Sun but more clouds in agrofood

Is the glass half full or half empty for the agri-food sector? Profits and exports are increasing worldwide. However, the prices of agricultural commodities, the Brexit and the ongoing Russian boycott are spoiling the hosanna atmosphere. This does not alter the fact that the global agri-food sector is still performing well this year. This is apparent from the risk analysis we made for the agri-food sector worldwide and in the Netherlands.

Operating profit in the sector is expected to increase by 2 percent worldwide. We foresee an export increase of 3,5 percent to 1,4 billion dollars. This is mainly due to the (limited) increase in global GDP (plus 2,8 percent in 2017 compared to plus 2,5 percent in 2016) and advancing deregulation worldwide. For example, later this year the European production and export quota for sugar will disappear.

Trade restrictions are easing
Agrofood is one of the most regulated sectors in the world, but the number of regulations is decreasing. We say that the number of trade barriers decreased by a third in 2016 compared to the previous year. The agri-food sector benefits structurally from the global population growth, and growth among the middle class is especially important. That is 40 percent of the world population in 2020 and currently 25 percent. Compared to other sectors, agri-food is also a financially healthy sector. The debt burden is relatively limited and solvency is high.

If we look at farming, there is of course always the dependence on market prices that can make or break a year. External factors such as climate and health can also have a significant impact. The food industry looks much less vulnerable. It is growing steadily worldwide. The expanding middle class is causing a changed diet. More refined products are gaining ground at the expense of staple foods.

Situation in the Netherlands
Obviously, the success of the sector is closely linked to the general economic situation. That looks good for the Netherlands. The economic picture improved further in the first quarter. In the CBS business cycle clock of mid-March, all indicators outperform the long-term trend. Consumer confidence rose in January to its highest level in more than 9 years.

A more positive view of the economy is the main reason. Producer confidence also increased further. The other indicators are also green: increased consumption, growth in exports, industrial production continues to rise, and the labor market continues to improve.

In summary: the economy of the Netherlands is in good shape and appears to be well positioned for the coming period.

Tailwind for the horticultural sector
The pick-up in consumption in 2016 has given the horticultural sector a tailwind. This applies to floriculture as well as to fruit and vegetable growers. It is unknown to what extent this positive development will continue this year. We expect the growth of fruit and vegetables to slow down. The main reason for this is the relatively expensive euro. That hinders the exporters. Furthermore, the Russian boycott still weighs heavily.

Brexit is heavy on the stomach for floriculture
In floriculture it is a different story. Although there was also an increase in turnover in 2016, the beginning of 2017 shows a different picture. Several exporters report that they are increasingly affected by Brexit. The uncertainty about the future relationship between the European Union and the United Kingdom has a clear impact on the results.

The high euro/pound rate makes ornamental horticultural products more expensive or leads to a smaller margin. Investments are postponed due to uncertainty. In the longer term, there are fears of new customs formalities that will have a cost-increasing effect. Uncertainty and lack of clarity. For these reasons, the outlook for the sector is less rosy.

Roy van der Lee

Agrifood sector and risk specialist at Euler Hermes

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