Over the next three to five years, agribusiness companies are likely to face increased market volatility and higher prices, according to a new Rabobank Food & Agribusiness Research and Advisory (FAR) report.

According to the report, "Looking for Delta: Tectonic Shifts Toward Higher and More Volatile Agricultural Markets," this will present challenges as risk management and positioning become even more important. However, a more volatile environment will also create opportunities - and not just of a trading and market-positioning nature.

"With slow world economic growth and food demand shifting east, companies will need to rebalance their operating portfolios or risk having regional imbalances, or more importantly, risk being left behind in the establishment of global production, distribution and trading networks," said Rabobank FAR global strategist David Nelson, who spearheaded the report and who focuses on the global grains, oilseed and protein markets.

However, he also notes that "while the cost of being wrong has gone up, so has the benefit of being right."

Overall, the report outlines and quantifies the key factors that, over the next few years, are likely to move world agricultural markets to higher, more volatile price levels than have been seen in the past. FAR developed the report to identify the major underlying factors that will drive developments in the global grain, oilseed and protein markets in the years ahead, and which may currently be underappreciated in the market place.

"You can only steer through the hills, valleys and curves when you can see them coming," said Nelson. "And we have found it's going to be a bumpy ride. A combination of factors -- primarily in Brazil, Russia, China and India -- will cause those bumps as agricultural markets move higher and become more volatile."

Black Sea region

"The 2010 drought will severely impact grain exports from the Black Sea region for at least one year and probably several more," said Nelson. "As a result, companies that buy, sell and trade crop commodities will need to reconsider balance sheet management factors such as working capital and risk-management practices."

Structurally the Black Sea region has become the primary incremental producer of world grain due to its available arable land. However, the poor environment and unreliable weather are and will continue to cause global grain prices to trend higher and with more volatility. Further contributing to tighter grain supplies in the region is growing international demand, and Russia's move toward self-sufficiency in chicken and ultimately pork production.

"Beyond grain, this will have a longer-term impact on the protein trade, causing shifting trade patterns, and threatening big meat exporters unless new markets are found," said Nelson.

China — new swing factor

"Profound shifts appear to be underway in terms of China's ability to be self-sufficient in key feed grains that could have significant implications for the industry globally," said Nelson. "For the first time in 15 years, China will import a meaningful amount of corn this year."

China's need for feed grains is likely to accelerate with its plans to rapidly industrialize meat production, which inherently reduces feed input flexibility and shifts animal diets toward standard rations, typically dominated by corn or feed-grade wheat. When considered in the context of net growth in China's soybean imports over the past decade, the order of magnitude of China's potential need for corn imports is enormous -- in the tens of millions of tons annually.

It looks increasingly likely that this need may come much sooner than many had previously predicted. While the industrialization policies are partly driven by food safety concerns and partly by the need for efficiency, there are also overriding market forces such as the natural evolution in food retailing and foodservice that take place as economies mature.