PrimeAg Australia Limited ("PrimeAg") is an investment that seeks to take advantage of the increasing global demand for soft commodities.
Structural changes occurring within the soft commodities market
Soft commodities can be broadly defined as commodities that are grown, rather than mined. Australian soft commodity crops typically include (but are not limited to) wheat, barley, chickpeas, sorghum and cotton. PrimeAg also intends to produce some livestock products.
Global soft commodity markets are currently experiencing a strong surge in demand, driven by:
Strong global population and economic growth
Since the 1950s, the world's population has increased from 2.5 billion people to over 6.5 billion people in 2005. The world's population is projected to grow to 9.2 billion by 2050. This growth will create a corresponding increase in the demand for soft commodities.
In addition, recent strong economic growth globally is changing consumption patterns towards higher value agricultural products, with this growth being particularly driven by the BRIC economies (Brazil, Russia, India and China).
Food price inflation has recently become a major issue in developing economies. During 2006, India alone experienced an inflation rate of 6%, with concerns that wheat demand will continue to exceed domestic supply in the near term. Food inflation fears will thus lead to more imports of soft commodities.
Governments around the world are continuing to mandate the use of biofuel blends in transport fuels, with major commodities used for bioethanol production (including corn, sugar and wheat) experiencing higher prices in recent times.
Livestock feed market
The growing demand for soft commodities is being partly driven by the livestock feed market. Most of the future demand for coarse grain and oil seed meals is expected to come from growing livestock industries in developing economies.
While global demand for soft commodities is undergoing strong growth, the supply of soft commodities is tightening.
Declining stock-to-use ratios
Global stocks for most soft commodities remain at all time lows, indicated by declining stock-to-use ratios.
Possible supply interruptions
Some countries have a specific competitive advantage in producing certain crops (eg. corn production in the United States and soybean production in South America). An interruption to production from any of these major crop producing countries would have a negative impact on importers and industries worldwide.
The demand driven nature of the current market is a structural shift from previous supply driven market surges. It appears that prices for most agricultural commodities will remain historically high (although below 2007 levels) and volatile for some time.