It turns out the analysts were half right. The lower end of the price range for wheat, corn and soybeans has been higher over the last decade. The days of $2 corn and $6 soybeans appear to be in the rearview mirror as demand for those commodities continues to trek upward thanks primarily to an increase in living standards and purchasing power in many developing countries.
But the decade of volatility that was forecast by some analysts hasn’t materialized as the continued improvement of biotechnology, crop inputs and other production methods coupled with a remarkable four-year run of near-perfect weather in the world’s biggest production regions have led to a glut of grain that has put significant downward pressure on the bottom lines of producers and agribusiness companies alike.
The USDA forecasts that net income for farmers in the United States will fall to $62.3 billion in 2017, about half of their earnings in 2013. And recent quarterly earnings reports from several of the world’s biggest grain traders have shown sharp revenue declines in their grain origination and processing segments.
|Soren Schroder, Bunge CEO|
Bunge CEO Soren Schroder, in a Nov. 14 presentation at the Morgan Stanley Global Chemicals and Agriculture Conference in Boston, Massachusetts, U.S., said he believes this “highly unusual” period of global grain glut will self-correct through economics at the farm level and changing weather patterns, but that a permanent shift may be taking place in some pieces of the agricultural chain, namely the U.S. grain origination and export industry.
“If there’s one place in the world where we do see that there’s a shift and there is a structural amount of overcapacity that somehow has to be rationalized, it’s in the U.S. grain origination and export industry,” he said.
To a certain extent, global agriculture is a victim of its own success. Seed companies have created products that are more resistant than ever to drought, plant disease and insect infestation. Seeding equipment is becoming more precise and increasingly cost-conscious farmers are applying fertilizer and chemicals more efficiently.
The corn belts of the world are expanding, too. Monsanto is working to develop what it hopes will be North America’s fastest-maturing corn, a variety that matures in 70 days, which will be perfectly suited to northern climates such as Western Canada and Ukraine.
Monsanto projects that Western Canadian corn plantings could multiply 20 times to 10 million acres by 2025, adding 1 billion bushels, or nearly 3%, to current global production. Soybeans also are spreading across Canada, with farmers having seeded a record-high 7.3 million acres in 2017, up 75% over the last five years.
Global corn production is more geographically balanced than ever, with 12 countries producing at least 10 million tonnes of corn annually, up from 10 countries with that output seven years ago. As the number of major crop-producing countries expand, it only stands to reason that a drought in a specific area, such as the United States or Western Europe, will have less of a shock on grain prices than it did in the past.
While keeping in mind that nothing lasts forever, it appears the stage is set for a medium and perhaps even long-term forecast of low volatility and depressed prices in the global grain market.
A decade ago, high prices proved to be the cure for high prices. The reverse also has been true over the years, but it seems now that axiom is being put to the test like never before.