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Agricultural Commodities Outlook Hinges More on Long-term Fundamentals

(By Jared Heng)

Supply and demand fundamentals will exert more influence on the global market for agricultural commodities than short-term upheavals, according to food and agribusiness bank, Rabobank International.

There has been a worldwide rebound in institutional investors’ risk appetite for agricultural commodities such as oilseeds and grains, Mr John Baker, Rabobank’s Head of Food and Agribusiness Research and Advisory for Asia, said.

“Despite the rising interest in agricultural commodities, short- and long-term market volatility has declined in recent months. This indicates that long-term supply and demand fundamentals are beginning to exert a greater influence on agricultural commodity prices, compared to the European sovereign debt crisis or other short-term concerns,” Baker said.

Global Oilseed Supplies Recovering

After two seasons of supply deficits, global oilseed supplies are rebounding strongly, thanks mainly to increased soybean produc- tion in South America ‒ particularly Argentina and Brazil.

Rabobank forecasts that Argentina will produce 54 million tonnes of soybeans in 2009/2010, up 69 per cent compared with 2008/2009 and a historical record for the country. Brazil is expected to produce 67.9 million tonnes of soybeans in 2009/2010, up 18.7 per cent compared with 2008/2009 due to better-than-expected yields.

With two consecutive years of surplus in global soybean stocks expected, there would likely be abundant soybean meal supplies in the near term, according to Rabobank.

The abundant South American soybean supplies and favourable outlook for the US 2010/2011 crop would likely weigh on soybean prices. Rabobank expects soybean prices, which traded at US$9.56/bushel (about S$13.25/bushel) in March this year, to drop to US$9.00/bushel and US$8.75/bushel in September 2010 and March 2011 respectively.

China’s strong demand for soybeans has kept global soybean and oilseed prices well supported, and is expected to continue growing over the next few years, Baker said. As for corn, Baker noted that “unless there is a structural change in the yield curve for corn in China,” the country is expected to increase its imports of the crop going forward.

Separately, near-record US and South American corn production will contribute to a fourth consecutive year of global corn surplus in 2010/2011. While the large harvests will likely keep near-term corn prices ‘neutral’, Rabobank expects rising global demand to support corn prices through late 2010 and early 2011. Corn prices, which traded at US$3.71/bushel in March 2010, are projected to reach US$4.10/bushel in March 2011.

Agribusiness as an Emerging Asset Class

There are several key long-term drivers behind the rapid emer- gence of agribusiness as an asset class, Baker said. Firstly, continued population growth, rapid urbanisation and land degra- dation will mean less available land to feed a larger number of people. With a current global population of about 6.5 billion, there is about 0.2 hectare of arable land per capita. By 2025, the world’s population is expected to hit 8 billion, and arable land per capita is projected to shrink by 10 per cent to 0.18 hectare.

Since 2004, the divergence between food consumption and yield has been increasing, Baker noted. “We need to rely on productivity and best management practices to try to narrow this gap,” he said.

In addition, rising per capita incomes ‒ particularly in emerging economies such as China and India ‒ are driving up global meat consumption and hence demand for animal feed, exerting further pressure on grain supplies.

Governments are also increasing their support for biofuel production, which requires feedstocks such as corn, oil seeds or other agricultural commodities. For example, global ethanol production is forecast to jump from 60 billion litres in 2008 to 100 billion litres in 2012.

Other key drivers include structural adjustments within the food and agribusiness supply chain, as well as increased investor interest in agricultural land from governments. “You need to understand the agricultural segments in more detail before you can leverage on agribusiness as an investment class,” Baker said. “Certain segments will do better than others going forward.”

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