Arshine:3 Global Factors Driving A New Commodity Super Cycle

 

Hopes for docile agriculture markets in 2022 have already been blown out of the water. Instead, we could be headed for a volatile year – or more – in both ag commodities and energy. Here are just a few reasons for strong prices.
 

1. South American Production Shortfalls 

“The No. 1 development in global ag markets is the loss of more than 1 billion bushels of crops in South America due to heat and drought,” declares Dan Basse, president and CEO of AgResource. Based on their recent crop tour, the company’s South American-based staff estimate soybean production will be at least 1 billion bushels less than initially expected and, corn, 600 million to 700 million bushels. 

“Historically, demand for nine of every 10 bushels lost in South America shifts to the U.S.” he says. “Currently, stocks are just not enough to pick up 900 million bushels of added demand.”

AgResource’s estimate of U.S. stocks of corn, wheat and soybeans is the lowest since 2012. 

Can enough acreage be added in 2022 to fill the void? Most don’t see a way: The U.S. and EU are essentially at peak farmland; there are no added acres to bring into production. Canada and Australia might have the potential for 10% growth. Brazil is growing 3% to 4% a year, but how long is that sustainable? 

Furthermore, in the next five years, we need another 25 million to 30 million acres in South America and the Black Sea area. The Black Sea region has good potential, but investment is leaving there, Stephen Nicholson, global analyst for grains and oilseeds at Rabobank notes.

Despite soaring production costs, U.S. corn and soybean returns are expected to be up for the second year in a row – and the highest since 2012, so the incentive is there – especially for those with strong risk management plans. 

The baseline 2022 U.S. forecast is for 241 million acres to be planted to combined corn, wheat, soybeans and cotton, up 3 million from last year and close to the peaks seen in 2012, 2014 and 2018. 

“The pressure is on for solid yields in 2022; a drought would tip the scales into a food crisis,” Basse emphasizes. 

2. Global Demand

The other side of fundamentals – global demand – also spells strong prices, given stocks drawdowns despite last year’s surprisingly robust U.S. crops. Global consumer demand for meats and dairy products continues robust. And a rising demand factor is renewable diesel initiatives in several countries. 
 
China’s strong feed grain demand has been a key component and that is likely to continue, though perhaps at a slower pace. Land, water and air quality are at a premium in China, so imports will remain the answer at least in the five-to-10-year window and possibly much longer, Nicholson says.

“While hog prices have plummeted in China, the government is keenly aware of the pressure to keep its people fed in the wake of the loss of trust caused by Covid,” points out Samuel Taylor, ag input analyst at Rabobank

In China, “the small hog producers who could quickly respond to price signals are gone – they did not come back after the African Swine Fever outbreak, and the government no longer allows feeding human food waste, their main source of feed,” explains says Lin Tan, executive president of Hopefull Group, based in Iowa. 

A short time ago, he says, the large producers were reporting $200 profit per pig. 

“Now, their goal is stockholder reports that show they are still producing the numbers of pigs that their big modern buildings require,” Tan says. “So even though Chinese hog producers are losing money, they do not want to cut back. Each one hopes others will go out of business and provide opportunities for them.”

In addition, the impact of the U.S.-China Phase 1 trade agreement has run its course. 

“Phase 1 included targets for 2020 and 2021 but there are no specific targets now,” Iowa State University ag economist Chad Hart adds, noting U.S. pork sales to China are down 45% year over year during the course of last year, with much but not all of the product shifting to Mexico, Colombia and the Philippines. 

3. Global Political Tensions

The tense Russia/Ukraine situation adds to supply concerns – for both grains and fertilizer. 

“Ukraine has been called ‘the breadbasket of Europe’ because of its rich soil, where vast fields have been productive for centuries,” reminds Angela Weck, professor of Russian Foreign Policy and contemporary world forces at Bradley University and president of the Peoria, Ill., Area World Affairs Council. 

She points out Ukraine’s ag advantage over Russia: “During the Soviet period, a quarter of the entire agricultural output of the USSR came from Ukraine. As boundaries exist in post-USSR countries, Ukraine has more arable land than Russia, which is 28 times its size. Likewise, 71% of Ukraine’s land is agricultural and 56% is arable, whereas only 13% of Russia’s is agricultural and a mere 7% is arable.”

Ukraine plus Russia grain (wheat, barley, corn) exports account for a quarter of the global total; sunflower products, 20% and rapeseed, 21%, Rabobank reports. Of course, some of the exports from last year’s production have already been shipped. But 8 million tons of wheat and 20 million tons of corn are still sitting in country. 

The next crop could also be affected. Wheat, most of the barley and canola already were sown, so their acreage will not change much unless crops are destroyed or damaged by war. But spring seeding (corn, barley, soybeans) takes place mainly in March and April and the acreage of those crops could be affected if actual conflict occurs. 

In addition, Russia provides 23% of the global ammonia market, 17% of potash, 14% of urea, and 10% of phosphates. While Ukraine is not significant in fertilizer, neighbor Belarus is noteworthy, particularly for potash, at 13% of the world market, according to Rabobank. So almost a third of the world’s potash shipments could be affected.

Sanctions or other disruptions to movement of already-pricey natural gas or oil would have large negative effects on the EU, which buys from Russia, Nicholson notes. But energy and potash could be a big boon to China and India if they move by rail in their direction instead. 

This potential conflict “is best described as a mixed bag,” Hart says. “A slowdown in their grain and oilseed exports could help U.S. farmers. On the flip side, slowdowns in energy exports could mean higher ag input costs globally.”

Source Arshine: https://www.arshinefeed.com/