The expression emerging markets has a whole new meaning for farmers across the globe.
In the late 2000s, food demand from China and India’s growing populations sparked a frenzy for agriculture investment and sent prices soaring. Now, the other two big emerging markets -- Russia and Brazil -- are behind the collapse in prices as farmers ramp up grain production and stockpiles swell. Weak currencies make it profitable for growers in those countries to boost output and may prolong the bear market for another three to five years, according to Dan Basse, president of researcher AgResource Co. in Chicago.
Farm commodity prices have fallen for three years, the longest streak in more than a decade, as bumper harvests filled silos and overwhelmed demand. The Bloomberg Agriculture Subindex slipped 0.7 percent in 2016 and the International Grains Council has said global grain stockpiles will stay near a 30-year high next season.
"We all bought into this thesis of having to feed nine billion mouths by 2050," Basse said in an interview at the company’s Cereals Europe conference in Geneva. "Unfortunately, at the moment global grain demand is not keeping up with the rise in production."
The Bloomberg agriculture index doubled in the four years after the global economic crisis of 2008 -- spurred by emerging-market growth and policies that increased demand for biofuels. Farmers responded by planting more and prices collapsed.
The decline in currencies for countries like Russia, Brazil and Argentina mean farming is still profitable, even at lower crop prices. That’s encouraged even more output.
"There’s an old saying in the commodities market that goes: there’s no cure for low prices like low prices," Basse said. "Unfortunately, the low prices aren’t the same for everybody anymore. It used to be that low prices really meant that the EU and the U.S. cut back. Now we have Latin America, we have our friends in the Black Sea that are really ramping up."
Brazil will overtake the U.S. as the world’s largest soybean producer in the 2016-17 season and output may reach 106 million metric tons, Basse said.
In Russia, farmers managed to increase production even after a drought. The harvest will expand about 1 percent to 61 million tons this season, AgResource forecasts. Argentina will boost wheat by more than 50 percent and corn production by more than 30 percent also due to a cut in export taxes.
"We don’t have any substantial growth in global grain trade outside of elevated soybean demand for China,” Basse said.
China is ending a corn stockpiling program and will move to reduce existing inventories, adding to bearish sentiment. Cheaper corn will hurt demand for soybean meal by 10 to 12 percent in the livestock industry and lead to lower imports.
Soybean production in China will rise to 14 million to 15 million tons next season, from just under 11 million tons now, Basse said. In the next two to three years, it could reach as high as 19 million tons, he said. The pace of China’s soybean imports may slow by 50 percent, he said.
"We see oversupply as the main thesis," he said.
AgResource 2016 Price Forecasts
Chicago contracts will reach as low as:
- Wheat: $4 a bushel. Current price is $4.60.
- Corn: $2.75 a bushel. Current price is $3.61.
- Soybeans: $7.70 a bushel. Current price is $9.05.