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12 Feb 2015
Are Decreasing Prices Threatening Crop Producers?
Global food prices fell in 2014, and cereals were no exception. Supply in 2014 exceeded demand for all major crops (barley, corn, oats, rapeseed, rye, sorghum, soybean, sunflower and wheat) in the marketing year (MY) 2013/14, thus reducing crop prices. The only exception was the price of rice which increased because major producers faced harsh climate conditions. The 2014/15 marketing year shows a similar pattern for cereals in general, but a further drill down into the different types of commodities and the factors affecting their supply and demand indicates that the underlying dynamics are different.
In 2014 world production of barley, oats, rye and sunflower oilseed decreased by 3.8%, 5.4%, 5.2% and 6.9%, respectively. This reflected the fact they all began the year with increased stocks stemming from the over-supply and falling prices that occurred in the 2013/14 marketing year. Official forecasts predict domestic consumption to recede in 2015, despite falling global prices, but not enough to result in increasing end-year stocks, especially since exports are expected to increase, adding to the demand side. World corn production, on the other hand, increased by 391 thousand tons in 2014 (0.04%), despite higher beginning stocks and falling prices, while domestic consumption in 2015 is expected to increase by 23,995 thousand tons. However, with exports expected to drop by 18,293 thousand tons in 2015, corn supply is expected to exceed demand for another year. What causes these opposing movements?
One factor that underlies these differences is the increased value of the US Dollar, as costs of production in agriculture are usually paid in local currencies. The European Union is the major producer of barley, oats, and rye, and Ukraine of sunflower seeds, while the major corn producer is the US. Thus exports from the EU and Ukraine are cheaper due to their weakening currencies and this in turn lead to reduced domestic supply and increased domestic prices, while in the US the opposite effects are in force.
WorldTrend Database
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+ Commodity Supply and Demand
+ Table 006-029: USDA: Forecast: Cereals/Oilseeds: Wheat/Coarse Grains/Rapeseed/Soybean: Area and Yield
+ Commodity Price Index
+ Table IMF.IFS: Commodity Price Index: Annual
+ Global Economic Monitor
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+ Table: Real Effective Exchange Rate: North and South America |
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However, the exchange rates are not the only factor at play. US-supplied sorghum and soybean exports from North America are expected to increase over the 2014/15 MY by 1,478 and 2,202 thousand tons respectively. At the same time, stocks of sorghum are predicted to decrease by September 2015, while soybean stocks are expected to grow. Exports of rapeseed, a crop produced in significant quantities in the EU, are forecast to decrease, resulting in a build-up of end-period stocks in 2015.
One part of the explanation lies in the particular use of these commodities – as oilseeds for the production of biofuels. With oil prices dropping sharply, bio-fuel demand is expected to decrease. However, when lands were sown a year ago, such developments could not have been anticipated, resulting in harvested amounts likely to exceed actual demand in 2015. The size of the harvested areas of biofuel commodities seems to be influenced by sustained oil price growth with a year’s lag, more than it is influenced by the USD value, even though both seem to be related to food prices and production.
What of increasing stocks of sorghum then? The difference between them is that one of the main importers of the soybean and consumer of rapeseed, the EU, reduced its demand in 2014/15 MY, while at the same time East Asian (China-driven) interest for sorghum rose by 38% in the same period, due to local Chinese policies supporting domestic corn prices and restrictions on imported genetically-modified corn, turning sorghum into a viable corn alternative.
Political factors contribute to the behaviour of wheat trends as well – prices of wheat started decreasing with the onset of the marketing year in June 2014, following oil prices, with increased production and larger beginning stocks, but started shifting up afterwards due to exports impediments and trade risks in the fourth largest producer – Russia.
With political and climate risks still to unfold it is hard to tell where crops prices will find an equilibrium, but it is likely that prices for different commodities will take different directions and some economies and producers might face further disinflationary pressure.
Contributed by Hristo Nikodimov, CEIC Analyst
» No Guarantee the ECB’s “Magic Wand” Will Work
» Will Market Demand Correct the Negative Oil Shock?
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+ WorldTrend Database
+ Commodity Market
+ Commodity Price Index
+ Table IMF.IFS: Commodity Price Index: Annual
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+ WorldTrend Database
+ Commodity Market
+ Commodity Supply and Demand
+ Table 006-031: USDA: Forecast:Cereals/
Oilseeds: Wheat/Coarse Grains/Rapeseed/
Soybean/Sunflowerseed: Supply and Use
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