SENIOR ANALYST, ETF SECURITIES
Most agriculture prices have seen double-digit gains this year, reflecting a trend towards higher and more volatile prices since 2003. For agribusiness, this could lead to stronger returns for agriculture producers and support companies, irrespective of near-term gyrations in the business cycle, if suppliers strive to boost productivity.
Rising prices have significantly boosted farm income, with the US Department of Agriculture (USDA) projecting 2010 net farm income to rise 24 per cent in 2010 to $77bn, the fourth largest on record. Farm balance sheets are strong and low gearing is leaving farmers with ample borrowing capacity. The strength of the US farm sector is reflected in booming activity in the agricultural mid-West, with unemployment in states like North Dakota almost one-third that of national rates.
Farmers in the US, the world’s largest cereal producer, are expected to respond to higher prices by boosting production. If similar patterns from 2009-10 are repeated, this could potentially translate into higher cotton and corn plantings – crops that tend to be relatively input intensive. For example, the nitrogen application rate for corn is estimated to be over five times that of soybeans according to the USDA. On the back of these developments, markets have begun to increase agribusiness valuations, reflecting higher expected earnings via both demand volumes and prices. The fertiliser industry is a prominent example since BNP Billiton’s bid for Potash was recently at the centre of M&A speculation.
Looking ahead, emerging market imports will be a key barometer to watch, with China recently becoming a large net importer of several agricultural products, mirroring trends in other basic resources. Food inflation has historically had a weak relationship to the business cycle, suggesting that recent Chinese tightening could have a more modest impact. Emerging markets will be the chief source of food demand growth in the future and already account for over half of the world’s cereal production. Emerging markets face shortages in infrastructure, training and technologies to boost food production adequately: improving productivity via agribusiness investment will be critical to avoiding global food shortages in the medium term.