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(Arab News), 15 April 2008 - According to a report published
this month by DWS Investments entitled, “Structural Changes Reshaping
Global Agribusiness Markets,” increasing global food prices have proven to
be a “downer” for consumers but could be a boon market for investors taking
interest in the agribusiness sector which is predicted to skyrocket even
further.
Agribusiness which has been
strengthening since 2001 is expected to last well into the next decade, the
report says. Food prices especially soared last year by 20 percent,
according to World Bank statistics. Cocoa and coffee prices caused an
increase in beverage prices by 13 percent, grains rose 22 percent and
leading the rally, vegetable oils and fats increased by a whopping 50
percent with overall global food prices spiraling since 2000 by 75 percent.
The trend is springing from rapid
economic development, population growth in fast developing nations like
China and India and rising human consumption of meat thus pushing demand
for grains to feed livestock.
Rice inventories also decreased
to 61 days of inventories, down by 52 percent since 1998/1999. Another
aggravation to the global food prices dilemma is weather conditions in the
form of droughts and animal diseases such as bird flu.
Another factor affecting food
prices is the West’s quickened interest in biofuel production amidst rising
oil prices. As a result, cereal, corn, wheat, sugar, oil seeds and
vegetable oils required for ethanol and biodiesel production hit the roof
putting pressures again on grain prices.
Other data from the US Energy
Department states that the US expects ethanol production to reach 7.5
billion gallons this year with the European Union (EU) proposing that 10
percent of all fuel used in transportation come from biofuels by 2020.
Although consumers continue to
struggle to make ends meet spending between 30-50 percent of their annual
incomes to feed their families, there is a silver lining to the crisis if
looked at it from an investor’s point of view.
Global financial commodity
exchanges have been showing turnover in agricultural commodity derivatives,
which grew by 53 percent in the third quarter of last year, a 26 percent
increase in the total number of commodity derivatives traded.
Sectors in agribusiness expected
to reap substantial financial benefits are real estate companies, seed and
farm equipment manufacturers, irrigation and water, as well as crop
protection companies, not to mention biofuel investors, and agricultural
commodities traders.
So how should Saudi investors
take advantage of the opportunities? According to DWS Investments,
investors should look to benefit by taking a bullish approach to
agriculture but also remain prudent with the best way to achieve this by
investing in a well-diversified global fund with a long-term focus.
Why long-term? Because, according
to the report, recouping food production and rebuilding inventories will
take at least 2-3 years or even longer, the primary driver in putting major
pressures on pushing prices higher.
Agreeing with the report but also
offering a bit of caution, John Sfakianakis, chief economist at Saudi
British Bank (SABB) in Riyadh, told Arab News, “I agree that food prices
have been continuingly increasing with the global rise expected to continue
through the next five years. But I see a price correction in the global
food market in the near future. I would personally not invest in
agricultural commodities directly at the moment.”
Asked why the entire agricultural
sector listed on the Saudi Tadawul has remained low or unchanged by global
price rises and increased global food demand, Sfakianakis said, “Due to the
scarcity of water in Saudi Arabia the Kingdom can never be a food producing
and food exporting country. The Kingdom only produces a percentage of food
to supplement the domestic market and therefore relies mainly on imports.
For this reason, stock prices of Saudi agricultural listings aren’t able to
grow substantially enough to show any significant returns,” he said.
By
Sarah Abdullah, Arab News
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