Photos courtesy of Chris Lyddon.
Emily French, managing director of Consiliagra, discussed the challenges that face the food sector. Food markets are going to be affected by the improved living standards of people surging into urban centers. The “21st century food wars” over calories, food safety fats, aging, disease and bioterror will continue. She said Asia is the epicenter of this trend, noting that all the people of North America, Europe, Japan, Australia and New Zealand combined account for less than 10% of the world’s food consumers.
“Is this the calm before the storm or rather are we in the eye of the storm?” she asked. “Will agriculture be allowed to feed 9 billion people? The technology exists, but it is being withheld. The less we spend on food the more time we spend complaining about it. I personally believe it will take a weather event. At some point in time we will have a supply shock.”
After weather, there is another great threat to the industry.
“The funds, or managed money, is holding at or near-record positions in grain,” she said. “Does money start shifting back into commodities?”
She started with wheat.
“The consumption story is not nearly as sexy as what we see in corn,” she said. “Consumption is forecast to rise about 1% in the year.” It has risen by 20% in the last decade.
“Feed wheat and the feed wheat segment of demand will need to take on a bigger role for demand growth,” she said. “There is an argument that wheat is non-biotech. On June 1, 2018, if the world did not produce any more wheat, we would have 120 days of wheat on hand. You’ll draw down that production spread quite quickly. Wheat has the largest supply cushion.”
However, the picture changes if you take out India and China, which hold around 51% of world wheat stocks.
“That wheat will likely not see the light of day,” she said. “When they come into the market it will be on the import side.”
Take out India and China and the supply cushion goes down to 90.5 days.
“Wheat is starting to become much more interesting to me,” she said.
She turned her attention to the Black Sea.
“Its percentage of worldly production actually has been on the steady rise,” she said, noting that its share of exports had also risen. “You have gone from 5% in the mid-90s, to 32% this year. Until you have a production issue in the Black Sea, it’s difficult to build a bullish case.”
Europe is the backstop on prices, she said.
“You also have had the emerging low-cost producers of southeast Europe,” she said. “Removing China and India, they hold about 90% of the world exportable surplus.”
Then there is the United States, which she described as “the world’s wheat storage tank.”
“Exports can never be banned,” she said. “We will have another record winter planting of wheat in the U.S. Exports account for 57% of U.S. production and yet the U.S. will only account for 15% of world trade.”
That compares with 40% from the Black Sea. The United States plays a big role in stocks.
“The U.S. will hold 20% of those 90.5 days,” she said. “The biggest price risk on wheat is the funds. We are range bound for the next three to six months barring any weather threat.”
She then discussed the corn market.
“We have a record yield out of the U.S.,” she said. “We finally passed the million-tonne demand number in corn. Biofuels was the demand driver for the past decade. That is slowing. Feed is now going to be that demand driver. It’s not as transparent as ethanol. You might see some surprises on the demand side.”
China holds massive amounts of corn that will never see the light of day in the export grid, she said.
“With China, the supply cushion is about 70 days,” she explained. “You remove China and the supply cushion goes to 55 ½ days. Nearly 51% of those 55 ½ days is in the U.S. The U.S. is the world storage tank.”
Just as with wheat, the U.S. has the advantage of transparency.
Brazil’s safrinha crop is the one to care about in the world market.
“If you are going to have a story in corn, there has to be an issue with the safrinha crop,” she said.
The funds are at a record short.
“Corn is the one on the charts that fills the gap,” she said. “Mind the gap. You have to have a supply shock out of South America.”
But there is also the question of the relationship between corn and wheat.
“Wheat, at some point in time, needs to price itself as a feed ingredient,” she said.
Oilseed consumption rising
There have been sharp rises in oilseeds consumption.
“In two decades, world soybean consumption is up 238%,” she said. “Canola is equally impressive, up 214%. We have no clue what it is going to take to ration that demand. Nine hundred million people in the world are classified as middle-class. The middle-class in China has doubled since 2000.”
She put the supply cushion in soybeans at 104 days.
“The market will not break the lower,” she said. “We are very aware that we need to keep producing oilseeds. There will be a supply shock at some stage, but it might take 20 years. If and when there is a production shock, especially in Brazil, get out of the way.”
Brazil’s domestic demand growth is flat.
“The more it produces the more it exports,” she said. “It is forecast to export 60% of its 108 million-tonne production number. It used to only export 40% 20 years ago. It will account for 43% of world trade.”
The role of the United States has changed.
“It is transitioning to become the world storage tank or backstop for soybeans as well,” she said. “Right now, it’s Argentina that is the world soybean export tank. It will bite America tremendously that it removed itself from a seat at the table in the TPP.”
There have been some big changes in other countries such as Bangladesh, which imported nothing 10 years ago.
“It will import 1 million tonnes,” she said.
Pakistan imported nothing four years ago.
“This year two million tonnes,” she said. “There’s so many demand stories in soybeans. Meal is going to be the one to watch, especially if funds get their teeth into it. The only thing soy oil has going for itself is the U.S. biodiesel program.”
Synchronized global growth
Erik Norland, executive director and senior economist with CME Group, discussed the macro-economic situation.
“For the first time in 10 years we have synchronized global growth,” he said. “When the economy grows globally it has tremendous impact on demand for certain agricultural goods.”
He also highlighted that options were “incredibly inexpensive” in the corn and wheat markets.
Politics can create surprises and uncertainty.
“In the United Kingdom the other government is breaking down into chaos,” he said.
He gave the expectation that the opposition leader, Jeremy Corbyn, could be prime minister within 12 months as an example of the uncertainty in the world and wondered at a market in which currency options are trading so inexpensively.
“Central banks are creating huge amounts of money,” he said, noting that their balance sheets are shrinking. “This will eventually create the conditions where we have a much higher volatility.
“If we do have a La Niña, La Niña’s are traditionally associated with much higher volatility. The market could be setting themselves up after this period of complacency for a big move. This very calm period may last another 6 or 12 months, but it is not going to last forever. You get a sense today that the real bubble is in government bonds.”
That is especially the case in Europe with low yields on the bonds.
“We have these colossal levels of debt around the world that eventually have forced interest rates to very low levels,” he said.
There is one exception to a very positive picture, he said, and it relates to China, which has several problems.
“They have enormously high levels of debt,” he said.