Global Grain
David Lehman, left, managing director, CME Group, leads a panel discussion on economic conditions impacting the grain and oilseeds markets with Mac Marshall, middle, Monsanto, and Erik Norland, right, CME Group, during the Global Grain North America conference this July in Miami, Florida, U.S.
Volatility is the new normal for global commodity markets, speakers agreed at the Global Grain North America meeting July 12-14 in Miami, Florida, U.S.


Corn (maize) prices have been relatively depressed and went through a period of extraordinarily low volatility for about a year until this spring, when there was a tremendous spike, said Erik Norland, executive director and senior economist, CME Group, Chicago, Illinois, U.S.

“The spike has caused the price of options to increase. We’re unlikely to see the options cost be extremely low like it was for much of the past year,” he said.

Several factors can lead to increased volatility including the possibility of a La Niña event. Volatility in corn, wheat and soybeans during periods of La Niña tend to be structurally higher than during an El Niño or neutral periods.

“In the year after temperatures are 1 degree Centigrade below normal in the Pacific, volatility can be 1.5 times its normal level,” Norland said.

Similarly, wheat stagnated for a long time, and has now taken a sharp drop. Options haven’t moved as dramatically, he said, and are still on the lower side. It’s possible the cost of wheat options could move from 25% implied volatility up to 40% implied volatility like was experienced in 2011.

Soybean prices have seen a tremendous spike recently after a long period of low volatility. Options costs have increased quite a bit, but could come down in the short term if the market stabilizes.

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China’s Prospects

Global Grain
Mac Marshall, an economist with Monsanto, said even if China’s growth rate falls, demand will continue to grow for agricultural commodities. 
Speakers at the conference examined macroeconomic conditions in key grain producing regions that are contributing to the market’s increasing volatility. Of particular interest is China, which has seen its economic growth drop in the last few years. It is estimated to reach 6% this year.


But even if there is a structural slowdown, data show that demand for agricultural commodity remains strong, said Mac Marshall, an economist with Monsanto, St. Louis, Missouri, U.S. That’s because China’s per capita protein demand continues to increase, and along with it, the demand for corn and soybeans – even in a decelerating economy.

Agriculture contributes 9.2% to China’s GDP, and employs 33.6% of the labor force. At 10 people per hectare of arable land, that’s more than twice the world average of 4.4, said Eric Trachtenberg, director, agriculture and food sector, McLarty Associates, Washington, D.C., U.S.

The nation is the largest agriculture producer by volume, but rising yields won’t meet increased demand, he said. There is increasing demand for higher value products for processors and domestic consumers, Trachtenberg said. The growth in cash crops, livestock and fishery sectors, and other labor intensive crops, is unlikely to match consumer demand.

In its 13th Five-Year Plan, China has called for economic growth of more than 6.5%; modernization of production practices; elimination of its price policy for corn; an 8-million-acre reduction in corn area by 2020; and an increase in domestic soybean production.

China has aggressive goals on expanding soybean production in terms of acreage and yield, Marshall said. An acreage increase is possible since that is government controlled. The expected yield gains to 30 bushels per acre is another matter. Such an increase would require annual growth of 2.5%-3% – well above the current yield trajectory, he said.

“Assuming they can meet these goals, what does that actually mean? How disruptive could an increase in soybean production be to global trade?” Marshall said.

The answer, he said, is not much. Right now, China is 88% reliant on imported soybeans to meet domestic demand. If by 2020 demand grows by 20 million tonnes, which is the total cumulative growth over the past three years alone, China would still be 85% reliant on imports.

“Going forward, expect trade and exports in the region to continue to be very robust,” Marshall said. “Wherever and whatever the economic conditions are, we’re going to continue to see growth in protein.”

One factor often overlooked when examining economic health is debt level, particularly in the private sector, Norland said. In 2008, when countries like Japan and the U.S. were suffering through financial crises, China had a relatively low debt to GDP ratio of 150%. Rather than learn from other nations’ mistakes, China encouraged non-financial corporations to take on debt to maintain a high economic growth rate. China’s debt levels have increased 20% in the last year to a debt-to-GDP ratio of 255%.

“That’s exactly the same level the U.S., the E.U. and Japan were at when our financial crises began,” Norland said. “It doesn’t mean we’re going to have an imminent financial crisis, but they could go further into debt.”

At such a high debt level, money that is borrowed is for the most part used to finance existing loans. When debt levels are low, money borrowed becomes an investment in consumer spending and adds to the GDP, he said.

“China is borrowing to finance a debt level they already have,” Norland said. “We’ve seen a structural slowing in China’s growth rate. At some point something is going to snap. It could be later this year, next year or in 2020. At some point this thing that is not sustainable will no longer be sustained.”

China’s population will see very little growth over the next few decades, Norland said, but even growth of 1%-2% means 10 to 20 million people. If China does grow as a market, it will be because of growth in consumption on a per person basis. China’s population is aging rapidly, Trachtenberg said. The elderly will increase from 167 million (13% of the population) in 2010 to 300 million (31%) in 2050.

“A slower growth rate coupled with little population growth makes China an unattractive export market,” Norland said.

The world population is growing in a way that it hasn’t before, Norland said. The main growth will come from Africa, which could add 75% to its population over the next few decades. That means about half of the new people by 2040 will be on the African continent. It will be a difficult market for exporters, because the continent is highly fragmented.

India will also experience population growth in the range of 30% in the next few decades. The nation has a lot of upside potential with stable economic growth at 7% and a low debt level, Norland said. But it does present some challenges, particularly the differences in diet and a lack of animal protein consumption.

“The question for farmers is can they grow crops that please the Indian consumer or can we market to them products that are currently not part of their diet but could be like corn,” he said.

India and Africa have low per capita consumption, meaning there is tremendous potential for increases in caloric intake.

“The growth focus in the next 25 years will be in Africa and India,” Norland said. “If we are able to continue to advance technologies, it may be that we continue to increase supply and allow broader groups of people to increase per person calorie consumption without causing the prices of these goods to rise relative to the prices of other goods in our economies.”

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South American Outlook

Marshall also reviewed economic factors and market conditions in South America, specifically Argentina and Brazil. The new political regime in Argentina has enacted several policy reforms that have impacted the agriculture community.

First, the peso was significantly devalued to move to a single exchange rate regime. The official rate moved from 9.78 ARS per U.S. dollar to 13.3 ARS per U.S. dollar on Dec. 17, 2015. This resulted in a sharp spike in corn exports, beyond the usual seasonal uptick, Marshall said.

“This marketing year has seen shipments outpace expectations,” he said.

Export taxes of 20% on corn and 23% on wheat were immediately removed, while a gradual plan was introduced for soybeans. Tariffs for soybeans were immediately reduced from 35% to 30% and will continue at a rate of 5% per year over the next seven years. For soy meal and oil, there was an immediate reduction from 32% to 27%.

Changes in export taxes have caused an increase in soybeans, outpacing the last two marketing years.

“Policy changes in Argentina coupled with currency softness incentivize area expansion – corn in the near term and soy in the longer term,” Marshall said. “Going forward for this next season and potentially the season after, we’ll see some pretty significant upside in planting. Some initial estimates have shown an increase from 8.5 million acres to 10.5 to 11 million.”

Brazil has experienced notable currency headwinds as well, Marshall said, which has led to counter-seasonal behavior in corn exports. Typically in March-May there is a slowdown in Brazilian exports with more consumption happening in the domestic market rather than export.

“The prices being received by Brazilian growers on the export market were some of the highest on record,” he said. “That incentivized a lot of extra exportation of corn that otherwise would have been destined for domestic markets. That caused some domestic shortages for the animal feeding sector.”