The changing dynamics of commodity supply
description
Transcript of The changing dynamics of commodity supply
By Thos GieskesSeptember 2011
The changing dynamics of commodity supplyPossible solutions to this challenge
2Rabobank International
Higher prices and volatility
The battle for raw materials
Market Update and Outlook
Cooperation along the supply chain
The big picture
Changing dynamics
Current landscape
The solution?
Presentation roadmap
Agricultural commodity selling options
Cooperation along the supply chain
3Food & Agribusiness Research and Advisory
Demand – surging on the back of
Asia
Supply- productivity
increases are slowing
down
(Bursts of) scarcity of
agri commodities
Higher prices
Ongoing high price volatility
From a world of surplus to a world of scarcityThe challenges of managing higher prices and volatility
Source: Rabobank International
4Food & Agribusiness Research and Advisory
Tighter and more volatile food markets
Jan 20
01
Apr 2001
Aug 200
1
Dec 200
1
Apr 2002
Aug 200
2
Dec 200
2
Apr 2003
Aug 200
3
Dec 200
3
Apr 2004
Aug 200
4
Nov 200
4
Mar 2005Jul
2005
Nov 200
5
Mar 2006Jul
2006
Nov 200
6
Mar 2007Jul
2007
Nov 200
7
Mar 2008
Jun 20
08
Oct 2008
Feb 20
09
Jun 20
09
Oct 2009
Feb 20
10
Jun 20
10
Oct 2010
Feb 20
11
Jun 20
110
100
200
300
400
500
600
700
CBOT Corn CBOT Wheat CBOT Soybean
USD
/ton
ne
Oversupply Tight Tighter
On average higher
and more
volatile prices
Chicago Board of Trade (CBOT) corn, wheat and soybean prices
Source: Bloomberg, Rabobank International
5
F&A players forced into action
The changing dynamics of supply
Higher prices, continued high price volatility and increased scarcity of agri commodities - from efficiency to risk reduction
Price-related risks Price level dictates working capital requirements Price volatility dictates gross margin, working capital requirements
Volume-related risks Empty handed – inability to trade Available quality – implications for reputation if substitutes not available
Sourcing as a competitive advantange for F&A companies – if they can work with producers!
Source: Rabobank International
6
1. Increasing control over supply: Investing in land Backward integration – owning production, storage assets along the chain ‘Farmer first’ – buyers actively assisting farmers in the production process Regional diversification – using multiple suppliers in one region.
2. Focus on market power: Supply contracting – long term supply arrangements becoming more common. Horizontal partnerships – food retail companies cooperating with competitors for
greater negotiating power with competitors Brand Power – passing on increased commodity costs to the next entity in the supply
chain. Forward integration – set up/buy processing assets later in the supply chain.
3. Adaptive strategies: Ingredient substitution - commodity substitution if there is a sufficient price signal. Tolling – ‘cost-plus’ pricing where price fluctuations are passed along the supply chain.
Maintaining control in an era of scarcity
Strategic sourcing options
Source: Rabobank International
Strategic sourcing options for F&A companies
7Food & Agribusiness Research and Advisory
‘Commodity colonialisation’
Source: Rabobank International
The battle for raw materials
8Food & Agribusiness Research and Advisory
What is driving the international interest?Example: strategic sourcing of Australian sugar
9Food & Agribusiness Research and Advisory
Australian sugar – a supply opportunity in Asia’s backyard
1 million tonnes sugar, 5 active mills, 2 bulk terminals, no refinery
1.9 million tonnes sugar, 6 mills,2 bulk terminals, no refinery consolidated by Sucrogen
1.3 million tonnes sugar, 5 mills,1 bulk terminal, 1 refineryConsolidated by Mackay Sugar
0.7 million tonnes sugar, 5 mills,2 bulk terminals, 1 refinery
0.4 million tonnes, 3 mills,no bulk terminal, 1 refineryConsolidated by Manildra
MossmanMaryborough Sugar Factory (MSF)TullySucrogenProserpineMackay Sugar Bundaberg Sugar Ltd Isis CentralWH HeckNSW Mills
Source: Rabobank International, company announcements
4-5 million tonnes of Aussie raw sugar
10Food & Agribusiness Research and Advisory
Increasing physical control over supply
Source: USDA, Rabobank International
Bridging the supply gap
Buy milli
Buy landi
Grow cane i
Crush canei
Produce raw sugari
Conventional marketing initially
iStrategic sourcing
in the future
Asia’s sugar deficit - 17 million tonne pa and growing
11Food & Agribusiness Research and Advisory
Selling options for agri-commodity producers
Farmer grain selling options
Go it alone
Take what is on offer
(bank/traditional finance)
Pool Take spot cash price
Actively manage production and
distribution
Store on farm (just in time
finance)
Store off farm (bulk handling
company finance)
Supply contracting with buyers/stakehol
ders
The current landscape
Source: Rabobank International
12Food & Agribusiness Research and Advisory
Producers and buyers – a marriage of convenience?
End-users and farmers want some of the same things:
Greater price certainty
Access to alternative ways of funding day-to-day operations
A reduction of their exposure to production risk
How can they work together to achieve their individual goals?
Source: Rabobank International
13Food & Agribusiness Research and Advisory
Crop Finance Crop production Harvest/delivery Crop marketing Proceeds from sale
Producer Issue: Low equity Low cash
reserves
Producer Issue: Production
volatility
Producer Issue: Lack of capital
to invest in on-farm storage
Producer Issue: Delay marketing
to achieve better price
Price volatility
Producer Issue: Doesn't align
with cash flow needs
Buyer solution: Provide capital Barter inputs for
commodity
Buyers - Providing solutions to producers problems to ensure supply
Producers - Want to increase production but need to overcome problems
Buyer solution: Share risk
Buyer solution: Invest in
storage so producer commits to selling to buyer
Buyer solution: Higher pricing
but producers need to better meet buyers needs
Buyer solution: Pre-payment
Cooperation between producers and buyers needed in an era of agri-commodity scarcity
Source: Rabobank International
14
Co-production model
.
Investor Farmer
Provides expertise equipment
and land.
Access to alternative forms of
capital outside debt.
Reduces overall risk.
Provides Capital
Owns the Production
Receives an Annual Return
Direct Exposure to soft commodity
production
Source: Rabobank International
15Food & Agribusiness Research and Advisory
Warehouse cash flow
Grower Warehouses grain in a bulk-handling companies storage facility (i.e. Graincorp)
The Grower sells grain to the provider of the facility at the prevailing market rate and receives an initial payment of up to 60% of the grains value.
The Grower at any time can repay the payment and sell to another party at the current market rate.
The grower captures prospective price upside, but must also manage and is responsible for price downside.
A solution ahead of it’s time?
Source: Rabobank International
16Food & Agribusiness Research and Advisory
Bartering inputs for grain
Inputs provided to the farmer at the start of the season in exchange for crops delivered at harvest time.
An alternative to farmers finding capital.
An accumulation strategy that works for many end-users/commodity traders.
Common practice in South America.
As much as 35% of Brazilian farm inputs are purchased through barter deals.
Only feasible in relatively low production risk areas.
The battle for agri commodities will be won by those with the most direct access to farmers.
Source:Rabobank International
17Food & Agribusiness Research and Advisory
Chinese bartering
China would like to secure supply of crops whilst reducing their dependence on grain trading companies.
Their initial approach of purchasing land and growing their own production has proved difficult in many countries.
Many countries limit foreign ownership of land.
Chinese companies are the leading producers of most farm inputs such as glyphosate.
It is only a matter of time before Chinese companies begin bartering agrochemicals and fertilisers in exchange for crop production.
Source: Rabobank International
18Food & Agribusiness Research and Advisory
Today’s conclusions:
30%
The World is changing:We are transitioning from an era of abundant agri-commodity supply to an era of scarcity and this will generate change along supply chains
Current Dynamics are not helping Farmers face weak signals to expand supply as buyers are hanging onto margins to boost profitability
Future depends on cooperation between producers and buyersAligning risk profiles with ability to fund will boost returns for both parties
Source: Rabobank International
19Food & Agribusiness Research and Advisory
Rabobank International
DISCLAIMERProfessional advice is recommended for all financial and strategic decisions. However, this information is not professional advice and has not been prepared to be used as the basis for, and should not be used as the basis for, any such decisions. This information is general in nature only and does not take into account an individual’s personal circumstances. No representation is made that any forecast or projected information is correct or will eventuate and past performance is not indicative of future performance. Although reasonable efforts have been taken to ensure the accuracy of the contents of this publication, no warranty is given in regard to the total accuracy of the printed contents. Rabobank has no obligation to update this document or correct any inaccuracies and/or omissions or otherwise advise the reader. The persons involved in the preparation and distribution of this information and their related persons disclaim all liability for any direct, indirect, consequential or other loss or damage suffered due to any use of or reliance on the information. Information contained in this publication may not be reproduced or published without Rabobank’s prior written consent.
“The financial link in the global food
chain”™
Food & Agribusiness Research and Advisory
Thos Gieskes
Chief Executive OfficerRabobank Australia and New Zealand