NEW YORK — Rabobank recently published its "North American Food & Agribusiness Outlook," which indicates that the grains and oilseed sector must make strategic and tactical adjustments for market uncertainty in 2009.
"While opportunities for locking in higher revenues during the bull market in 2007 and 2008 were welcomed by farmers long-suffering from tightening margins, the outlook going forward is expected to be a bumpy ride," said Karol Aure-Flynn, executive director of Food & Agribusiness Research and Analysis (FAR). "We are not likely to see a simple stabilization of prices, but rather increased volatility. Agricultural markets are responding to uncertainty in outside markets, many factors are at work here, not just supply and demand."
This volatility may lead to higher costs — such as more costly crop insurance premiums and higher transaction costs for hedging commodities — which is likely to pressure operating margins for U.S. and global farmers and constrain organic expansion.
"In addition, managing balance sheet risk will also be a key concern as working capital needs and asset valuations come under scrutiny," Ms. Aure-Flynn said. She wrote the outlook’s chapter: "U.S. Grains and Oilseeds – Fundamental Shift to Unchartered Territory."
In the short term, as the 2008 commodity price surges work through the supply chain, demand rationing may happen in the feed and biofuel sectors, Rabobank said. At the same time, price weakening or a change in crude prices may allow businesses to strategize for energy needs. Additionally, as global demand erodes, pressure may ease on historically low stocks.
From a long-term perspective, growth in global demand for grains and oilseeds will evolve with population growth and urbanization, as well as the permanent installation of renewable energy requirements. With historically low ending stocks, the U.S. and world grain complex is vulnerable to a production shortfall in case of weather events. Additionally, geopolitical events are the wildcard, but in the case of food security, political interference can be expected.
"As farmers, grain handlers, grain traders and processors face serious challenges, timing and risk management will be crucial for converting opportunities into profit," Ms. Aure-Flynn said. "Planning for volatility is critical."