The U.S. food and agribusiness industry has not been immune to the 2009 economic downturn. However -- as the recession eases -- it is an industry that offers opportunities for growth and improved returns, according to Rabobank’s recently released 2010 North American Food & Agribusiness Outlook.
The Outlook is produced annually by the Rabobank Food & Agribusiness Research and Advisory (FAR) team, who provide information and analysis covering all major sectors throughout the food chain. The Americas-based FAR team is part of Rabobank’s global FAR group, which is comprised of approximately 80 analysts around the world. They research subjects of strategic interest to companies and customers within the food, agribusiness and agriculture sectors.
According to the authors of this year’s Outlook, “in spite of the difficult year for U.S. agribusiness, the underpinning fundamentals the food and agribusiness industry remain largely in place for 2010.”
In the Outlook, Rabobank’s FAR team takes an in-depth look at issues that will affect the global agricultural industry in the coming year. Below are highlights of three key issues addressed in this year’s Outlook:
· how consumers have changed,
· a view from the field – a look at commodity prices and input costs, and
· moving forward how the global economic framework will U.S. agriculture.
The Changing Consumer
“The current recession has had the most dramatic impact on consumer wealth and income since the Great Depression,” said FAR Executive Director Stephen Rannekleiv. “As a result, U.S. consumers have become increasingly frugal, drastically cutting back on spending for personal consumption, paying back debt, and increasing their savings rates to replace lost wealth and to prepare for future uncertainty,”
Initially when U.S. consumers began to cut back more drastically on restaurant spending in 2008, it provided a welcome sales boost to food retailers. However, as the recession wore on, the trend toward frugality increased, with price becoming the key driver of consumers’ purchasing behavior, and eventually food retailers began to feel the pressure.
“This increase in frugality and savings rates are a natural and rational result of the current economic climate,” said Rannekleiv. “But ironically this behavior will – in some respects – prolong the downturn as consumers are unlikely to have the ability or desire to lead the U.S. economy back to sustained growth as they have done in the past,”
Food producers and processors have altered their production and strategy in response to these rapidly changing consumer trends:
· The surplus that dairy producers had built in response to international demand created an oversupply and price reductions in 2009.
· As demand dropped, animal protein producers did not reduce production, which impacted prices (particularly beef and pork).
· Predominantly higher-priced wines and spirits have been disproportionately affected by the decline in bar and restaurant sales, as well as the trend toward trading down. They are now finding it difficult to move products without deep discounts.
View from the Field
The rally in commodity prices in the three years leading up to 2008 provided a strong incentive for U.S. farmers to invest in crop inputs to maximize production. This demand resulted in skyrocketing prices for key inputs and significant investment by the industry to increase production.
During the same period, the U.S and global grains and oilseed markets underwent rapid transformation. Prices for most grain and oilseed products suffered a sharp contraction, demand waned, and investors withdrew.
“However, looking ahead to 2010, the U.S. grains and oilseed sector appears well-placed to capitalize on expected improvement in global demand, especially given the sharp depreciation of the U.S. dollar in late 2009,” said Assistant Vice President Erin FitzPatrick.
Additionally, she said, “As 2009 comes to a close, much of the pain for key input sectors has worked through the system allowing prices to stabilize.”
While input costs will stabilize in 2010, challenges remain for the U.S. grains and oilseeds sector: price volatility is expected to continue at historically high levels – making price and capital risk management more difficult. Price risk management for margin and capital protection is an increasingly important aspect of managing a business in this industry.
In terms of prices, the U.S. grains and oilseeds sector is entering 2010 following record or near-record crops of both corn and soybeans, with ample supplies of wheat in the supply chain. Prices appeared to reach a cyclical low in September, and higher corn and wheat prices are expected in 2010. Soybeans are likely to see a somewhat counter-cyclical move, weighed down by expectations of a record South American soybean crop.
Nevertheless, said FitzPatrick, “prices for all three major grains and oilseed crops are expected to continue above their long-term average levels, and lower input costs, should provided some support to on farm margins.”
Economic Framework
Decreased global demand, tighter trade credit availability, increased global competition and a stronger U.S. dollar in the first half of 2009 all contributed to the first decline in U.S. agricultural exports in more than a decade. By the end of 2009, exports are forecast to reach $97.5 billion. This is down 15 percent from 2008, although it is still the second-highest figure on record.
“In 2010, while early estimates for U.S. agriculture exports remain reasonably unchanged, the prospect for a material growth in exports above 2009 figures is promising,” said Executive Director Michael Whitehead. “With the strengthening global economy and the continued weakness of the U.S. dollar, that is expected to persist well into 2010.
Additionally, the economic crisis saw merger and acquisition activity decline in 2008 and the early part of 2009. It has since recovered – driven by recovering appetite from industry players who saw a window of opportunity to act. On the other hand, private equity investors, who had become prominent prior to the financial crisis, remained on the sidelines.
“However, the necessity for scale and efficiency to enhance competitiveness has not disappeared,” said Whitehead. “While the financial crisis and recession resulted in a substantial gap between sellers’ and buyers’ expectations, the fundamental drivers for consolidation in the U.S. agricultural market remain in place.”
Much of the consolidation that occurred during the downturn was driven by the need for strategic positioning in the increasingly globalized agribusiness world. As customers become larger and trade liberalization continues to open new market opportunities for exporting countries, agribusiness corporations are positioning themselves to become truly global agribusinesses.
In the U.S. this activity has been most evident in the dairy and meat sectors, and substantial transactions emerged late in the year as markets recovered. “Time will tell whether the benefits derived from such transactions exceed the costs and risks, and convert into enhanced shareholder value,” said Whitehead.
In addition to increasing globalization, an ongoing merger of sectors is expected to be an important driver for food and agribusiness merger activity in 2010.
“Globalization, market convergence, and the need for companies to move beyond traditional sector boundaries to find new sources of cost efficiency, scale and growth will be important drivers shaping the food and agribusiness industry in the coming year,” said Whitehead.
CONTACT:
Heather McElrath
212-309-5181
heather.mcelrath@rabobank.com