Slower growth in emerging markets will likely last for the rest of the decade, thus limiting the rate at which demand for agricultural products increases.
The commodity “super-cycle” is on the down swing, said Erik Norland, senior economist and executive director, CME Group, Chicago, Illinois, U.S., during the 10th Oilseed & Grain Trade Summit this September in Minneapolis, Minnesota, U.S. In the 1980s and 90s, low commodity prices discouraged additional production, making them ripe for a rally when demand from China and other emerging markets outstripped demand, he said.
From 2002-14, higher commodity prices encouraged the development of new supplies, which are now encouraging commodity prices to come crashing down, Norland said. This is slowing growth in Latin America, the Middle East and Russia, and creating instability.
Growth is shifting to developed economies, which, at best, will mean a modest increase in commodity demand. That’s because the potential in those economies is lower given their stagnant population growth and existing high levels of per capita calorie consumption, Norland said.
The greatest growth potential is in places with low current levels of per capital calorie consumption and high population growth, such as India and Africa, he said. The least potential is seen in nations with declining populations (China, Germany and Japan) and relatively high levels of per capita calorie consumption (the U.S., Brazil and Germany).
While conditions aren’t perfect in India, the nation has great potential for increased per capita calorie consumption and population growth. It has the best near-term potential for demand growth, Norland said. Africa’s near-term outlook is mixed to negative, and China is essentially tapped out as a growth market.
“The case for being optimistic about India is much stronger than the case for being optimistic about Africa, Latin America, the Middle East, Russia or China,” he said.
India taking the lead
While its demographics aren’t as growth oriented as Africa, India’s calorie consumption is up from about 2,100 to 2,400 calories per person, Norland said. If India could bring that consumption up to the world average, that would mean 20% more consumption per person for over 1 billion people.
India’s Gross Domestic Product (GDP), at least on the surface, looks good.
“The economy is growing officially by 6% per year, but when you peak under the hood, things are not looking so good,” Norland said.
Mining is not really growing, agriculture is underperforming, manufacturing hasn’t seen growth in the last three years and construction is growing slower than the overall economy. While the “real” economy isn’t growing, Norland said there is increased government spending, growth in financial services and real estate transactions.
“When that starts taking up a larger share of the economy, that can be a bad thing,” he said. “People are taking on too much debt that one day they’re going to find themselves unable to pay back.”
But the good news is inflation rates have come way down, spurring economic activity, and the Indian rupee has come down in value, meaning India is competitive on the export side.
“Short term, India is the best hope for economic growth, and increased consumption of vegetable oil and other agricultural products,” Norland said.
In the long term, Africa holds the greatest potential, he said. Average calorie consumption is between 2,200 and 2,300 per day, and the population is skyrocketing.
“If Africa can grow its population by 70% and come up to the world average in calorie consumption, it could grow food consumption by 100% in the next 25 years,” Norland said.
Africa is a region that rarely gets discussed in terms of economics, partly because its 57 countries constitute only 3.5% of the world economy.
“But that economy has been growing very quickly in the past decade, in part because it has been sustained or encouraged to grow by very high commodity prices,” he said. “Now that commodity prices are dipping, the African economy is starting to look shaky.”
In general, African economies are based on resource extractions and exports. Collapsing prices for such things as copper, iron ore and other metals, as well as lower energy prices, are bad for countries like South Africa, Algeria, Nigeria and Angola. In addition, currencies in the two largest countries haven’t fallen as far as other emerging nations, which means it likely has farther to go.
“We have these short-term hiccups that will make Africa not so promising in the next two to three, maybe five years, depending on how long commodity price dips continue,” Norland said. “But it will hopefully not diminish Africa’s potential to grow in the 2020s and 2030s. It is an area of massive potential growth in food consumption.”
China, which has captured the imagination of so many in terms of the potential to consume more food, is seeing its population stagnate and begin to decline, he said. In fact, the nation’s demographics closely mirror those of Japan in the 1990s, with an aging population.
Japan had been averaging 8% growth, and dropped down to less than 1% per year. Norland said he expects a similar scenario in China, but to a less drastic degree. The nation will come down from the current 10% growth rate to 5.7% on average for the rest of the decade, reaching a low of 3.5% during the 2020s. Japan’s calorie count also dropped by about 300 calories per day as the population aged.
“There is a lot of potential for China to slowdown; that’s a real big problem,” he said. “China’s calorie count went from 2,500 to 3,000 from 1990 to 2011. I think there are reasons to believe that the calorie count will stop growing.”
China’s transformation to a middle class country is starting to run out of steam, he said. Urbanization has been the driver for an increased standard of living over the past quarter century, and China is more than halfway through its rural-urban transition. The nation also has high levels of debt.
“Private sector debt is very high relative to GDP and is higher than any comparable emerging market country,” Norland said. “The other problem is overvalued currency. The 4% devaluation is just beginning of a much larger devaluation that has to happen.
“China has excess investment, it’s too reliant on exports, it has an overvalued currency and too much debt. It looks like Japan in the early 1990s. So the idea that China is going to drive food consumption is an idea that was valid during the 1990s, valid during the last decade, and valid to some extent for the last four to five years. But I think it stops being valid going forward.”
E.U., U.S. hold steady
The E.U. is looking at increased stability now that the drama in Greece has played out, Norland said. Growth in Europe for the rest of the decade will be boosted by lower oil prices, since few nations in the region produce their own oil.
Having interest rates at zero along with aggressive quantitative easing has made it possible for debt-laden countries such as Italy and Spain to finance themselves and return to growth. A weaker euro is making Europe more competitive, but it will probably need to weaken further, he said.
Europe’s population and diets are mature, so it probably won’t respond to economic growth by consuming more vegetable oil and other agricultural commodities, Norland said.
The U.S. dollar has been soaring, which may hurt agricultural goods when seen from a U.S. dollar perspective, he said. However, those prices are not declining when seen from the perspective of other currencies.
The Federal Reserve would like to hike interest rates toward the core rate of inflation, but it has been hesitant because of a potentially negative reaction from financial markets. A strong growth in total labor income will eventually give the Federal Reserve the courage necessary to begin tightening policy. Unless oil prices collapse further, inflation should move back above 1% by early next year. The potential for commodity growth in the U.S. appears limited, Norland said.