Opportunities and Risks in Agribusiness
Opportunities and Risks in Agribusiness
Because the broad range of opportunities also come with a broad range of risks in the global agribusiness industry, a comprehensive strategy and strong risk management become a critical factor for success. Likewise, some countries and cities are more prepared than others to receive investors and foster entrepreneurship. For instance, the business-friendly government of President Mauricio Macri in Argentina is working hard to establish the country as a Latin American start-up hub through its “Entrepreneurs’ Law” by easing the processes for establishing a business, accessing financing, and receiving preferential tax treatment. This initiative follows on the steps of Chile’s similar legislation from 2013, the “Business in One Day Law”, as both countries seeks to remain major centers for business development within the region.
Emerging Markets
As a large share of global consumption growth comes from emerging markets, particularly Asia, a continued slowdown in these markets can have large impacts on the global food markets by ways of lower demand, reduced purchasing power, and change in dietary habits. Similarly, a rise in social tensions and political intervention around the world may exert a strong influence on the food and agribusiness sector, resulting in uncertainty in agricultural markets. Besides, continued flaws in the legal and physical infrastructure in productive regions of the world remain a source of risk.
Environmental, Food Safety, Bioenergy, Inflation, and Regulation Challenges
Weather events, including droughts, floods, and extreme temperatures, remain one of the top risks for the agribusiness industry and they could well affect harvests around the globe. Likewise, the spread of a disease or intoxication from contaminated products can affect consumers’ health in serious ways, with adverse consequences to food producers, traders, and retailers. Similarly, the widespread use of ethanol and biodiesel, among other biofuels, remains a source of sociopolitical tension as food and energy become both scarcer and more expensive. Ultimately, the management of available water sources and agricultural land has a determining impact on the availability of both foods and biofuels.
Asset prices, particularly in emerging markets, will remain sensitive to movements in interest rates in the United States and other major economies. Exchange rate fluctuations and potential capital regulations in emerging markets can also affect the value of investments. A surge in the cost of farming inputs, including oil and its derivatives, can propel conflicts and raise food security concerns among food importing nations. Market conditions can become more volatile, with broad price oscillations, affecting raw material purchasers and adding pressure to the food value chain. Global food markets can be affected by trade restrictions from producing or importing countries, and by legislation on genetically modified organisms.
Agricultural Commodities
Expectations are that the northern hemisphere crops will refill grain and oilseed stocks, reflected in a downward forward price curve for these crops. This new lower price level could be a good entry point for a long-term position in some key agricultural commodities, considering that the absolute levels of demand will continue to grow and volatile weather can be expected to bring production shocks again in the coming seasons. The prospect of a strong U.S. dollar is a factor to consider. Likewise, hedge strategies with absolute target returns can be an attractive option.