The agricultural commodities business is becoming a high-risk one, with prices rising sharply, says Pawan Kumar, associate director, food and agribusiness advisory, Rabobank International. In an interview with Rajesh Bhayani, he says companies active in this business should invest more in risk-mitigating tools. Edited excerpts:
With the dynamics of agricultural commodities changing globally, what should be India's policy response in managing the demand-supply situation?
Globally, supply is struggling to keep pace with the growth in demand, driven by population and economic growth. Also, given land constraints, the world is looking for new supply regions. However, there has been a high degree of unpredictability in supplies from non-traditional regions, which are, in many instances, functions of poor local weather conditions, stock levels and domestic agricultural prices. For instance, Russia banned wheat exports in 2009-10, while India had imposed a ban on wheat exports for a long time, before lifting it last year. We will continue to see the world rely more and more on non-traditional suppliers. Policy-level interventions in such new regions would impact price volatility. For India, it is very important to focus on farm-level efficiencies and best practices to increase yields to support the growth in demand, not just domestically but global demand, too. At the moment, yields in India are significantly lower than the global average. Yield improvements would go a long way in resolving supply constraints and price shocks.
Which are the stress areas in agricultural commodities, with regard to financing companies active in the business?
Rising commodity prices have increased the working capital requirement of industry players and, therefore, the funding requirement, without really changing the volume. Now, there is a higher degree of risk attached to commodities, owing to higher prices. Also, increased price volatility has added significant risk to the players’ business models. Investing in or developing risk-mitigating tools/skills would be crucial for players in the current volatile market.
The grain market has looked bullish on last few months. What is the outlook on this and how long would the bull run continue? Would this run have any effect on other sectors?
The grain complex has come under pressure due to weather disruptions. The US is seeing one of the worst droughts in the last 66 years and this impacted the corn balance sheet significantly. The stocks-to-usage ratio is at a record low level and this has kept corn prices at elevated levels. Wheat has also seen a declining stocks-to-usage ratio, with reduced crop from the BSR (black soil region, Russia) weighing strongly on prices. Looking at the current tight stock levels, it is expected prices would continue to remain at elevated levels in the coming 12 months. Besides grain, we have also seen a bull run in soybean and meal prices, both at record levels. The bull run in feed commodities would impact the animal protein industry and the dairy industry negatively. Higher prices are required to ration demand and encourage production response to strengthen stock levels.
What changes are expected in the biofuel market, considering the rising crude oil prices and its indirect impact on some agricultural commodities used to make biofuel?
Crude oil prices are relatively lower this time, compared to the peak levels. However, biofuel policies are coming under pressure due to the shortage of key grain and oilseed commodities. Close to half the corn produced in the world’s largest producing nation, the US, goes into ethanol production. In the 2012-13 season, we might see a decline in the usage of corn to produce ethanol in the US, the first in 17 years. The current high prices are exerting pressure on biofuel producers, challenging the usage of corn for biofuel production.
How important is the demand in China for agricultural commodities?
China has been a key growth engine for the world. With rising gross domestic product and income levels, the demand for animal protein in China has increased tremendously. This rising demand has received a global response. China has become a net importer for some key feed commodities like corn and soybean. The appetite in China for feed commodities has been so strong that despite the high soybean prices, it has imported about 59 million tonnes of soybean, about 70 per cent of world trade in 2011-12.