Agricultural traders warn of long-term oversupply

Some of the world’s biggest agricultural companies have said that key food markets are likely to remain oversupplied for at least three more years, in a likely boon for consumers facing higher inflation but a possible crimp on margins for growers, processors and traders.

Gonzalo Ramirez Martiarena, chief executive of Louis Dreyfus Company, told the Financial Times Commodities Global Summit that last decade’s period of high prices, triggered by fast-growing emerging market demand, was unlikely to be revisited anytime soon.

“Consumption keeps on growing fast but production grew faster,” said Mr Ramirez.

Chris Mahoney, chief executive of Glencore Agriculture, the trading and mining company’s grains arm, echoed the view, saying that the agricultural industry had to copy the discipline of copper and zinc producers, which had reduced production in response to lower prices.

“It’s not big overcapacity, and there is demand growth, but a bit like the mining industry there is overcapacity,” Mr Mahoney said. “People sitting on their hands for a few years would definitely help.”

The agricultural companies speaking at the conference lined up to appeal to keep trading restrictions to a minimum, echoing comments by Cargill’s chief executive David MacLennan, who launched a robust defense of the benefits of free trade.

LDC and Cargill are among the handful of companies that dominate agricultural trading, along with Archer Daniels Midland, Bunge and Glencore. They had enjoyed a decade of bumper growth at the start of the century due to the shifting diets of the rising middle class in developing markets.

Daan Vriens, chief executive of BayWa Agri Supply & Trade, a leading European animal feed company, said the entire industry had to adapt to lower margins.

“It’s about making 5 cents a tonne rather than 5 euros,” said Mr Vriens. “That mindset is coming back.”

Carle Casale, president and chief executive of CHS, agreed there were “not outsized margins to be made”. But he said some of the later investments that had been made in the industry towards the end of the cycle may themselves hard hit by lower prices.

“Some of that last capacity that came on-stream will be challenged.” Mr Casale said.

This post has been amended to remove an erroneous reference to a fall in net income at Louis Dreyfus Company.