How grain, oilseed prices dance to a new global tune

May 10, 2019 09:48
As production of corn and wheat in the Black Sea region has soared, what happens in Russia and the Ukraine is of great importance. Photo: Reuters

Agricultural prices are often at the mercy of the weather and a set of economic forces including planting, growing-and-harvest cycles and crop inventories. These risk factors are important price determinants. But in addition to them, macroeconomic factors play a subtle role in agriculture.

For example, during the great inflation of the 1970s, crop prices soared as the US dollar (USD) plunged. Crop prices retreated during the 1980s as tight Federal Reserve monetary policy brought disinflation, and the USD rebounded. The correlation between crop prices and the US dollar is increasingly negative, reflecting structural changes in global agricultural production and trade that have increased the influence of macroeconomic factors.

As production of corn and wheat in the Black Sea region has soared, what happens in Russia and the Ukraine is of great importance. Likewise, corn and soy production has increased dramatically in Argentina and Brazil, making what happens to South American currencies central to determining the prices of those two crops. The fate of the Russian ruble (RUB) and the Brazilian real (BRL) are closely linked to the outcomes in key agricultural markets.

At the same time, a greater diversity of crop growing regions might be mitigating weather impacts. Inclement crop weather in the US, South America or the Black Sea could send crop prices higher, but such weather is less likely to occur in all three places at once.

The Brazilian and Russian economies are, in turn, heavily influenced by developments in the world’s most rapidly growing major economy: China. While China is the most important food market in the world, variations in China’s growth rate have little direct influence on agricultural prices as Chinese consumers probably won’t change their consumption.

But their demand will grow more slowly for oil and industrial metals like iron ore and copper. Energy and metals are key exports from many major agriculture-exporting nations including Australia, Brazil, Canada and Russia. China’s demand for raw materials moves the values of their currency via the markets for energy and metals. This, in turn, changes the relative costs of production for farmers in South America, the Black Sea region and elsewhere versus US farmers, who transact entirely in USD.

The rise of the Black Sea and South America

Over the past three decades, US wheat production has fallen from 8-12 percent of the world total to between 6-8 percent. Meanwhile, Black Sea wheat production has risen from 8-12 percent of global production to around 13-15 percent and it exports the equivalent of 7-8 percent of global production each year, making it the world’s leading exporter. Meanwhile, US exports of wheat used to be 4-5 percent of global production, and now are around 3 percent.

The US remains the dominant corn producer. US production ranged from 38-42 percent of the world total until 2010 but has fallen to around 33-34 percent. Over the same period, South American production rose from 7-10 percent of the world total to around 11-13 percent while Black Sea production increased from 1-3 percent to just below 5 percent.

The impact on net exports of corn is much more dramatic. Since the US consumes most of its production, it exports only the equivalent of 5.5 percent of total global production, down from 8 percent during the late 1990s and early 2000s. Meanwhile, South American net exports have risen from just 1-3 percent of global production to about 5.5 percent. In the past decade, Black Sea net exports of corn have increased from zero to around 3 percent of world total output.

In the soybean market, South America has increased its total production from 32 percent to 48 percent of world total while US production has fallen from 47 percent of global total to just below 33 percent since the late 1990s. US net exports of soybeans stagnated at around 15 percent of global production while South American exports now account for around 23 percent, up from around 6-7 percent 20 years ago.

Soybean and corn prices closely track the BRLUSD exchange rate and that wheat prices move roughly in tandem with the RUBUSD rate. US farmers have always been subject to the USD to some extent but increasingly their prosperity is at the mercy of events in faraway places. Brazil’s fiscal deficits and difficulties in passing pension reform could weaken BRL and hurt US growers of corn and especially soybeans. Meanwhile, Russia’s exemplary fiscal health might turn out to be good news for US farmers of wheat, and probably corn.

The trade disputes have been bad news for American farmers, depressing the price of soybeans, in particular, as China curtailed its imports of US supplies. China has eased monetary policy by reducing its reserve requirement ratio, and also enacted additional tax cuts. The easing of China’s monetary policy has steepened the country’s yield curve and, over the past dozen years, China’s yield curve has been an excellent predictor of accelerations and decelerations in China’s official GDP.

As such, if China’s growth responds to the monetary and fiscal stimulus, this could boost China’s economic growth, energy and metals prices, and through them the currencies of key agricultural exporting nations. This could raise production costs in Brazil, Russia and other emerging agriculture exporters and offer relief to American farmers.

Farmers around the world are the mercy of more than just weather and the US dollar. They are increasingly impacted by public policy decisions made in faraway places.

Bottom line

• Global crop growing areas are increasingly diversified.

• Increased supply diversification reduces the impact of weather.

• Crop prices are increasingly sensitive to the US dollar, Brazilian real, and Russian ruble.

• Currency movements change relative production costs.

• China influences ag markets both directly (buying decisions) and indirectly via its buying of energy, metals and emerging market currencies.

• Russia’s robust fiscal health might be good news for wheat.

• Brazil’s fiscal problems could weigh on soybeans.

• China’s stimulus could boost crop prices via energy, metals and emerging market currency effects but only if it overcomes other problems (demographics, debt and trade disputes).

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Senior Economist, CME Group