T

he year ahead will present both opportunities and challenges for primary producers, processors, traders and retailers in the food and agri sectors.

With one of the most intense El Niño events on record, dry conditions are expected to linger into 2016. The food and agribusiness sector must prepare to weather the '€˜new normal'€™ as volatility from the El Niño weather pattern and China'€™s economic slowdown may constrain production of several agri commodities and drive up prices.

A report released by Rabobank titled Bear with Grains, While Softs Lift Off predicts that 2016 will see grains and oilseeds continue to trade at around current price levels, but some upside is expected on soft commodities such as sugar and coffee.

For palm oil, reduced production could lead stocks to decline by 8.5 percent in 2015/2016 and increase prices by 10 percent to average MYR 2,420 per ton compared to this year.

While Malaysian production is expected to decline by 2.4 percent to 19.4 million tons, Rabobank expects Indonesia'€™s palm oil production to rise by 1 million tons, as loss of yield due to dry weather is compensated by the country'€™s increasing maturity in plantation techniques.

Overall palm production at global level is expected to rise marginally by 800,000 tons against 2 million tons last year.

Global demand will remain moderate due to the availability of cheaper soy oil. While 2016 palm oil prices will be supported by El Niño-related constrained production seen in 2H 2015, ample soybean supplies driven by a record-large crop from Latin America in 2016 will present soy oil competition and put a lid on rallies in palm oil prices.

Uncertainty in the biodiesel market will also keep the market within the same range.

A key swing factor will be Indonesia'€™s implementation and fulfillment of biodiesel mandates '€” Indonesia already has a B15 mandate in place and will move to B20. Close to 1 million tons of additional demand for biodiesel will come from Indonesia, though still far below the required mandate level.

In coffee, Rabobank predicts a deficit in Robusta, with Indonesia forecast to reduce production from 12.5 million bags in 2015/2016 to 10 million bags in 2016/2017. Most affected by El Niño, South Sumatra and Lampung saw almost zero rainfall in August and September.

However, neighboring Vietnam will still see a significant increase to above 28 million bags in 2015/2016, up from 26.5 million bags in the previous year.

Coffee prices are set to rise beyond USc 130 per pound in Q4 of 2015, supported by visible stock declines in non-producing countries around the turn of the year.

Futures in 2016 will also remain under pressure from currency weakness in producer countries. Economies dependent on commodity exports (including, among others, Indonesia, Colombia, Brazil, Central America and Burundi) may see problems such as capital flight and lower investment which will reinforce the currency weakness.

Following a very dry 2H 2015 across much of Asia, the most intense El Niño on record sets the stage for considerable production risks in 2016. Deficit production will also be the new norm, especially in the sugar and cocoa sectors.

Chinese import demand also continues to be a crucial factor with uncertainty arising from the weak Chinese economy. The moderation in China'€™s economic growth rate to an estimated 6 percent and potential further devaluations of the renminbi may weigh on the minds of Chinese buyers.

Despite this, recovery in several Chinese food and agri sectors and local consumption growth means long-term demand for agri commodities remains healthy.

At a global level, the Rabobank report predicts that FX rates will have a bigger influence on agri commodity markets than ever before. The US dollar is predicted to find additional strength throughout the year, while currency weakness in agri-producing regions will alter the competitiveness of production and trade flows.
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The writer is director, food and agribusiness research & advisory for Rabobank. The views expressed are his own.