19 July 2017

Don't Get Sucked In by the Rally in Agriculture Commodities

It's been a pretty good time for speculators anticipating higher agriculture prices. Hot, dry weather in parts of the Midwest and deteriorating crop ratings caused grain markets to surge in the past few weeks. Both wheat and corn traded near their highest levels in more than a year on the Chicago Mercantile Exchange, while soybeans jumped approximately 13 percent from a June low. The combined global stockpile of corn, soybeans and wheat at the end of the 2017-18 season is likely to shrink for the first time in five years, according to June forecasts by the U.S. Department of Agriculture.

Don't expect the good times to last. Agriculture is a global market and world reserves take precedence over U.S. markets when it comes to prices, and it would be smart for traders to reconsider their bullish sentiment following the release last week of the unanticipated, fairly bearish USDA monthly World Agricultural Supply and Demand, or WASDE, report. To be sure, some air came did out of the rally as soybeans, corn, and (more prominently) wheat all suffered declines.

The WASDE report was preceded by the Agricultural Outlook 2017-2026, a collaborative effort by the Paris-based Organization for Economic Cooperation and Development and the United Nations’ Rome-based Food and Agriculture Organization that projected global food commodity prices should remain low over the next decade compared with previous peaks. With world population expected to reach 9.7 billion by 2050, one would assume growing demand would prop up prices, yet the report concludes that demand growth for agricultural commodities is expected to slow considerably over the next 10 years.

First, spending in China is slowing. Second, biofuel policies are having a diminished impact on markets, with biofuel production projected to grow by 17 percent over the next 10 years, compared with a 90 percent increase the previous decade. Third, the replenishment of cereal stocks by 230 million metric tons over the past decade, along with abundant stocks of most other commodities, should help limit increases in world prices, which are at levels seen prior to the 2007-08 crisis in food prices.

While neither report is encouraging for agriculture prices, it’s imperative to assess the impact of global agriculture trade flows on world markets, particularly in regions where food production is low and imports are high. In doing so, it becomes apparent that global food markets are poised to face supply-shock risks due to production imbalances. Such shocks may result from weather, infestations or changes in government policy. Climate change serves to exacerbate these shocks as it means more adverse weather patterns and disruptions in shipping routes. Global trade wars, trade restrictions and lack of cooperation between nations will further upset an already precarious balance.

Source: https://www.bloomberg.com