Five Key Themes In Asia Agribusiness

BMI View: Food security and environmental concerns are driving change in the Asian agribusiness sector, with biofuel mandates being increased and sustainable palm oil certification schemes being strengthened in Indonesia and Malaysia, while agricultural giants such as China and India modernise their production complexes by rationalising support policies and addressing excessive use of inputs. We assess the impact of China's 19 thCommunist Party Congress on key sectors, whilst frontier markets in the Mekong struggle to improve traceability and quality control systems.

palm oil

1. Palm Oil Biodiesel: Positive Outlook With Limited Impact On Prices

The outlook for biodiesel production is positive in 2017 for Indonesia and Malaysia as palm oil prices decrease, boosting the competitiveness of biofuels relative to fossil fuels. Both countries maintain ambitious blending targets in the long term, but we continue to believe biodiesel production will provide modest support to palm oil consumption and therefore to prices in 2017 and beyond ( See 'Palm Oil Biodiesel: Positive Outlook In 2017 But Uncertainty Beyond', 20 March 2017)

Palm Oil At A Steep Premium Over Brent Oil
Three-Month MDE Palm Oil & Front-Month ICE Brent Oil - Price Difference (USD/tonne, LHS) & Price Ratio (RHS)
Note: An increase in the ratio suggest palm oil prices outperforming crude oil prices, meaning that palm oil based biodiesel becomes less attractive. Source: Bloomberg, BMI

Five Key Themes In Asia Agribusiness

BMI View: Food security and environmental concerns are driving change in the Asian agribusiness sector, with biofuel mandates being increased and sustainable palm oil certification schemes being strengthened in Indonesia and Malaysia, while agricultural giants such as China and India modernise their production complexes by rationalising support policies and addressing excessive use of inputs. We assess the impact of China's 19 thCommunist Party Congress on key sectors, whilst frontier markets in the Mekong struggle to improve traceability and quality control systems.

palm oil

1. Palm Oil Biodiesel: Positive Outlook With Limited Impact On Prices

The outlook for biodiesel production is positive in 2017 for Indonesia and Malaysia as palm oil prices decrease, boosting the competitiveness of biofuels relative to fossil fuels. Both countries maintain ambitious blending targets in the long term, but we continue to believe biodiesel production will provide modest support to palm oil consumption and therefore to prices in 2017 and beyond ( See 'Palm Oil Biodiesel: Positive Outlook In 2017 But Uncertainty Beyond', 20 March 2017)

Palm Oil At A Steep Premium Over Brent Oil
Three-Month MDE Palm Oil & Front-Month ICE Brent Oil - Price Difference (USD/tonne, LHS) & Price Ratio (RHS)
Note: An increase in the ratio suggest palm oil prices outperforming crude oil prices, meaning that palm oil based biodiesel becomes less attractive. Source: Bloomberg, BMI

In Indonesia, the government has kept an aggressive policy to support biodiesel production over recent years - it raised the compulsory blending mandate to 15% in 2015 and started, in Q416, to enforce a voluntary B20 mandate more strictly. Malaysia is struggling to keep up with Indonesia's pace in terms of biodiesel production and use growth, but the government remains committed to implementing the long-awaited B10 mandate in 2017 despite the delays and difficulties it is facing.

Struggling To Reach Blending Targets
Indonesia & Malaysia - Biodiesel Blending Mandates & Actual Blending Rate (%)
e = expected blended target by authorities. Source: USDA, BMI

We continue to believe biodiesel production in Indonesia and Malaysia will provide modest support to palm oil consumption and therefore to prices in 2017 and beyond. The mandates are creating a floor for prices as they have created demand at a time when the global palm oil consumption outlook is not as rosy as in the past ( see 'Palm Oil: Prices Will Ease In 2017 As Market Loosens', January 10). However, we do not believe biodiesel production will provide a boost to prices in 2017 and 2018. Malaysia's sector will continue to struggle, and volumes produced in Indonesia - although on an uptrend - still account for only 7.0% of the country's palm oil consumption and exports.

2. Agricultural Policy Reform In Asia To Continue In 2017

Public policy will remain a key theme to monitor, amid rising food self-sufficiency rhetoric in South East Asia and China and India's ongoing agricultural policy reform. Asian developing countries have been increasing their support to farmers over recent years, in contrast to developed Asia and global trends ( see chart below). The specific policy goals of the authorities are to boost local production and reduce dependency on imports. These policies will help production increase in the coming years despite of growing constraints - including the fast decline in arable land and robust food consumption growth due to demographic trends and changing habits. However, we believe Asia will continue to be a net importer of food in the coming years.

Government Support On The Rise In Emerging Asia
Select Countries - Agricultural Producer Support Estimate (as % of gross farm receipts)
Note: The producer support estimate is an indicator measuring the level of government support to farmers calculated by the OECD and FAO. Source: OECD, FAO

Within Asia, China is the country that has embarked on the most ambitious reform of its agricultural sector, aiming at modernising and diversifying agriculture. Authorities are in the process of scraping the minimum support price and stockpiling policy for some grains and softs (soybean, cotton, corn and sugar), while incentivising mechanisation and higher yields.

In India, ongoing reforms to the agricultural sector will support slow yield improvement. After a weak start for investment in agriculture at the beginning of his mandate, Narendra Modi has enacted a number of new schemes and allocated more generous funds to the sector aiming at increasing farm income and modernising agriculture. However, efforts to commercialise more GMOs and to reform fertiliser subsidies remain fruitless for now ( see 'Ongoing Agricultural Reforms To Support Long-Term Sector Growth', April 25).

India - Ongoing Agricultural Policy Reforms
Topic Policy Description Result
Source: BMI
Marketing National Agriculture Market Launched in Q216, this online trading portal for farmers is supposed to widen the farmers' universe of buyers and enable farmers to get better prices for their produce. The former state-level system permitted the first sale of crops - after harvesting by farmers - to take place only in regulated market yards or mandis. Coverage of the e-NAM will be expanded from the current 250 markets to 585 markets in 2017. Adoption may be slow as farmers would, in theory, have to pool their produce via producer organisations or cooperatives to attract distant buyers. There is also a lack of a third party certification for quality monitoring.
Farm insurance Fasal Bima Yojana This new crop damage insurance scheme was launched in January 2016 and allows for low premiums and faster claim processing. The government has been increasing budget allocated to the scheme and aims to cover 40% of the crop area in 2017/18 and 50% in the subsequent year, up from 30% in 2016/17.
Improve-ment in farm productivity Soil Health Card Scheme Distribute approximately 14mn soil health cards (SHCs) nationally in order to address imbalanced application of fertilisers in India, which has been a serious problem hampering yields. An SHC is meant to give each farmer the soil nutrient status of his holding and advise him on the dosage of fertilisers and the needed soil amendments that he should apply to maintain soil health in the long run. Slow progress in the dispatch of the cards, as of Q117.
Potential relaxation of GM use After years of strong government opposition to GM crops over the 2010-2014 period under the ANC rule, Central authorities' interest in GM have revived since 2014 with Prime Minister Modi. India saw the resumption of field trials in some states for GM mustard seeds, rice, chickpeas, corn and aubergines and in 2016 the environment ministry's Genetic Engineering Appraisal Committee (GEAC), the regulator of GM crops in India, received a proposal to allow the commercialisation of a Herbicide Tolerant GM mustard type (DMH-11), developed by the Centre for Genetic Manipulation and Crop Plants at Delhi University. A technical subcommittee of the GEAC deemed it safe in September 2016, but neither the regulator nor the government has given the final go-ahead amid protests by opponents of GM foods, as of the beginning of 2017. The matter is now in the hands of India's Supreme Court, as the central government announced it will not allow commercialisation without the court's permission. Given the court's significant backlog of pending cases, a decision will most likely take time to be reached. The topic of GM food crops is highly contentious in India and opinions over biotechnology differ widely among the population and especially within Modi's Bharatiya Janata Party (BJP), which is most likely going to impede the commercialisation of GM food crops for now.
Reform of input policy Fertiliser subsidies policy Although Modi and his government have pledged several times to reform India's urea subsidy arrangements, they appear to be taking a more careful attitude towards the needed changes to India's subsidies policy. Most of the progress has been seen regarding the Direct Benefit Transfer (DBT) scheme for fertilisers, which is a new subsidy dues settlement system that has been tested via a pilot programme since Q416. The scheme will, within a week, settle subsidy dues to companies for selling fertiliser at the state-set price, unlike the existing system, where payments to companies often get delayed. This is aimed at improving the efficiency of fertiliser distribution and limiting subsidy misuse. Another aspect of fertiliser policy reform for which India has made little progress is the change in urea prices. Urea remains the only fertiliser yet to be de-controlled and very low set prices have encouraged farmers to increase the use of nitrogen fertiliser, creating severe imbalances in overall fertiliser consumption that have adversely impacted soil health and long-term yields. Low fertiliser prices have helped alleviate the large fertiliser subsidy over recent years. The total budget allocated to the Department of Fertilisers has remained broadly stagnant.
Upcoming reforms Development of Contract Farming A model law on contract farming in India is in the making (H117). It would allow entry of private players into the sector as it would allow farmers to enter into advance agreements with private entities\buyers (for example agricultural processors). The latter may in turn invest in inputs and skills in the farm. The system could provide farmers with a better price for their products. na

3. Palm Oil Companies: Persisting Challenges & Strategy Shifts

The improvement in palm oil companies' earnings that started in 2016 with the temporary rise in palm oil prices will persist into 2017, driven by the rebound in palm production following El Nino. As sustainability topics are gaining momentum around the palm oil sector, we believe companies integrating this issue into their operations will stand out as winners against other companies competing for market share. They will benefit from a more stable revenue stream and will be able to compete in a larger number of markets ( see 'Palm Oil Companies: Persisting Challenges & Strategy Shifts', May 16).

Oleochemicals Remain The Bright Spot
Malaysia - Utilisation Rate Of Select Palm Oil Capacity, %
Source: MPOB, USDA, BMI

4. 19th Party Congress: Assessing Key Industry Implications

Chinese President Xi Jinping placed a strong emphasis on environmental protection during his speech at the opening of the twice-a-decade party congress on October 18 ( see '19th Party Congress: Assessing Key Industry Implications', October 27 2017). Specifically, he stated that the country is seeking to transition towards a phase of quality growth as well as more efficient and sustainable development in an effort to achieve the goal of a 'moderately prosperous society' by 2020, placing less emphasis on the pace of economic growth. Xi emphasised the following aims for the country:

  • Greater focus on environmental protection, which we believe will impact the power, oil & gas, electric vehicle, and metals and mining sectors.

  • The modernisation of the economy and the improvement of citizens' quality of life, which we expect to benefit telecoms, healthcare, infrastructure, and consumer sectors.

5. Infrastructure And Traceability Are Hampering The Rice Sector In The Mekong

Cambodia and Myanmar have struggled to gain market share in international rice markets due to infrastructure deficiencies and inadequate quality control systems. Both could prosper in an environment of low international prices were these issues addressed. In the meantime, Vietnam and Thailand will continue to dominate. ( See 'Rice: Infrastructure, Traceability Hampering Mekong's Frontier Markets', 14 Aug 2017). Over the long-term, the potential for Cambodia and Myanmar to increase their market share remains, given healthy levels of global demand, competitive production costs at the farm-level (mainly due to low labour costs and the availability of land), and the presence of high-quality local varieties.

Mixed Picture For Mekong Rice
Greater Mekong Sub-Region - Rice Production Balance ('000 tonnes)
f = BMI forecast. Source: BMI, USDA
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