A renaissance in the agricultural sector demonstrated in surging commodity demand and higher prices is powerfully rooted in trends that will continue to drive the industry in the years ahead. That was the conclusion of a new Rabobank International report, "The Boom Beyond Commodities — A New Era Shaping Global Food and Agribusiness, 2008."
An executive summary of the report was issued by Rabobank in connection with the group’s announcement that it was creating two food and agribusiness equity-linked indices focused on Asian and global food and agribusiness companies.
The indices have been named Rabo Fastracks Asia Pacific Top 20 and Rabo Fastracks Global ex-Asia Top 20. They are focused on five sectors Rabobank said it has identified as lucrative going forward — agri-inputs, agri-machinery and equipment, energy crops and commodities, food processing and protein.
Amid an almost frenzied investor rush into commodities that have provided a hedge for investors, Rabobank suggested the continued boom in agriculture will center on businesses that help produce and support/process commodities, rather than on physical commodities themselves. "Much of the investment in agribusiness to date has been primarily in downstream food companies, where business models are more easily understood by investors," the report said. Without dismissing the potential for further upside potential downstream, the "fundamentals driving the current boom in agricultural commodities have moved some of the best opportunities to the up- and mid-stream segment of the value chain," Rabobank said.
Rabobank has a long association with world agribusiness, but is ratcheting this focus up even further, said Brady J. Sidwell, assistant director, food and agribusiness research and advisory.
"At this time, food and agribusiness are in the spotlight internationally," Mr. Sidwell said. "Rabobank at a global level is devoting more and more resources to this sector and is committed during this cycle to growing with it."
A principal author of the report, Mr. Sidwell said its findings were based on contributions from Rabobank leaders in different markets and sectors, charged with identifying key trends in food and agriculture in a single report.
While hardly the only or even the central driver of the current agricultural boom, renewable fuel stands as the newest demand driver, Rabobank said. Biofuels initiatives have added a new "f" to demand factors — food, feed, fiber and now fuel, the report said.
Other "pillars" of demand identified by Rabobank as shaping the food and agribusiness sectors are rising income levels, population growth, increasing urbanization, resource scarcity (land and water), freer trade/globalization, food safety and sustainability.
"Satisfying this new level of demand can only be achieved through increased investments in agriculture, particularly wider mechanization in the developing world and greater use of existing and new technologies to increase production and more efficiently use scarce resources, including land, water and fertilizer," Rabobank said. "With improvement in transportation infrastructure globally, greater access to previously inaccessible resource-rich countries will result in increased agricultural investments in these areas and appreciation of production assets, primarily in South America, eastern Europe and Southeast Asia.
"Freer trade will also support more international investment in agriculture in these regions that offer comparative advantages. Over time this will continue to result in a broader distribution of wealth and thus increasing consumer demand."
The role of India and China driving agribusiness growth hardly has reached its conclusion, Rabobank said. In those two countries alone, nearly 50,000 people are expected to be added to cities each day over the next decade.
Such urbanization has a "multiplier effect" for commodity demand as protein demand, the report said. "Expanding urban populations, which prefer convenience and variety, will bring growth to food processing and food retail — which will again boost demand for commodities and inputs," Rabobank said. "Biofuels industries will also require increasing volumes of food commodities, which also drive demand for inputs. Together, these factors will create significant growth opportunities that Rabobank believes are set to benefit players in several agricultural sectors, including animal protein and dairy, food processing, energy crops and commodities and agri-inputs and agri-equipment."
While several sectors identified by Rabobank as lucrative have performed well in recent years, that hasn’t necessarily been the case for packaged food companies, Mr. Sidwell said.
"Companies involved in food processing at the moment are getting squeezed," he said. "They are purchasing higher priced ingredients and have limited ability to pass these higher costs along to consumers. The outlook at the moment isn’t so rosy.
"Longer term though, with more people in cities, working longer hours with two-income households, they are buying more processed foods. These are trends we have seen in the U.S. over time. One element that will accelerate this trend is the further expansion of food retailing in different parts of the world. The world’s largest retailers are expanding rapidly in these markets, Asia in particular. For instance, South Korea is now the largest retail market for Tesco outside the United Kingdom."
The report noted steady food consumption growth is expected to outpace yield gains against a backdrop of declining availability of arable land per capita, especially in areas where demand may be growing fastest, such as China.
"Thus, productivity gains both in China and the rest of the world will be an important factor to satisfy increased demand from the world’s up-and-coming urban, middle-class consumers," the report said.
Demand in developed nations is likely to be characterized by relative stability, Rabobank said. By contrast, developing markets are expected to remain on a strong growth curve, especially in Asia "which Rabobank believes has some of the best potential for continued expansion in the years to come despite recent shocks to the global economy," the report said.
Rabobank called China’s situation both familiar and a good reference point for its case for the outlook for agribusiness.
"With over one fifth of today’s consumers, China is truly shaping the world of agriculture," Rabobank said. "Over the next two decades, food will continue to account for the largest share of consumer spending in China. With future food production expected to increase by only 1% annually as a result of increased productivity, the future demands on agriculture as well as land and water resources will be profound.
"Another Green Revolution in agriculture … making broader and more efficient use of crop technologies and investments, will be key to sustaining the growth in demand anticipated in the years ahead."
Top 5 holdings of Global Index
2. Potash Corp. of Saskatchewan
5. Terra Industries
Top 5 holdings of Asia Index
3. China BlueChemical
4. Nissin Food Products
5. Kikkoman Corp.
Source: Rabobank International
This article can also be found in the digital edition of Food Business News, August 5, 2008, starting on Page 37. Click