THIS TIME IT’S DIFFERENT

peppers

Spring 2011

Structural shift in demand

There has been a spate of articles from researchers and commentators pointing out that the global agricultural industry is undergoing a structural shift in demand for its output. No lesser an organisation than the highly respected IMF has pointed out that while random factors such as the weather have played a part in the recent rise in global agricultural prices the main reason has been the rising global demand for food and this structural change, it points out, will not be reversed. Regular readers of VIEW should not be surprised by the IMF’s conclusion as we have for two years, argued that food companies are facing a paradigm change which will necessitate new, strategic thinking. We have to date found a reluctance on the part of some senior executives in the food industry to accept this projection of fundamental change.

This time it is different

Executives are only too well aware that agricultural commodity markets are characterised from time to time by random fluctuations and the experience of the last 50 years has been that price spikes are followed by a rapid return to the underlying slow rate of decline in agriculture prices; a decline driven by the application of productivity enhancing new technology and techniques.

But this time it is different.

The 2007 spike in global cereal prices was the precursor for what we believe is permanently higher prices for agricultural products. And as can clearly be seen in Figure 1 there is a very close correlation between the movement of cereal prices and agricultural prices in general, particularly meat and dairy products. The decline in world grain stocks and willing speculators were the catalyst in 2007 but the cause was the emergence of a longer term structural shift in demand.

Figure 1 provides visual support for a fundamental, permanent upward shift in the price of wheat.

This issue of Our VIEW explores the significance of this paradigm change for food businesses. One way to approach this issue is to look for another example where a structural shift in the price of a basic commodity brought forth far reaching change in a dependent industry’s products and production strategies. And the price of oil provides a perfect example.

 

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