How To Manage Volatility In Agribusiness

Otto Lenz

Volatility in pricing and supply has contributed to the need for a digital transformation in agribusiness. Technology helps businesses keep up better with the uncertainty in weather and other factors affecting the industry. Technology and innovation create a new agriculture system that accounts for these constantly changing conditions in farming.

Changes in agribusiness

Supply shortages are an important concern in today’s world. An increasing population around the world, unpredictable weather conditions, and a reduced amount of farmland and resources make it difficult to have the supply to meet global demand. Geopolitical and economical situations such as an improvement and then decline in Brazil’s economy also affect agricultural supply. Companies especially struggle when it comes to securing supply for specialty products. Supply shortages will only worsen without new methods of dealing with them.

Further, agribusiness has to deal with volatile pricing, which is another symptom of changing supply and demand. For example, price fluctuations put the margins of commodity processing companies at risk. Jose Cuesta explains on The World Bank website why it’s important to be ready for continuing changes in food pricing, even if one pattern holds steady for a while, noting,“Risks, like energy, do not disappear, but they do change.”

Examples of factors that can affect the food business and quickly change pricing include the impact of weather events like El Nino and a government import ban on certain foods. Other examples include countries starting intervention programs that change the domestic price of a certain food and countries creating restrictive export policies to protect domestic prices. Nadia Rocha, Paolo Giordani, and Michele Ruta point out on Vox that restrictive export policies have correlated with rising food prices internationally.

Agribusiness must respond to these changing factors in the industry. Technology and innovation already provide methods for businesses to keep up.

Solutions to a volatile market and pricing

One way to deal with volatile pricing and supply is to use risk management in real time. Technology helps businesses stay on top of these market changes. Agribusiness needs to keep up with price changes as they happen and be aware of the current supply situation and the associated risk factors. For example, if all of the supply is coming from one country or region, the company should figure out whether it can be diversified. The company also needs to look at how weather could impact the supply and plan accordingly.

Companies also need to understand the value chain from the beginning so they can manage risk more efficiently and manage the source of the problem rather than treating the symptom of price reactions. This is similar to a doctor trying to solve the source of back pain, such as a bulging disc or muscle strain, instead of prescribing pain medication to treat the symptom of pain.

Companies could create closer relationships with farmers and work with them to support practices that stabilize yield and quality. Karol Boudreaux explains for Devex, “Providing better-quality seeds, extension services, irrigation, and other infrastructure will undoubtedly help small-scale farmers meet the challenge of feeding the world’s growing population.” Companies could offer new technologies to help farmers improve these practices. Examples include irrigation technologies that protect against drought, and crop varieties that are more resistant to drought, pests, and other conditions.

If a company is unable to take these measures, or if they are not enough, the company can insure or hedge against the remaining risks. One way to do this is with Meteo Protect, a type of weather risk management insurance. Rick Huckstep explains on Daily Fintech that this insurance provides companies with protection if weather affects their profits or other aspects of the business.

Also, an efficient commodity management solution can help companies better manage the buying and selling of commodities. It helps them understand current market conditions, commodity prices and best practices, as well as effectively manage their commodity procurement, processing, and sales processes. It also offers integrated real-time risk management.

Keeping up with volatility in agribusiness

Companies in agribusiness need to handle supply and price volatility. This requires a clear vision of the supply chain. For example, a company producing chocolate bars needs to know where the ingredients are coming from. This also requires a clear view on risk. For example, a company needs to know how much external factors and adverse events would affect supply price, availability, and the quality of materials. “Predictive analytics and simulations enable optimized risk mitigation strategies,” says Anja Strothkamper, VP SAP Agribusiness and Commodity Management. Finally, a company needs a clear idea of price risk and efficient risk management processes.

The industry is moving forward with technology and innovative solutions as the world tries to handle consumer demands and prevent a global food crisis.

Does your business need help managing the risks of volatile pricing and changes in supply? Rely on the SAP Commodity Management solution. It can help agribusiness to simplify processes and come up with relevant insights. To learn more about digital transformation in agribusiness, click here.

Otto Lenz

About Otto Lenz

Otto Lenz is a solution manager for the Agribusiness and Commodity Management Solution Management team at SAP. Focused on commodity trading and risk management, he drives, supports, and positions the latest SAP solutions in and beyond the agribusiness industry – closely working with customers and partners in these areas.