India needs to focus on farm level efficiencies: Pawan Kumar

Q&A with Associate Director, Food and Agribusiness Advisory, Rabobank

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Agriculture commodities business is turning high risk with prices also rising sharply, says Pawan Kumar, Associate Director, Food and Agribusiness Advisory, Rabobank International. Rabo is specialised in agri business financing and in an interview to Rajesh Bhayani he said that companies active in the business need to invest more in risk mitigating tools.

With changing dynamics of agri commodities globally what should be India’s policy response in managing demand supply of agriculture commodities?

Globally supply is struggling to keep pace with demand growth which is driven by population and economic growth. Also, given the constraints on land expansion world is looking for new regions besides traditional regions for supply to the global need. However, there has been higher degree of unpredictability in supply from non traditional regions which on many instances function of poor local weather conditions, stock levels and domestic agri prices for eg. Russia banned wheat export in 2009/10, India had a ban on wheat for long time before lifting it last year.

We will continue to see the world reliance on more and more non traditional suppliers and policy level interventions in such new regions will impact the price volatility. For India it is very important to focus on the farm level efficiencies and best practices to increase yields to support the demand growth not only domestically but of the world. At the moment the yield in India are significantly lower than the global average. Yield improvements will go a long way in resolving supply constraints and price shocks.     

Which are the areas of stress in agri commodities segment with reference to financing companies active in the business?

The rising commodity prices have increased the working capital requirement for the industry players and hence the funding requirement without really changing the volume scale. Now, there is higher degree of risk attached to the commodities due to higher prices. Also, the increased price volatility has added significant risk to the player’s business model. Investing in or developing risk mitigating tools/skills will become crucial for players in current volatile market

Grain market is looking bullish since last few months. What is the outlook, how long will the bull run continue? Any side effect of this bull run for other sectors?

The grain complex has come under pressure due the various weather disruptions. US is having one of the worst droughts in last 66 years which has impacted the corn balance sheet significantly. The stocks to usage ratio are one of the record low levels which have kept the prices at the elevated record level for corn. Wheat has also seen declining stocks to usage ratio with reduced crop from BSR region (black soil region; Russia) weighing strongly on prices.

Looking at the current tight stocks level it can be expected that prices will continue to remain at elevated levels for coming 12 months. Besides grains we have seen bull run in soybean and meal price both reaching record price levels. The Bull Run in feed commodities is going to impact animal protein industry and dairy industry negatively. Higher prices also required to ration demand and encourage production response to strengthen the stock levels.

What kind of changes are expected in biofuel market in view of rising crude oil prices and its indirect impact on some agri commodities which are used for making biofuel?

Crude oil prices are relatively lower this time when compare it with the past peaks. However the biofuel policies are coming under pressure due to shortage of key grain and oilseed commodities. Close to half of the corn produced in the world’s largest corn producing nation US, goes into ethanol production. In season 2012/13 it will be first time that in last 17 years we may see a decline of corn usage for ethanol production in US which has consistently grown over the last 17 years. Current higher prices are putting pressure on biofuel producers challenging the usage of corn for biofuel production.

How is Chinese demand relevant for agri commodities?

China has been a key growth engine for the world. With rising GDP and income levels, demand for animal protein has increased tremendously within China. The rising demand in China for protein has got global response. China has become net importer in some of the key feed commodities like corn and soybean. China appetite for feed commodities has been so strong that despite such high soybean prices they have imported close to 59 million tonnes of soybean, almost 70% of world trade, in 2011/12.