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News 222 views last update:6 Aug 2012

Rabobank sees growth for agri commodities

Inventories for wheat and maize are low. Populations increase and biofuel production increases. This augments demand for agricultural commodities. Prices are expected to remain volatile and above their long-term average for the next few years to come, Rabobank says in a new report.

Over the past two years, demand has surpassed supply primarily due to adverse weather conditions that have led to crop failures.

The cost price of soft commodities has risen due to increasing energy costs.

According to the report, developments in India and China have been the most important drivers for global food demand in the recent past and will continue to be so in the years ahead.

The Rabobank Commodities Outlook was officially presented Thursday by Bert Heemskerk, chairman of the Executive Board, in tandem with the economic Outlook for 2009.

The ability and willingness of global governments to stimulate productivity improvements, offer a stable production environment and facilitate, rather than distort, the functioning of global agricultural markets will be central to meeting future demands, the report says.

The level of investments in R&D and the degree to which a risk-reducing, stable environment for agricultural producers is present are likely to determine the pace of the anticipated growth in productivity.

Potential for production increase
"There is potential for increasing agricultural production capacity by increasing yields and by taking into production the substantial area of land available globally that can be used for arable crops," said report author Harry Smit of Rabobank's Food & Agribusiness Research and Advisory (FAR).

But uncertainties are vast, however. For instance, it remains to be seen whether stocks-to-use ratios will return to historical levels or stabilise at lower levels, thus contributing to increased price volatility in the future.

Energy uncertainties
Also, the global economic slowdown makes it unclear whether the shifts in diets in emerging economies from rice to meat will continue at the same pace as in the last couple of years.

Furthermore, little is known about the energy-price developments—and thus the cost-price developments—of agricultural products.

"The future price of energy will remain a key external factor that will determine the price outlook," stressed Smit.

"Rising energy prices drive up the cost prices of agricultural commodities and have a diminishing effect on supply."

Smit adds that commodity markets are expected to be more correlated with energy markets in future thanks to a new trend linking agricultural commodity markets with energy prices via the price of biofuels.

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