Globally, high agricultural commodity prices appear to be good news for the sector. These prices incorporate the drought that affected much of Latin America, the lower grain production in Russia and Ukraine as a consequence of the war, and the global trade restrictions imposed on Russia.
In this context, are the companies of the sector anticipating what would happen in case the war between Russia and Ukraine comes to an end? What would be the new equilibrium price of commodities? How would this impact on the global reality of agriculture, and more specifically on the situation of the Argentine agribusiness?
The local agricultural sector is currently facing numerous challenges: the shortage of diesel oil at the beginning of the harvest, the sharp increase in the price of inputs, and an excessive interventionism on the part of the State resulting in a high tax burden. Each of these challenges, if not adequately addressed, can have a strong impact on the companies in the sector.
If we add to these challenges the eventual end of the Russia-Ukraine war and the possible collapse of international commodity prices, the sector would face the perfect storm. What would happen if the company acquires its inputs at record prices, and then sells its production at prices substantially lower than those prevailing at the time of acquiring its inputs?
The key question is: How do companies protect themselves against this risk? Commodity price volatility is beyond the control of companies. That is, they cannot protect themselves from this risk by reducing its probability of occurrence. However, agricultural companies can make decisions that reduce the impact in case price volatility occurs. An example of this is the conclusion of futures contracts that fix the selling price of part of their production (at least the part that must be sold to pay for inputs).
Often, the urgency and impact of short-term issues divert management’s attention from the long term. We invite companies in the agricultural sector to imagine future scenarios, map their risks, and not to neglect their long-term vision in order to ensure the sustainability of their companies.