Opportunity lies inside market volatility

Rabobank’s senior analyst Hayley Moynihan was also a speaker at last month’s National Ewe Hogget Competition field day north of Gisborne.

01-11-2008 | Sandra Taylor

An ability to manage volatility will determine the success of businesses and industries in these turbulent economic times.

Speaking at the recent Irrigation New Zealand conference in Christchurch, Rabobank senior analyst Hayley Moynihan said uncertainty in the global economy breeds volatility. But it also provides an opportunity for people who manage risk well and adapt to markets quickly.

The benefits of sound risk management and market adaptation may not always be in the form of premiums, they just may mean less volatility in the business.

She sees the opportunity for this country will be in its ability to lift productivity while keeping costs under control.

As a food producer and exporter, this country is well placed to weather the global economic storm, however the market requires food that is affordable and NZ needs to be mindful of this.

In the past year there has been a wholesale shift in the way people have thought about food, particularly the prices they have been paying for it.

It is not such a big issue in countries such as NZ where spending on food only represents 10-20% of a consumer's income, but in countries where 50% of the average wage is spent on food, the reality is a lot harsher.

Issues such as food security are also becoming more prevalent and these are issues that have not been considered for more than a generation.

Moynihan says it was a build up of long and short term factors that led to the economic conditions of the past few seasons.

Global food demand was racing ahead of supply while availability of arable land remained relatively fixed.

This growing gap was initially met by stockpiles, but these stockpiles were rapidly eroded due also to climatic and production factors.

Globally economic growth has decreased and this is likely to continue in the remainder of this year and throughout 2009 when a slow recovery is expected.

However, putting it into context, an expected economic growth of 3%, driven largely by emerging economies, is still above the level of economic growth seen in the early 1980s, early 1990s and 2001.

But unusually this period of slower economic growth has hit at a time of high food prices and inflation.

Food prices have had a huge effect on global economies. In many countries food prices have led inflation and this is something consumers are grappling with as they reduce their spending.

But the demand for food remains and it is the growth in emerging economies that is underpinning that demand, however food must be affordable.

Looking at consumers globally, as income levels rise, food requirements go from survival to convenience; from a carbohydrate- based diet to a protein-based diet to high value, functional foods. This change is essentially one from consumer needs to consumer wants.

These wants are prevalent among wealthy consumers and these consumers are appearing in emerging economies such as India and China.

More recently, consumers have taken into consideration other aspects of food production including animal welfare, sustainability and transportation.

Moynihan says the United Kingdom markets have led the way on issues such as fair trade and food miles, while Japanese markets have been particularly concerned about traceability.

In recent years the global market has been subject to the usual demand and supply factors, but Moynihan says the list of other factors, such as exchange rates and oil prices, has got larger and added an element of speculation which has influenced prices more rapidly than the world seen before.

For example freight rates have been highly volatile which makes it very difficult for exporters to lock in budgets.

The global policy and regulatory environment has also changed and factors such as the United States' country-of-origin labelling and production-system labelling seen in other countries, are all influencing the market.

Some countries have changed trade regulations in response to high food prices while others have banned exports.

"There have been huge changes in policies and controls as governments have grappled to secure food for consumers."

Uncertainty in the world markets has increased and there have been rapid changes in response to world events such as droughts, floods and protests.

Arguably, as uncertainty has increased so has the need for assurances around food production and supply. Consumers are looking for more certainty in the form of food labelling and certification.

A good example of this is the marine stewardship certification which provides a guarantee that fish stocks are managed in a sustainable way.

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