Transitioning to a greener carbon-sensitive global economy seems likely to significantly affect global commodity markets in the years ahead.
The US has been a major provider of commodities to world markets in recent decades, but as it hits peak land availability, any further expansion in one product seems likely to take from the production of another.
Are we returning to an era when price and margin become the major driver of land use decisions?
This was a central theme in the address made by Dan Basse to the recent R&H Hall/Barnett Hall/Precision Liquids virtual conference.
Last week, I reported on the likely increasing demand for soya beans in the US to fuel its increasing demand for renewable diesel. With peak land availability for crop production in the US now a real issue, Dan said US production will follow price signals.
This is because US farmers will no longer be able to chase different market demands at the same time. While high fertiliser prices will influence such choices in the short term, peak land will be a longer-term influence.
While other countries still have access to additional land, their ability to find more land to produce more of everything is becoming more limited.
World demand for grains has been growing at about 1.8% per annum for almost two decades. This equates to an additional 41Mt to 42Mt of grains being produced every year for the past 20 years. Dan is now questioning our ability to maintain this pace of production growth across the globe.
This increased production has been driven by a combination of increased crop area and improved crop yields. The main area increases relate to regions such as central Europe and South America, plus the return of environmental land to production in the US.
Yield improvements have been more universal, with the biggest improvements made across much of central Europe, but from a low base.
Now we are told that global crop yields appear to be levelling off. This has been a real issue in Europe for many years, but technology adoption helped to pull up yields elsewhere. This now seems to be levelling off also.
So with new land being more limited and global grain yields flattening, the question of long-term food availability is once again a real issue.
“New acres are no longer available in the US, so commodities must compete on price for those acres,” Dan said. Product price will be an increasing driver of planting and land use decisions.
On the supply side, we are already witnessing the world stocks-to-use ratio reducing across all major grains.
This is generally a price driver and that is happening currently. As well as this, Dan said the commodity:equity price ratio looks out of sync and he expects funds to look more at commodities in the years ahead.
The impact of higher food prices will mean different things to different segments of the global population.
Dan told us that the average American spends 6.7% of disposable income on food, so they can afford higher prices.
Many other areas of the world spend 10% to 15%, but there are also many countries in Asia and Africa where people spend 30% to 70% of their disposable income on food.
So price will remain an important political consideration.
Drought continues to be a major cause of annual variation in global production. Dan said GMO wheat with a drought resistance trait is now being grown in Argentina.
I also note that it was cleared for use in Brazil earlier this month. This may give these producers more weather resilience, but will this GM trait affect trade patterns?
Will some stray GM-wheat grains in a consignment of soya bean meal continue to spark reaction when coming into the EU?
Global population continues to increase. Having been at about 1.6bn in 1900, today’s estimate is 7.9bn and the forecast for 2050 is 9.7bn. Predictions suggest that India will become the most populous country and that Africa will have the highest population growth.
If we cannot maintain that 1.8% production increase, the amount of grain available per capita will decrease from its current 290kg/capita level. Dan said this increased production would require an additional 20m to 25m acres every year to meet this increasing demand, but those extra acres may soon not be there in the big producing countries.
Because of this, he believes markets are heading into a period of “demand pull”. Peak acres and flattening yields point to food and feed supply pressures in the years ahead.
He pointed to the increasing demand for feed and food in China. The rebuilding of pig production there in biosecure seven-storey hog hotels that can house up to 850,000 head has increased the overall demand for feed. Prior to its African swine fever cull, much of the pig production happened in homes where they were fed on household slops.
While import demand from China has been lower so far in 2021, Dan said the country had a big grain harvest and so it needs to import less.
But China is still feeding and it is still importing and this demand may be higher again next year. Dan estimated that China will need to import 40m to 60m tonnes of feed annually.
China’s stocks-to-use ratio is also decreasing. Three weeks ago, the price of maize on China’s futures market was $10.78/bushel versus $5.60/bu in Chicago. This price gap has increased since then, so imports remain possible.
There are also many other market forces at play. Fertiliser costs seem likely to affect maize acres in the US and elsewhere next year.
The USDA predicts that at least 3m acres will leave maize and go to soya or small grains to reduce total fertiliser requirement next spring. But Dan said the last time there was a big fertiliser price hike, US farmers switched 9m acres out of maize.
Actions within the EU regarding Farm to Fork, etc, could see the block becoming a net grain importer in the years ahead and thus add to international price volatility.
International trade in wheat is currently very high and this looks set to continue. Russia’s export tax has added to trade from the EU, Australia and Argentina.
Access to farm credit will be a bigger issue as costs increase, especially if we get an interest rate hike.
Transport and logistics are currently huge supply chain issues. Containerised transport has increased at least 10-fold and bulk freight carriers are up three-fold. Availability rather than cost has become the issue for trade in world markets.
Dan also said there is variability in freight costs. Transport cost into China or elsewhere is much higher than the cost out of China because they own many of the shipping lines.
Dan sees cell-based meats as sitting alongside real meat in the future to help supply total demand.
If the political situation in Brazil becomes more stable, its currency is likely to appreciate in the coming years and this would affect its export competitiveness.
Following on from comments on organic food production and demand in last week’s Irish Farmers Journal, Dan does not see that market increasing in the US.
However, he believes food health issues will become increasingly important in the years ahead.
The immediate prospects for wheat remain strong. Global stocks-to-use ratio is at a record low (17%) and that drives market volatility.
Currently, there are just 17 days of world wheat use in stock and that is a real concern for exporters. With stocks being low, Dan said the wheat market needs to grow an additional 5m to 7m acres to meet demand for 2022. Dan believes Russian wheat needs to move up to $380-$400/t (€334-€352/t) to increase global supply – prices are currently around $330-$340/t (€290-€299/t) depending on milling quality. This would enable Chicago wheat get up to around $9/bushel (€289/t).
Maize area seems likely to decrease for 2022 due to high fertiliser prices. Futures prices are strengthening to encourage production and minimise any acreage drift. Global production will be strongly influenced by South America and the impact of weather.
Dan said maize demand and usage are both at record highs and the current price levels do not appear to be rationing usage. He said Chicago maize seems set to remain above $5/bu for the next few years.
He expects prices to easily stay at $250-$275/t (€220-€242/t) and they could get up to $300/t (€264/t) if weather limits production in South America (closer to $7/bu).
While higher supply this year might normally pressure prices downwards, maize acres will fall unless there is a strong forward price to justify production.