Agribusiness: The food prices combat

With a global population that is expected to reach over 7.5bn by 2020, and will most likely exceed the 9bn by 2050, the agriculture sector will have to increase its output by 35%, compared with 2010. Otherwise, there will be a significant shortage of food.

After World War II, the green revolution introduced high-yielding varieties of cereal grains, expanded water irrigation infrastructure, modernized management practices and improved the distribution of new seeds, synthetic fertilizers and pesticides to farmers.

However, during the last two decades, developments and investments in the food value chain have been largely neglected, failing to keep pace with the growing need for more and better food.

Climate changes play an important role. The traditional agricultural regions in the world are either suffering from severe drought or from too much rain. In either case, these unusual conditions do have significant consequences for the harvest outcomes.

There is also the impact from biofuels. The challenge for a farmer is: “Should I produce crops for food, feed, or fuel?” The significant subsidies that governments feed the production of biofuels have led to diversions in production. And the fuel price itself plays an important role too. As soon as the biofuels absorb over 10% of the total consumption of a crop, there is a significantly increased connection between food and fuel prices.

Commodity trading games, obviously play a significant role in the defining of food prices. Commodity markets have taken on such importance that the financial world will continue to exploit their movements.

Obviously, the combination of various factors justifies food price anomalies. This phenomenon will not change in the foreseeable future.

More vertical integration can mitigate supply chain risks related to exogenous factors (i.e. weather)? The advantage is the ability to maintain control over the entire value chain, incorporating origination of the raw products and initial processing before the goods are handed over for further processing by food manufacturers. The disadvantage is cost. An agricultural business needs to align activities which often demand clearly different skill sets. Generally, vertical integration makes sense for an agricultural business depending on the type of product that business produces.
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