No big jump expected for grain prices

Grain farmers are not going to experience the sky-high prices that accompanied the last global financial crisis, says one of the world’s leading food security experts.

Josef Schmidhuber, deputy director of the trade and market division of the United Nations’ Food and Agriculture Organization, said the circumstances of the Great Recession of 2007-09 were entirely different than those of today’s Great Lockdown.

In fact, prices for most major grains have been slumping in 2020. The FAO’s Food Price Index fell 7.8 percent in March compared to February. There has been a massive three-month slide in the price of corn, sugar and vegetable oil.

“This does not suggest that we are running into a food security crisis,” he said during a recent webinar organized by Global Grain.

“Quite the opposite. We see very tame price developments practically across the board.”

That was not the case during the Great Recession. The main difference was that grain stocks were at very low levels before and during the Great Recession.

“That made the system super vulnerable and led to a speedy run-up in prices,” said Schmidhuber.

World cereal grain stocks are ample today by comparison at about 850 million tones, compared to 470 million tonnes at the start of the Great Recession.

“Compared to the situation that we had in 2007-08 we nearly have twice the stocks,” he said.

The scant stocks situation at the start of the Great Recession meant any small supply shock could cause a major price hike and that is exactly what happened when Australia had a bad crop and the European Union and other countries had mediocre harvests.

At the same time, there was a biofuel demand shock as ever-increasing mandates combined with rocketing energy prices to siphon off a considerable amount of ethanol feedstocks such as corn and sugar.

That double-whammy drove grain prices to “stratospheric levels,” causing food security problems around the world, said Schmidhuber.

Today, it is the exact opposite scenario. Biofuel demand has evaporated due to plummeting crude oil prices and COVID-19 travel restrictions. The U.S. ethanol industry is operating at about half its capacity.

That will result in even higher global corn stocks at the end of 2019-20.

And then there is African swine fever, a disease that has ravaged the global swine herd. That has greatly reduced feed demand, further bolstering corn and soybean stocks.

One concern is that nearly three-quarters of the world’s grain stocks are in the hands of five producers — China, the United States, the European Union, India and Russia.

China and India are not apt to respond to any food security issues because they have serious issues of their own.

Still, the world is unlikely to run out of basic food supplies any time soon, and that is going to keep a lid on prices, unlike what happened during the Great Recession.

Some Black Sea countries are implementing export caps, but they are within normal volumes, so there won’t be much restriction of trade.

A final difference between the two crises is that the U.S. dollar is strengthening now compared to a precipitous decline during the Great Recession.

Competing commodity currencies have depreciated 15 to 30 percent against the American currency since the start of 2020. That is making trade more profitable for many key exporting nations.

There are concerns that COVID-19 will have lasting impacts on trade. The World Trade Organization is forecasting a bigger contraction in world trade than what happened during the Great Recession. And that is under its most optimistic scenario.

However, Schmidhuber doesn’t think that analysis applies to agricultural trade because demand for food is inelastic and the ability to replace imports with domestic production is severely limited.

Agriculture trade largely occurs in bulk shipments that don’t rely much on labour, which could be the big limiting factor for trade going forward.

“It is a highly capital intensive, highly automated process with little human interaction,” he said.

And bulk shipping rates are at 3 1/2 year lows, or about five percent of the peak during the Great Recession. Again, that bodes well for trade.

Finally, agriculture value chains are simple compared to the manufacturing sector. For instance, a mobile phone manufacturer may have to rely on 70 countries producing more than 1,000 components.

“We are way less complex than that,” said Schmidhuber.

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