Emma Cowan has been an independent agribusiness consultant since 2007 and is a founder of Cardy-Brown & Co, a network of agribusiness consultants. Here she describes the changing landscape for commodities amid a shift in biofuel and BRIC countries’ growth potential.
In 2007 the prospect of feeding the emerging BRIC markets and fuelling cars from biofuels pointed to a bright future for agriculture. It enticed many Wall Street and City professionals to change their vision of farming from Old MacDonald with his farm to high tech industrial-scale commodity production. And the emerging markets were not just the target of consumption, but for production too as many fund managers chose to launch funds in these countries.
At that time I published a report for Rabobank entitled “BRICs & Biofuels”. The report attempted to outline just how big the impact of growing populations and GDP per capita in Brazil, Russia, India and China could be on agriculture. It also pointed out that ethanol initiatives would have a positive impact on overall demand for agricultural commodities, particularly in the Americas.
Today, despite the BRICs and biofuels phenomenon, commodity prices are heading south. In fact, “2014 was the third consecutive year of falling prices as all commodity groups except meat are falling,” according to the FAO. So did I get it wrong?
Currently there are several factors operating all at once. Firstly, supply is high. Harvests of maize and soybeans were particularly big in 2014 helped by high performance seeds, crop protection and fertilisers that contributed to an overall increase in crop yields per hectare. The amount of land dedicated to these crops is also growing and most importantly, weather conditions have been conducive to strong yields in the Americas.
Demand is lagging, however. US biofuel production is flattening out (see chart 2) as the political driver to America’s biofuel initiative – to mitigate supply risk for the Middle East – is now less relevant with more oil found locally and the shale gas revolution.
Previously, ethanol production has helped push corn prices up as I predicated in my report. The feed industry was forced to pass on increased prices subsequently squeezing meat producers between feed costs and aggressive food retailers. The larger meat companies were able to find some new business in selling to the evolving BRICs, however.
So between 2007 and 2012, I can claim my ex-colleagues and I got it right. But now we have moved into a new cycle and the world is changing. Ethanol from corn has never made total environmental nor economic sense and now that US has local supply, ethanol from corn is going to become increasingly superfluous.
Today animal feed demand is still tempered as the firm lid controlling animal stock numbers remains in place. Meat prices have recovered, but large import markets such as Russia and China are facing falling GDP figures which usually coincides with falling demand for meat. China’s GDP per capita will fall to 7.4 percent in 2016, down from 10.4 percent in 2010, according to World Bank forecasts. As the consumption growth engine for the world’s commodities, China’s forward purchases of soybeans are taken as a major determinant for futures prices. See chart 1 for the tail-off of Chinese demand for soybeans. So does this mean we have we come to the end of the BRICs and Biofuels era?
For commodity prices more widely, we must turn to oil prices for guidance. Historically the single most powerful factor in determining commodity prices and therefore farm profitability, oil prices have largely been tracked by grains and oilseeds over the last decade, albeit loosely. See chart 3 below:
Source: World Bank Commodity Price Data (The Pink Sheet)
The emerging oil price war has brought about such dramatic falls that even the soybean price has thankfully slowed its fall in the recent months (chart 3) so perhaps this is an indicator of how contrived the current oil price is. But for commodity prices to gain lustre, they must be supported by crude oil price increases on current levels.
In the short-to-medium term, investors would be wise to capture returns in value-add products, advances in bio-technology, niche market opportunities and so on.
In the long term, the underlining facts are: our population will grow and the number of undernourished people in the world is falling. Today the global population is roughly 7.1 billion. It will be roughly 8 billion by 2025 and 3 billion of that 8 billion will live in either China or India. The GDPs of India and China continue to grow, albeit slower than they have in the recent past.
Agriculture is cyclical. We have now moved from a period of high oil prices, emerging BRICs and a rocketing biofuel industry, to a period of low fuel prices and slowing BRIC growth. For the next year at least, commodities will remain in the doldrums.
About the author: Cowan recently returned to Europe after five years of working in Africa supporting both the commercial and donor investment sectors, and she is now intent on developing her consultancy business for both investors and agribusinesses. Her previous experience includes 15 years in senior corporate roles for Monsanto, Syngenta and Rabobank. Although British, Cowan spent many of her formative years in the Grosso, Brazil, working on the family’s beef operation. She holds a BSc in Animal Physiology & Nutrition and an MBA from the Royal Agricultural College, Cirencester.