The West Asia crisis has highlighted the need for reserves, but how much of everything do we need to be secure? How do companies and countries make a call that would not jeopardize their balance sheets?
Order too much, and you are sitting on unused, expensive stock; order too little, and you risk jeopardizing your production process. Further, given the unpredictability of the war, decision processes are becoming complex and volatile.
In Singapore, where 90% of its food is imported, the country is trying to diversify and build strategic reserves of essential foods. However, they note that given the extent of disruption, not all imported foods would be available.
The government has encouraged its residents to look for alternatives where possible. Asia is among the most affected by the blockage of the Strait of Hormuz, and many import-dependent countries in the region, like Singapore, are preparing for the long haul.
In Indonesia, they are looking to strengthen their feed sector by increasing wheat imports amid rising corn and soybean prices, driven by trade and fuel disruptions.
Brace for higher prices
Despite these strategies, it will be difficult to completely avoid the impact of the war. Higher fuel prices are driving up logistics costs and, in turn, the prices of raw materials and finished goods. This is in addition to the higher insurance and shipping premiums.
The FAO report predicts that the real impact would only be felt later this year as higher fertilizer costs lead to more expensive grain harvests.
The markets have already started to react to this scenario, as prices of soybean seed and meal have risen due to supply constraints, even though prices are generally higher this time of year because the harvest season in Brazil is ending.
According to S&P Global, South American soybean meal export prices were supported “by a 5% jump in CBOT futures on April 10. At the time, analysts cited a round of technical buying amid rising demand and logistical concerns for US shipments.”
In the meantime, the rating agency noted that, “Rising fertilizer costs and logistical risks tied to geopolitical tensions are beginning to impact the US DDGS market, reinforcing broader cost support despite uneven demand.”
Interestingly, the US has been working to open new markets for its agricultural exports in Asia; for example, it received approval to export DDGS to India this year. However, if prices are uncompetitive, such trade achievements would remain limited.
For many Asian producers, there are few choices left on the table to keep pain at a minimum, given the interconnected nature of the global trading system. The silver lining is that we are in the food business, and people need to eat.
