Food and agribusiness survey
Respondents view the primary causes of price volatility in the food and agribusiness industry as:
- increasing consumption in emerging markets
- climate change
- natural disasters
- the price of access to agricultural inputs
These results are very much in line with our last survey in 2012, although it is notable that respondents regard the impact of the use of bio-fuels as much less significant than they did in 2012. Only 7 per cent of respondents identified the use of bio-fuels as having a significant influence on price volatility.
Respondents are concerned by classic supply and demand fundamentals. Economic growth and higher incomes in emerging markets are having a major effect on demand. Put simply, there are more mouths to feed and higher income individuals and families are seeking diets that are more meat and protein-based than they have been historically. With a greater demand for meat, the agribusiness industry must produce animal feeds such as cereals, grains and soya to feed the livestock. On the supply side, extreme weather events and natural disasters affect supply and this contributes to price volatility.
Respondents also note the influence of urbanisation on price volatility. As a greater percentage of the population inhabits large towns and cities, this increases demand for high value commodities such as dairy and meat and leads to greater supply side challenges as workers move away from agricultural jobs.
Respondents see the emerging middle classes and urbanisation in Asia as market-changing phenomena, with China given particular attention. One survey participant points to the US, Japan and Korea as key meat markets over the years, but recognises that secondary markets such as China and the Middle East are quickly developing. For a number of reasons, India is not viewed as such a key market. Domestic production for local consumption is still a notable trend and, furthermore, a large percentage of the population adhere to vegetarianism for cultural and religious reasons.
Climate change, extreme weather events and natural disasters are also identified as being of concern to the industry and a cause of price volatility. Depending on the time of year and where these events take place they impact different segments of the industry. For example, a recent drought in Brazil caused the price of coffee beans to reach record highs, whilst in 2011 a cyclone in Queensland caused banana prices to reach highs of over A$15 a kilo.
Respondents see the combination of increased demand and extreme weather events as a grave problem for the industry as they leave little margin for error on the supply side. Respondents say it is imperative to maximise harvests and work with the limited available land and water resources. One respondent noted that a weather event or natural disaster in one country or region often leads to price volatility in the wider vicinity or even in the global market. This explains why global traders are continuing to build their international presence, especially in the southern hemisphere, so that they can hedge against any unexpected adverse weather events.
The price of, or access to, agricultural inputs is identified as a major contributor to price volatility – and as having a more profound effect on the market than was remarked on in our 2012 survey.
Further regulation to manage price volatility is, according to 69 per cent of respondents, not feasible. There is a view that, while this may be achievable at a regional level (in the European Union, for instance, or where multilateral treaties exist), addressing price volatility at a global level would simply not be achievable. In our 2012 survey, 78 per cent of respondents believed that this was not possible.
Respondents note that worldwide regulation is something that has proven hard to coordinate.
Respondents appear divided on the issue, with 55 per cent believing that further regulation to address price volatility is undesirable. A number believe that, whilst the idea may appear attractive, it would be impossible to police around the world and could have negative consequences.
"The market is too big to be regulated"
Iain Lappin-Smith, Managing director, Macquarie Bank
Respondents acknowledge that many jurisdictions face their own particular challenges and problems, so reaching a global consensus on this issue would be too demanding. One respondent pointed to the amount of time that EU members spend trying to achieve common ground on regulation; trying to do this at a global level would be substantially more arduous.
Many respondents believe that there is already too much regulation and that free trade principles should be applied more widely. The continued international debate over Canadian supply management systems for its dairy, poultry and egg industries is a case in point. Respondents in the main are in favour of classic supply and demand fundamentals to regulate the market.
The largest section of respondents, 27 per cent, believe that no new regulation is needed to manage price volatility. This contrasts with 46 per cent in 2012.
"Food markets are already regulated. There are financial markets and trade and food safety issues, but further regulation would have an adverse effect."
Gerdien Meijerink, Scientific researcher, LEI Wageningen UR
Some 43 per cent of respondents believe that limits on commodity futures contracts or transparency and public disclosure of land concessions could provide real benefits to the agribusiness industry and mitigate against price volatility. Only 16 per cent believed this in 2012.
Some respondents express concern about the impact of non-traditional investors on the market, with 20 per cent believing that there should be some limits on commodity futures contracts. It is difficult to pinpoint the exact concern with non-traditional investors' involvement in the industry; however, some respondents view with concern the ability of large investors, hedge funds and financial institutions to speculate, seeing this as a means of distorting markets and amplifying price volatility.
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