Volatility in the agribusiness value chain

The agribusiness environment is becoming increasingly volatile.This volatility stems from several different sources: the changing climate, political actions and social changes. The weather has been responsible for fluctuating yields and a supply shortfall which has put pressure on crop prices.This was what sparked the 2006 food crisis when drought in Australia led to a greatly reduced wheat crop which then had knock-on effects around the world and on other crops. Historically, while demand tends to be relatively smooth and predictable, supply is much more erratic, due mainly to the weather (see below).

It is now generally accepted that with the advent of global warming we can expect more weather-driven volatility in the future as average temperatures and rainfall increase. Despite the extent of these extremes, assessing the timing and impact of global warming on agriculture is still very much a developing field.

On the political front, volatility stems from government actions, for example the push towards biofuels which has had a major destabilizing effect on world markets since 2005. While growth in demand for food is modest (1-2 percent CAGR over the last 20 years) limited by population and economic growth, growth in demand for biofuels has been much greater and could in theory continue to grow at this higher level, although it is currently showing signs of leveling off.

Political influences on supply and demand manifest when governments take actions to subsidize production, as they have to a large degree in the EU and US in the past, or to influence trade, for example by banning exports when there are concerns about domestic supplies as Russia has been known to do. The collapse of the Doha round of the World Trade Organization (WTO) trade negotiations increases the likelihood that such actions will take place in the future. At the same time, it opens the way for more bilateral trade agreements.

Another significant political influence could come from China. To date, China has had a policy of near (95 percent) self-sufficiency for its major crops: rice, wheat and maize. The notable exception is soybeans, where China has had to increase imports to satisfy growing demand for animal feed. If this were to be relaxed, it would have destabilizing impacts on world markets.

There is no doubt that politics play an increasingly important role in agriculture and, due to its inherently unpredictable nature, more political complexity means more potential volatility.

Where social forces are concerned, consumer reactions to food scares, such as the recent horsemeat issue in Europe, can be sudden and severe and have a large impact on demand for the foodstuffs involved.

Amid all this volatility it has now become the conventional wisdom that crop prices will remain high and well above their long term historic levels – the continuation of the so-called commodity ‘supercycle’.

High crop prices will impact players at different stages of the value chain in various ways. While farmers and those who supply them with seeds, crop protection, fertilizers and machinery, generally benefit the companies which purchase their outputs, food companies and retailers find their costs ever higher and must adopt strategies to increase efficiency and pass on price increases, etc. Meat companies, for which the costs of crop feed-stocks make up the greatest proportion of their costs, are particularly vulnerable. The impact on traders, who sit in the middle of the chain is more complex and will depend on their particular business model.

The impact of and possible reactions to volatility at each stage of the value chain are examined in more detail in the following section. However, certain strategies can be used to mitigate or adapt to volatility at all stages of the value chain:

• Be more agile–if the future is harder to predict, you must be better able to respond rapidly when changes occur. This approach has implications for organizational structure.

• Improve business intelligence and environmental scanning. Forewarned is forearmed. Look beyond your own sector to developments up and down the value chain to gain a greater understanding of possible external drivers and emergent disruptive technologies as the chain becomes more integrated.

• Diversify, though going too far beyond the ‘core’ introduces risks of another nature. ‘Adjacency’ might be the best approach.