Agricultural outlook 2008: a volatile harvest
Tuesday, 1 January 2008
LONDON Dec 31: Decline in world stocks of staple foods, record production matched by sustained demand growth and corresponding high prices, might suggest that the world's agricultural sector time has come.
It is necessary though to recognise some factors that ought to be considered lest an unhelpful bubble also emerge in agricultural commodity markets. The most important factor is that farmers globally have generally responded successfully to higher prices with increased plantings and production.
But while world stocks of wheat, coarse grains and rice remain high, stores in the main wheat export nations are low, notably impacted by Australia's drought affected winter crop. Low export wheat inventories have now combined with an unusual set of demand and supply influences that have heightened a psychological component in world agricultural markets.
There is an elevated awareness that climate, high oil prices, biofuel tensions and depreciation of a volatile USD have the potential to influence agriculture. Seasonal shortfalls in production in nations that are rapidly developing and highly populous also contribute to a perception of increased demand. Ultimately, realised production in 2008 will determine if agricultural commodity markets are currently being driven by a combination of fear and speculation.
Not all countries benefit from the trend towards high international cereal prices. There is an adverse impact on those that are highly dependent upon food imports and now suffer from substantial increase to their cereal import bill - notably in the countries designated by the United Nations as low-income food-deficit countries and less-developed-countries. International price increases are affecting domestic and retail prices across the world, according to the United Nations Food and Agriculture Organisation (FAO). Figures, purportedly also from the FAO, claim 18 per cent food price inflation in China, 13 per cent in Indonesia and Pakistan, and 10 per cent or more in Latin America, Russia and India. There is concern amongst officials in China that food inflation might be contributing to broader inflation in their economy.
Nevertheless, extensive land resources exist to raise production. The EU has relaxed an enforced 10 per cent fallow on all farmland for 2008. The extent to which new farmlands in South America, China, Russia and the Ukraine will expand is unknown.
Price volatility is a major concerns for the agricultural sector. In November 2007, US farmers in the mid-west grain belt states were urged to forward-sell 2008 harvests to lock in high prices to avoid "violent moves downward" in prices that might result from an expected increase in the global area sown to wheat. These increases have now been confirmed by the FAO. Still, some farmers resisted, hoping that the trend has further upside for their prices.
High cereal prices are also influencing meat and dairy prices due to large increases in the cost of feeding supplements to livestock. Strong consumer demand in the absence of traditional world dairy stocks and drought-affected production in Australia made dairy prices surge in 2007. The FAO described rises as "remarkable". The outlook for New Zealand, the world's largest dairy exporter, remains strong despite prices coming off historic highs.
High oil prices are also having an impact upon agricultural production particularly in developed economies; it is increasing the cost of fuel, fertilisers, processing and distribution. Its influence upon the development and economics of the biofuel refinery industry are complex; 2008 harvests will test USDA claims that maize plantings will increase sufficiently to accommodate competing demand of the feed, food and fuel industries.
The risk of "stagriflation" - this is, economic downturn and rising food prices - exists. This is already making life harder for the poor and may threaten political stability. It is not simply high price, but also volatile prices, that deserve consideration. Volatility heightens emotions, impacts on investment decisions and makes planning more difficult.
The influence a weakening US currency will have on agricultural price volatility is possibly under-assumed and not well understood. The USD dominates the trade of agricultural commodities. A less stable currency hinders consensus on price equilibriums and the response by traders, for example, may be to seek greater premiums to accommodate exchange rate risk despite the opportunity to hedge on financial markets. Combined uncertainty about price equilibriums and exchange risk might encourage speculative activity that exasperates high prices and heightens volatility in agricultural markets.
Agricultural price volatility intensifies the global economy's precarious position; now highly dependent upon China's domestic boom and faced with the odds-on possibility that the United States economy is headed for recession.
The psychological influences will however lessen if forecast cereal production increases are realised in the markets where demand and supply is tight. A widespread failure of harvests in the northern hemisphere - always a possibility in agriculture systems that are dependent upon the climate - could combine with high oil prices to create turmoil in 2008.
It is necessary though to recognise some factors that ought to be considered lest an unhelpful bubble also emerge in agricultural commodity markets. The most important factor is that farmers globally have generally responded successfully to higher prices with increased plantings and production.
But while world stocks of wheat, coarse grains and rice remain high, stores in the main wheat export nations are low, notably impacted by Australia's drought affected winter crop. Low export wheat inventories have now combined with an unusual set of demand and supply influences that have heightened a psychological component in world agricultural markets.
There is an elevated awareness that climate, high oil prices, biofuel tensions and depreciation of a volatile USD have the potential to influence agriculture. Seasonal shortfalls in production in nations that are rapidly developing and highly populous also contribute to a perception of increased demand. Ultimately, realised production in 2008 will determine if agricultural commodity markets are currently being driven by a combination of fear and speculation.
Not all countries benefit from the trend towards high international cereal prices. There is an adverse impact on those that are highly dependent upon food imports and now suffer from substantial increase to their cereal import bill - notably in the countries designated by the United Nations as low-income food-deficit countries and less-developed-countries. International price increases are affecting domestic and retail prices across the world, according to the United Nations Food and Agriculture Organisation (FAO). Figures, purportedly also from the FAO, claim 18 per cent food price inflation in China, 13 per cent in Indonesia and Pakistan, and 10 per cent or more in Latin America, Russia and India. There is concern amongst officials in China that food inflation might be contributing to broader inflation in their economy.
Nevertheless, extensive land resources exist to raise production. The EU has relaxed an enforced 10 per cent fallow on all farmland for 2008. The extent to which new farmlands in South America, China, Russia and the Ukraine will expand is unknown.
Price volatility is a major concerns for the agricultural sector. In November 2007, US farmers in the mid-west grain belt states were urged to forward-sell 2008 harvests to lock in high prices to avoid "violent moves downward" in prices that might result from an expected increase in the global area sown to wheat. These increases have now been confirmed by the FAO. Still, some farmers resisted, hoping that the trend has further upside for their prices.
High cereal prices are also influencing meat and dairy prices due to large increases in the cost of feeding supplements to livestock. Strong consumer demand in the absence of traditional world dairy stocks and drought-affected production in Australia made dairy prices surge in 2007. The FAO described rises as "remarkable". The outlook for New Zealand, the world's largest dairy exporter, remains strong despite prices coming off historic highs.
High oil prices are also having an impact upon agricultural production particularly in developed economies; it is increasing the cost of fuel, fertilisers, processing and distribution. Its influence upon the development and economics of the biofuel refinery industry are complex; 2008 harvests will test USDA claims that maize plantings will increase sufficiently to accommodate competing demand of the feed, food and fuel industries.
The risk of "stagriflation" - this is, economic downturn and rising food prices - exists. This is already making life harder for the poor and may threaten political stability. It is not simply high price, but also volatile prices, that deserve consideration. Volatility heightens emotions, impacts on investment decisions and makes planning more difficult.
The influence a weakening US currency will have on agricultural price volatility is possibly under-assumed and not well understood. The USD dominates the trade of agricultural commodities. A less stable currency hinders consensus on price equilibriums and the response by traders, for example, may be to seek greater premiums to accommodate exchange rate risk despite the opportunity to hedge on financial markets. Combined uncertainty about price equilibriums and exchange risk might encourage speculative activity that exasperates high prices and heightens volatility in agricultural markets.
Agricultural price volatility intensifies the global economy's precarious position; now highly dependent upon China's domestic boom and faced with the odds-on possibility that the United States economy is headed for recession.
The psychological influences will however lessen if forecast cereal production increases are realised in the markets where demand and supply is tight. A widespread failure of harvests in the northern hemisphere - always a possibility in agriculture systems that are dependent upon the climate - could combine with high oil prices to create turmoil in 2008.