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Food crisis, consolidation & more... - Views on News from Equitymaster
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  • Jul 22, 2008

    Food crisis, consolidation & more...

    Asian markets rally
    Majority of the Asian indices closed yesterday's trading session with gains of 2% to 4% and were largely influenced by the positive sentiment prevailing in the US markets. What led to this cheer were the 'better than expected' earnings reported by the financial heavyweights Citigroup and Bank of America. While the losses reported by these banks were huge by any standards, the quantum of the same was a tad lower than what was expected on Wall Street. Whether this signals a sign of recovery in the ravaged financial sector in the US remains to be seen. The economy still continues to be bogged down by a deteriorating housing market and credit crisis. The fact that financial institutions such as Bear Stearns, Freddie Mac and Fannie Mae had to be bailed out of trouble only accentuates the difficulty of gauging the depth of the subprime crisis. And the tool of reducing interest rates, which the US Fed had employed liberally since the unraveling of this crisis, may not be easy to use now against a backdrop of rising inflation and firm crude oil prices.

    No end to the food crisis
    While the oil prices have come down from their highs and provided some sort of relief to markets around the world, the food crisis just refuses to die down. The International Herald tribune states that as per numbers released by the United Nations' Food and Agriculture Organisation, the rising prices of basic foodstuffs have pushed 50 m more people into poverty and this number is likely to go up to 100 m. According to the World Bank, grain prices have more than doubled since January 2006, with over 60% of the rise in food prices occurring since January 2008. Rice prices more than tripled between January and May 2008, with a slight price reduction in June. Factors contributing to rising food grain prices have been high energy and fertilizer prices, the continuing depreciation of the US dollar, sharply increased use of both cereals and vegetable oils in bio-fuel production and declining global stocks of food grains due to changes to buffer stock policies in the US and the European Union.

    All these factors have resulted in counterproductive policies adopted by key exporters and importers. The introduction of export restrictions and bans ? such as those imposed by India and China on rice amongst others? has restricted global supply and aggravated shortages. With other exporting countries adopting the same stance, the result has been a considerable price spiral. Prices for those crops used as bio-fuels have risen more rapidly than other food prices in the past two years, with grains up 144%, oilseeds up 157% and other food prices only up 11%. This has spiked inflation in both developed and developing countries and has forced governments to make a decision as to which should get the top priority - restricting the rise in inflation by hiking interest rates or focusing more on arresting the economic slowdown.

  • Also read - Problems of a growing food crisis

    Consolidation in generics hots up
    Consolidation in the generics space is once again taking centrestage. Global generics giant Teva has reportedly bid for the US based generics company Barr Pharmaceuticals to firmly entrench its position as the world's largest generics player. This acquisition is also expected to cement Teva's strong position in the US, as the company's objective is to raise its market share in generic prescriptions to 30% by 2012 from around 20% currently. Other notable example in recent times has been the Japanese company Daiichi buying the promoters' stake in Ranbaxy to venture into generics.

    Consolidation in the key developed markets of US and Europe will be one of the critical factors to achieve scale, given the heightened competition in the generics industry. Acquisitions alleviate the need to make investments (especially on the sales and marketing front) in any region right from scratch. Therefore, many players are looking to acquire companies that already have a strong presence in one particular region with a large product portfolio. For instance, acquisition of Barr will enable Teva to gain a foothold in the central and east European markets, which are growing at a faster clip than the western European markets. Acquisitions also enable companies to garner a widespread geographical reach, which is a critical strategy in sustaining growth in the global generics market in the long term.

  • Also read - Pharma: Press 'A' for survival



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