Agricultural market and outlook
The current agricultural commodity market situation is relatively unique. Over the last decade there have been three price spikes (in 2007, 2010 and 2012) caused by supply constraints, and then in the last three years three massive harvests have increased supply to recharge stocks and cause farm gate prices to fall substantially from their 2012 peak levels. There have been no serious weather events or supply shocks since 2012 and stocks to use ratios are at historically high levels, meaning that relatively small changes in supply and demand forecasts do not impact prices meaningfully. In the absence of significant near-term supply constraints, prices are likely to remain low in 2016.
Longer-term, the growth in demand for agricultural products is expected to remain firm. A growing world population, coupled with dietary shift, continues to drive demand growth. Cereals are still at the core of human diet, but growing incomes, urbanisation and changes in eating habits contribute to the transition of diets that are higher in protein, fats and sugar. In the next decade, livestock production is projected to grow at higher rates than crop production. This changing structure of global agricultural production prompts a relative shift toward coarse grains to meet demands for livestock feed, away from staple food crops like wheat and rice.
The bulk of the additional production will originate in regions where the determining factors, such as land and water availability, and regulatory conditions, are the least constrained and most supportive. This presents a significant opportunity for countries likes Russia, which have large tracts of uncultivated and under-performing farmland and where the government recognizes the agricultural sector as strategically important.
In its most recent long-term forecast, the FAO-OECD believe that agricultural commodity prices are likely to rise with costs of production and normalize from the current levels, which are depressed by unusually large global harvests, but remain below the 2012 supply driven spike level. Global export trade in agricultural commodities is expected to increase modestly over the next decade in line with production and consumption trends. Exports of agricultural commodities are however projected to come from fewer countries, which increases supply risks, including those related to weather and trade policies.
Emerging Economies to Drive Demand and Provide Incremental Supply
The major demand drivers for agricultural commodity products are related to developments in emerging markets. Globally, the number of people with annual incomes in excess of USD 6,000 is set to more than double over the next 20 years, adding 2.7 billion people to the consumer middle classes. More than 90% of this increase – around 2.6 billion people – is expected to come from emerging markets, of which 1.8 billion are in Brazil, China, India and Russia. Developing countries in Africa, Asia and Middle East are major importers of grains. All of these regions, which are driving incremental demand, have limited land and water resources to supply their increasing populations.
The importance of emerging markets to global demand makes agricultural prices sensitive to economic and dietary trends in the developing economies. Emerging market and developing economies are projected to grow 4.3% in 2016 and 4.7% in 2017. As China’s economy rebalances, the slowdown is a concern as China is a substantial importer of agricultural commodities and as Chinese dietary shift has been a significant component of agricultural commodity demand growth over the last decade. Consumption in India and the rest of emerging Asia is projected to continue growing at a robust pace. The on-going recession in Brazil and turbulence in other Latin American countries is likely to supress agricultural commodity demand growth in that region in the short-term, but longer-term consumption is expected to grow. Russia, which continues to adjust to low oil prices and Western sanctions, is expected to remain in recession in 2016 but also to be a source of growing demand longer term. Soft (agricultural) commodities are considered less sensitive to economic downturns than hard (energy and metals) commodities. The economic slowdown in China and Latin America may therefore have a greater effect on energy and metals prices than it does on agriculture.
Additional agricultural production will need to come from increased productivity in the same way as it has for the past 50 years. Productivity gains in the medium-term should come primarily from improving productivity in developing and emerging countries with sufficient resources. Based on their greater potential to increase land devoted to agriculture and to improve productivity, developing countries are expected to provide the main source of global production growth out to 2024. Annual production growth is projected to slow to 1.5% over the coming decade, with the majority of the growth occurring in developing and emerging economies. In Asia, Europe and North America, additional agricultural production will be driven almost exclusively by yield improvements. In South America,both yield improvements and additional agricultural area are expected to contribute to incremental production growth. Only modest production growth is expected in Africa, although the regional holds meaningful agricultural potential and investments could raise yields and area in production significantly.
Dietary shift becomes a more important driver of demand
Human food use and livestock feed use will drive most of the cereal demand growth over the next ten years, as the growth in biofuels subsides. Across most cultures, cereals are still the main staple component of the daily diet and the single most important source of energy. According to FAO-OECD, wheat consumption is expected to increase by 13% over the next ten years; dominated by food use at a constant share of about 69% of total use. Feed use of wheat is projected to increase in China, the Russian Federation and the European Union, as pork and poultry production grows. Coarse grain consumption continues to be dominated by livestock feed use, which accounts for more than two thirds of the increase in global consumption (additional 156 million tons of feed use). Most of the additional feed is going to be consumed in emerging markets, to feed an expanding intensive livestock sector in these regions.
Biofuel importance declines with global energy prices
While only an emerging sector in 2008, biofuels rapidly became an important part of the global agricultural balance sheet. According to the OECD, some 65% of EU vegetable oil, 50% of Brazilian sugarcane, and about 40% of US corn were used to produce biofuels in 2012. By 2024, the FAO-OECD has estimated that 10.5% of global coarse grains, 25% of global sugar cane and 13% of global vegetable oils could be used to produce ethanol and biodiesel, which in itself could require an increase in global agricultural area of up to 20 million hectares. The growth of the biofuel sector over the past decade has however been supported by high energy prices and relatively generous government policies. Over periods of high fossil fuel prices, the use of ethanol as an octane additive expanded and correlation between agricultural markets and energy markets increased. The lower current energy prices will however leave the sector more dependent on support programs and US and EU policies are unlikely to change substantially. Any production growth istherefore more likely to arise from so-called second generation lingo-cellulosic biomass based ethanol. As a result, and especially at lower levels of energy prices, biofuel is less likely to divert substantial volumes of produce from food and feed supply than was previously anticipated.
Energy and input price inflation
The relationship between oilseed prices and crude oil prices, and between corn, ethanol and crude oil prices is also one which is often debated. Undoubtedly since the substantial increase in production of crop-based biofuels ten years ago the linkage between agricultural markets and energy markets has increased, but it remains only one of a number of drivers of market prices and as the relative importance of biofuels as a user of agricultural commodities declines, the correlation could weaken further. Lower oil prices clearly affect oil-related input costs of production (fuel, fertilizer and agricultural chemicals). According to FAO estimates, energy accounts (directly and indirectly) for approximately 50% of the production costs of corn and wheat.
Resource Constraints to Land and Water
Globally, the scope for area expansion is limited. Approximately 38% of the earth’s total land surface is currently used for agriculture and only 11% is classified as arable land. Arable land per capita has consistently been decreasing and has practically halved over the past 50 years on the back of population growth, climate change and urbanization. FAO expects total arable land to increase by only 69 million hectares (less than 5%) by 2050. Some 25% of all agricultural land is highly degraded and water scarcity in agriculture is already a significant and growing constraint for many countries. In 2010, some 3.1 trillion cubic meters of water was used for agricultural purposes globally, or roughly 70% of total water extraction. Constrained water availability is becoming a major obstacle for further intensification of crop production. Global Water Intelligence forecasts that by 2030, fresh water demand from agriculture could reach 4.5 trillion cubic meters, which is higher than the total supplies currently available, including surface and groundwater.
Population growth continues, but at a slower rate
According to the projections of FAO-OECD, world population growth is expected to slow to 1% per annum over the next decade, leaving a total of more than 8.1 billion people to feed in 2024, an increase of 0.7 billion over today’s population of 7.4 billion. Slower population growth is expected in all regions and most countries, including India, whose population is nevertheless expected to increase by 139 million people. The impact of liberalising the one-child only policy in China at the start of 2016 could, in the long term, be a factor in global population growth.
Cereal and Oilseed Market Outlook
On a global level, rising demand will mean more than 320 million tons of additional cereals are forecasted to be produced by 2024, of which 180 million tons will be coarse grains (predominantly corn), representing more than one-half of the additional production. Oilseed production is expected to expand by more than 20% over the same period, resulting in firm increases in the production of oilseed products. Protein meal output is projected to increase by 23%, reaching 355 million tonnes by 2024, while vegetable oil production will rise by 24% over the same period.
Sustained demand growth should help prices recover from current lows in the medium term. The short term outlook for cereal and oilseed markets, however, remains challenging. Three bumper harvests have resulted in record large wheat, corn and soybean stocks, providing significant weather cushion and holding prices at depressed levels.
Global corn and wheat prices are at a 6-year lows. US and EU exports have been lower than forecasted as European producers struggle to compete with South American and Black Sea supply. Another strong global supply outlook has offset the 7% y-o-y drop in 2016-17 US wheat plantings.
Oilseed prices are at a 9-year lows. Global oilseed production for 2015-2016 is forecast to increase to 527 million tons, with soybean accounting for 320 million tons. Meanwhile, demand is expected to remain stable. The soybean import forecast for China has been raised to reflect strong imports to date and higher soybean meal imports going forward. This is however offset by reduced import estimates for the EU, Pakistan, and Mexico.
Analysts estimate a 50-75% of La Nina developing in 2016, following the strongest El Nino event for two decades in 2015. La Nina usually results in dry conditions in the US grain belt and could negatively affect US crops. La Nina was responsible for the US drought in 2012, which devastated US corn and soya yields.
Cereal and Oilseeds Overview
Over the last decade there has been a substantial increase in cereal and oilseed production across Russia, driven predominantly by the Central (Black Earth) region. Since 2004, grain production has increased by 70% and oilseed production has increased by almost five times. The southern regions have showed more modest growth. Grain production has increased by 16% and oilseeds output by 33%. Production growth partly reflects a recovery after a decline in production after the collapse of the Soviet Union Increased output has been driven by a combination of both yield increase (predominantly in the centre) and area increase (predominantly in the south). Supply has also been supported by higher demand for feed grains from a growing domestic livestock industry, increased exports, as well as by government policy.
The output of the Russian meat industry has increased by 56% over the last ten years, but in the central region it has increased by 240%, with the Belgorod region becoming the powerhouse of Russian pig and poultry production. As a result of the recent import restrictions and increased federal support to the livestock companies, the sector is experiencing substantial growth. As a result, demand for grains by Russian pig and poultry producers is expected to grow by at least 3% per annum over the next few years. Most of this growth is occurring in the central region, boosting the local customer base for BEF’s grain and oilseed crops.
Since 2008-2009 Russia has returned as a key player in export markets. Historically, export volumes were linked to the amount of production surplus in the southern region, close to the Black Sea ports. In recent years, exports have been greater than the so-called “southern surplus”, meaning that cereals and oilseeds from other regions are now also finding export customers. With continuing growth in production, Russia is expected to continue to grow its exports of cereals and oilseeds.
The total Russian grain production estimate for the 2015 harvest is 103 million tons, an increase of 2 million from earlier forecasts but still 2 million below the post-Soviet 2014 harvest of 105 million. Wheat accounted for 61 million tons, barley for 18 million tons and corn for a record 13 million tonnes. Other crops contributed 11 million tons, including rye at 4 million tons. The final 2015 planted area amounted to 47 million hectares, approaching the peak level of 2009.
As of the end February 2016, grain exports totalled 26.3 million tons comprising, of which wheat contributed 19.1 million tons, barley 3.6 million tons, corn 2.7 million tons and other crops 0.9 million tons. Barley and corn were at record volumes whilst wheat is slightly behind previous years at this point of the year. Total exports for the 2015 are projected to be 32 million tons.
In dollar terms, grain prices have declined in line with international markets. Wheat and corn are down 26% and 30% respectively y-o-y, but continued currency weakness, has resulted in record high prices in rouble terms, exceeded only by the severe drought year of 2010.
Towards the end of 2015, the wheat export levy was under Government review. Authorities reportedly contemplated changes to the wheat levy and introduction of levies on corn and barley exports. While no changes followed, the discussions created uncertainty for producers and exporters in Russia.
In contrast to grains, oilseed prices are largely unchanged y-o-y in USD terms. The stronger oilseed market is due to a lower rapeseed supply (down 30% y-o-y) against an insufficient increase (3%) for sunflower and soya production. Overall supply is therefore lower whilst crushing and processing demand is higher, partly due to sanctions restricting the import of many competing vegetable oils.
The final winter plantings estimate for the 2016 harvest shows a small -1.4% y-o-y decrease from 16.33 million hectares in 2015 to vs 16.10 million hectares in 2016. This is however higher than the 2011-14 average. The share of winter wheat in the winter crop mix increased from 82% to 86%.
The winter crops have enjoyed a mild and wet winter. Sowings are down in Volgograd and crop conditions are uneven across the Belgorod and Voronezh regions.
Early estimates point to a total 2016 grain crop of approximately 101 million tons (–2% y-o-y), of which 58 million tons would be wheat (–5% y-o-y), 19 million tons barley, 13 million tons corn and 11 million tons other crops. Off slightly lower production against strong domestic demand, total grain exports are likely to be down marginally from 32 million in 2015 tons to 30 million tons in 2016.