WlitËiB
SECTOR SPECIAL THE FOOD CHAIN
Focus points and opportunities
for Rabobank duringfood crisis
Confident
commodities as an interesting alternative. The
current volatility in the grain markets makes these
markets more interesting for investors to specu-
late.
Finally, some other effects play a role in the rise
of the food prices. One is the higher production
costs due to higher farm input prices, for example
for fertiliser. Production is currently also limited
due to a more capacity constrained environment
because of infrastructure limitations and land
availability issues. Some short-term trade barriers
such as export restrictions and levies, imple-
mented in response to strong domestic demand
and tight supply, have exacerbated volatility and
market distortions. However, this has, to some ex-
tent, been mitigated by the reduction or waiving
of import tariffs in net importing countries.
In the long run, however, Rabobank's Food Agri
Research is confident of a positive outlook for the
commodities market. This confïdence had several
reasons, the most important being that the current
high food prices will stimulate a higher production
effort by farmers worldwide. Higher production is
possible, according to Braks: "Grains and oilseeds
production can grow by allowing efficiency im-
provements of yields (by means of more fertilisers
and better quality seeds) as well as expansion of the
Agricultural Area." For example, yields in the former
Soviet Union are about 1 to 2 tons per hectare, while
in Western Europe these yields amount to 8 tons
per hectare. And then there is still a lot of agricultural
land that can be taken into production. This is even
more interesting for farmers with food prices at the
current high level. In the long term, Braks experts a
rebound of the grains and oilseeds production. 'This
will gradually bring supply and demand in a more
balanced situation and could result in rebuilding of
stocks."
Braks says the current scarcity in the grain market
is not of a structural nature. The expectation is that
grain prices will gradually return to a '10 year aver
age' due to an increase in production and higher
stocks. However, he says, "the unpleasant weather
conditions can always change the picture resulting
in price volatility."
TT,-T'.'.vT
During these times of increased commodity prices coupled
with the effects of the global financial crisis, Rabobank can
support its food and agri clients by being their strategie
partner when it comes to offering solutions for managing
their balance sheet and optimize financing due to tighter
working capital and the increased requirement for additional
funding.
A key added value will be the bank's Commodity Price Risk
Management Services. The unprecedented high volatility
requires hightened Price Risk Management.
Companies in the food market are really in need of strategie
advice from their financial partners, especially when it comes
to backward integration projects. With the ongoing high
prices contract default has increasingly become a major
concern for the industry, meaning non-delivery of commo
dities to refiners and retailers. For this reason participants
in the various food chains are looking for ways to mitigate
delivery risk by contract farming and in general, by back
ward integration. For example, breweries buying cultivated
farm land to ensure the delivery of malt and hops instead
of buying this from processing companies as these are now
sometimes pressured to limit supply. Rabobank can play a
role here in finding sound financial solutions to support its
food and agri clients with these programmes.
The highly volatile food market also attracts new parties
like hedge funds. And although they are still in the futures
business, spiralling prices also force them to look at other
initiatives like buying cultivated farm land and silos where
commodities are kept in stock. These are new parties in the
food and agri landscape with new and different financing
needs. A deveiopment that is certainly interesting for a
leading food and agri bank like Rabobank.
issue ia THE WORD
