Don’t get trampled in rush
Economic growth and shifting dietary patterns in developing countries, and biofuel policies, have accelerated demand for agri-commodities since the start of this century, and brought the global food system to a tipping point, according to Rabobank.
There are warning signs of increasing pressure, say experts at the international financial services provider.
But they also warn of the danger of farmers getting trampled, as giant food and agribusiness companies scramble to get hold of raw materials.
Without farming, there is no market, warn the bankers.
I wonder how many farmers were trampled when agri-commodity giant Wilmar International Limited built up its land bank of 573,405 hectares of oil palm plantations, mostly in Indonesia and Malaysia.
That’s one of the best ways for huge food companies to secure scarce commodities — buy up farmland.
Other big firms — and nations — have been so active buying up land that countries such as Argentina and Brazil have restricted foreign investment in farmland.
Rabobank also says companies that control the supply chains are increasingly wielding their market power and, as a result, they will start drawing profit margin away from the other players in the chain. Companies like Germany’s Sudzucker, which signed a contract to import 400,000 tonnes of sugar per year until 2015, from Mauritius, one of the sugar-exporting countries with preferential access to the EU market. European beet growers could be the losers.
Dairy farmers are losing out, due to the global food industry’s main response to rising prices for scarce dairy products — which is to use cheaper ingredients. Butter now costs $3,500 dollars per tonne more than soy or palm oil, versus $500 more in 2002. In some instances, dairy ingredients have been substituted completely by alternative ingredients. For example, dairy fat has lost significant market share to vegetable oils in ice cream and bakery products.
Naturally, the food companies want the lowest farm-gate prices, and they aren’t slow to use their muscle to capitalise on strong demand and pass back the least share of profits possible to farmers, traditionally the weakest link in the food chain.
As usual, farmers are price-takers, left with whatever profit margin is available between farm-gate prices and input costs.
Also chasing profit hard, as food scarcity sets in, are the chemical, fertiliser, seed and machinery companies who supply farmers. Making new investments to enhance productivity and make the most of a food boom, they too are squeezing farmers, in order to maximise their return on investment and keep shareholders happy.
Expensive farm inputs are part of the reason why farmers cannot respond to rising demand by producing more. With agri-commodity supply failing to match rising demand, stocks have been winding down, and the result has been higher and more volatile commodity prices.
Meanwhile, many governments have imposed export bans to insulate domestic food prices from global food-price inflation, and keep food affordable for their general populations. But this policy also hits farmers, by denying them access to the superior farm-gate returns needed to increase agricultural productivity.
The next decade will be dominated by a battle for raw materials as we transition into an era of scarcity, according to Rabobank. But their experts say that food and agribusiness companies are — at last — increasingly recognising the need to work with farmers and support them, realising that without primary production, there is no market.
In order to de-risk their businesses, both the companies supplying farm inputs and buying produce are increasingly looking to put the farmer first, say Rabobank experts.
They predict that larger farmers will be best placed in the coming decade of scarcity, and predict a shift to larger farms, which brings better leverage to obtain better deals from suppliers and customers, capacity to invest in ongoing productivity growth, and scale to withstand lower profit margins. More pricing contracts and guarantees are also predicted — another way for processors and traders to secure scarce supplies. &&&
The food industry giants will need farmers on their side, to tackle the challenge through to 2050 of doubling the agri-commodity supply base, even while land, water and mineral resources are halved.
“There will be winners and losers, those who grasp the change first will have the best prospects for turning the new reality into an opportunity”.
That advice from Rabobank is aimed primarily at their food and agribusiness clients, but farmers also must take it on board.
