18 August 2008 - High volatility and continuing high food prices over the coming years will require farmers and food and agribusiness companies to significantly increase their risk management skills, warns professor of food marketing, Dr David Hughes from the Imperial College London.
In his address Global Food Industry Developments: Implications for Farmers and Agribusiness, the Rabobank visiting expert told an agribusiness audience that New Zealand can no longer rely on being the lowest cost producer and, consequently, its food industry will have to raise its game to adapt to the changing economic climate of the global industry.
He highlighted supermarkets’ attempts to ‘hold the line’ on rising prices, but said: “eventually the market has its way and prices for intensive livestock products rise sharply, pulling grass-fed stock product prices with them, including lamb and dairy beef”.
Professor Hughes, who was in New Zealand recently as part of Rabobank’s Visiting Experts program, said that changing consumer demand, market segmentation and rising fuel and food costs are all set to become major challenges for producers of premium products, whereby New Zealand in particular, “will need to quickly identify what people are prepared to pay a premium for and which segments are best to target”.
“As shoppers tighten their belts, they are now looking more carefully at premium food prices and questioning why they should pay more for a particular product. We know that they will pay more for a better tasting or healthier product, but they will not pay more simply for fancy packaging,” he said.
Accordingly, he told the audience that with New Zealand not being the lowest cost producer of any commodity going forward, now is the right time to test markets for value-added products. Referring to the current strong dairy market, with its high product prices, Professor Hughes said it is also a good time to expand supply presence in international markets in order to potentially produce goods off-shore.
“I believe that this is an opportune moment to assess the market and develop sustainable strategies for the future,” he said.
“This will be essential for New Zealand in order to prevent losing out on global market share in dairy products as demand outstrips the country’s ability to expand production at home.”
For the sheep and beef market, Professor Hughes maintained an overall positive outlook, but advised on “a need for greater collaboration” as a way to further develop the essential marketing skills required.
In addition, the professor claimed that progress for dairy, beef and lamb will “not be linear and upwards but rather emerging markets will stutter in their economic growth which will challenge the balance of supply and demand”.
“There will be periodic over-supply and under-supply resulting in volatile prices,” he warned.
Fuelled by environmentalist group concern in developed countries, Professor Hughes also anticipated an increased awareness of, and resistance to, grain-fed beef products due to the poor feed-to-meat conversion ratio of eight kilograms of feed to produce one kilogram of beef. This he said, will also be a factor affecting the dairy market, but not to the same degree as that of beef.
“Extreme food deprivation in African countries, alongside excessive grain-fed meat consumption in some developed countries, will also be highlighted by environmental groups which will further exacerbate the issues,” he said.
“It’s not what you grow, it’s what you know,” Professor Hughes said. “Fundamentally, a business revolves around understanding what your customers – and your customers’ customers – value and are willing to pay for. Then, it’s simply a matter of delivering what your customers value at a sufficiently low cost that you can make a good profit!”
Professor Hughes also sees strong and volatile oil prices increasingly challenging farmers and agribusiness firms in the foreseeable future.
The vast majority of world light crude reserves are located in countries which are politically unstable, or adjacent to political ‘hot spots’,” he said. “A problem in any of the top ten suppliers will send oil prices rocketing over US$200 per barrel with severe financial consequences for all economies, in general, and the oil dependent agricultural and food industries in particular."