Demand is always important. But for feed grains and biofuels, seldom has that mattered more than for the 2014/15 crop, with prospects of record yields, growing stocks and falling prices.
"How low can grain go? It boils down to exports," says Jean Philippe Gervais, chief agricultural economist for Farm Credit Canada.
In large part, that export outlook will be determined by China and a host of new demand players such as India. Internal factors such as income growth and demographic shifts must be heeded. That’s according to experts who gathered this week for the Federal Reserve Bank of Kansas City’s Ag Symposium.
Feed grain prices are more likely to model the low end of USDA’s forecast range, Gervais says. The agency has projected new-crop corn between $3.65 and $4.55. Prices likely will plateau over the next decade, though there is little risk that they will be below 1990 levels.
"There is a fairly wide consensus around global production increases for commodities, so pricing and income all hinges on demand," Gervais explains.
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But even if food demand increases by 60% because of world population growth and changing diets—as projected by the Food and Agricultural Organization (FAO) of the United Nations—"world production would need to increase at levels much lower than in the past," he says. "This is really overlooked."
Although increases in gross domestic product (GDP) are often referenced as the key to future export growth, Gervais says another factor is more important. The global population also is rising, albeit at a declining rate.
"The biggest driver is incomes, not GDP," says Gervais. As incomes approach $20,000 in developing countries, the growth rate for food softens. Red meat consumption has upside in countries such as China, Russia and Brazil even though it is expected to stabilize in western countries.
Those factors mean the outlook for future grain demand is positive, even though prices will be lower in the next 10 years than in the preceding decade, Gervais says.
Policy also matters, Gervais says, as evidenced by the level of ag trade among the U.S., Canada and Mexico stimulated with the North American Free Trade Agreement. He foresees more bilateral trade agreements, but negotiating those deals isn’t always easy because countries have different values.
China Outlook Mixed, But India Rises
Although the global demand outlook is strong, projections for Chinese demand concern Gervais. USDA’s long-term projections assume linear growth of Chinese meat demand.
"But the linear trend will change," he cautions. At some point over the next five to 15 years, "demand growth will start to slow down."
Already, China’s economy is slowing down. But that might be good for North American grain exporters because it could give China the chance to adjust to a new economic reality. Growth in recent years, combined with a smaller workforce, could lead to higher wages that hurt Chinese competitiveness.
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As a result, "China has no choice but to increase productivity," Gervais says. "Its challenge is to rebalance its economy." Investment and consumption must be aligned more closely.