John Neppl, Chief Financial Officer of Bunge, an international leader in the agribusiness and food space, was invited to share his insights at UBP’s latest EXPERT SERIES webinar. This interactive session was hosted by Norman Villamin, CIO Wealth Management at UBP, and included Marc Elliott, Investment Specialist Energy Transition at UBP.

The agricultural sector has undergone a spectacular transformation in recent decades. Improved agricultural techniques, particularly in the area of fertiliser use, have led to a dramatic increase in crop yields, allowing the emerging world to join the ranks of producing nations. The fall of the Soviet Union in 1990s also contributed to this trend, providing crops, fertilisers, metals and fuels for the global economy, further enabling growing food demand to be met. On the demand side, the 1990s saw a boost to global food consumption thanks to China, which in turn contributed to the acceleration of globalisation.

The challenge of rising input costs

Food production is intrinsically linked to energy. Today, the energy crisis is leading to higher fuel and fertiliser prices. “About 50% of input costs are energy-related, especially in the case of certain fertilisers, which are correlated to natural gas,” says Marc Elliott. Rising input costs are posing a growing challenge to global food production.

According to John Neppl, the war between Russia and Ukraine has served to exacerbate pre-existing dynamics.

“The lack of certainty around supply and disruptions in Ukraine and Russia, as well as the impact of extremely high energy prices, notably in Europe where it is disrupting production, require other parts of the world to pick up the slack. Demand for certain types of food inputs is fairly inelastic over time, simply because people have to eat.”

Bunge’s CFO

According to him, the US, and even more so Brazil and Argentina, which are low-cost production areas, will be the winners in the coming trade-flow adjustments.

Climate change is affecting yields

John Neppl and Marc Elliott highlight climate change as a risk. Rising instances of extreme weather, such as droughts and heatwaves, are disrupting production and impacting crop yields. Some of the pressures on agriculture markets have been lessened as a consequence of reduced Chinese demand caused by Covid lockdowns and a weaker economy. However, an easing of Covid restrictions and economic growth would increase pressure on the global food supply chain, as well as on global energy prices, which themselves contribute to farming costs.

The unstoppable rise of biofuels

There are other disruptive long-term trends, such as the dramatic increase in demand for renewable fuels.

“High fuel costs enhance the attraction of biofuels. With incentives put in place, a really sticky demand is evolving. This is another aspect of how the two markets – energy and the agri space – are intrinsically connected.”

Marc Elliott 

A whole new demand that did not exist in many economies is developing rapidly. “The food sector is now competing with the energy majors for the same resources, which will have an impact on global availability,” adds Neppl.

Smaller in size, the demand for non-meat organic proteins is another interesting long-term trend that is emerging, but it faces cost and technical challenges.

Much more efficient farming but a growing population

While John Neppl does not believe that protectionist and nationalist impulses in some producing countries could override market forces, he does not rule out the risk that disruptions to the food supply could create political instability, as was recently the case in Sri Lanka. “It is going to be challenging for smaller, less developed countries. It is important to continue to produce globally as much as possible, because we do have a growing population and it’s going to take a concerted global effort to get crops to these parts of the world,” he comments.

On the bright side, “[…] even though fuel and input costs are higher, we’re getting a lot more on the same acre of the same land,” notes Bunge’s CFO. Continuous improvements in technology at farm level have made agriculture much more efficient. For example, in the US, yields have increased by 30% in 20 years, while farmland consolidation was accelerating. “We now need more efficiency throughout the supply chain,” he adds.

In his opinion, it would take two crop cycles to bring the market to balance, provided that those two years are not affected by extreme weather, geopolitical tensions or other disruptive events.

High prices and volatility

Against this backdrop, John Neppl expects prices to remain high for some time and to experience volatility. “Ultimately, the market will work, and global producers will have to step up and meet demand,” he concludes.