Worldwide production of grain will fall 3% in 2009-10 because of a drop in prices and reduced availability of fertilizer due to the credit crisis. The price drop was caused by too much grain on the market in 2008-09.

* U.S. wheat growers are facing strong global competition, and many growers are shifting to corn or soybeans. …

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