There are no reasons to think that crop prices will get much better unless farmers cut millions of acres somewhere in the world.
That was a theme running implicitly in presentations and discussions during Cereals North America, a major crops market outlook conference held last week in Winnipeg.
“As we think globally, to balance things out over the next three to five years, I need to reduce 17 to 20 million acres somewhere, somehow,” said Daniel Basse, president of AgResource, which hosts the conference with G3.
Basse presented a similar outlook last year, and the market has evolved to meet that year-old outlook. He sees more of the same unless something significant changes in the supply and demand math.
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The change isn’t likely to be booming demand growth, which along with increasing ethanol use of corn drove market gains from 2006-12.
CME Group senior economist Erik Norland said farmers and the agricultural commodities business shouldn’t be assuming prices will rise because of the world’s growing population.
People may have trouble imagining how farmers will be able to meet the growing demand for food from an increasing world population, but market history suggests farmers do indeed produce more with time and real prices fall over the long run.
Agricultural goods today cost about half of what they cost in 1965 in real terms, he noted, yet the world population is much larger and richer.
“That’s really quite extraordinary,” said Norland.
The United States and Japan have begun seeing a reduction in daily calorie consumption, so that might also occur in places like China, which many grain bulls are banking on having ever-increasing food demand.
Population growth in countries like China might also stall as people become richer and urbanized and don’t want the costs of big families.
The conference also heard experts on China discuss a variety of topics from the ending of the one-child policy to the intricacies of feedgrain import policies.
However, another theme was that the years of China’s booming increases in food demand are likely over and growth in the future will be much more modest. That is combined with another bearish factor: no “new China” has emerged to take the country’s place as the world’s demand driver for food and feed.
The situation for U.S. farmers is the worst in the world. Its farmers’ net returns have collapsed as prices fall and the U.S. dollar soars.
“We have margins contracting, we have prices going lower, we have oversupply,” Basse said in an interview.
That isn’t true everywhere, analysts noted. Grain prices converted to local currencies are sometimes at record-high levels in Argentina, Brazil and Russia, which doesn’t encourage farmers to slash acres.
That’s why Basse and other analysts expect U.S. farmers to eventually reduce acres, but how and when that will happen depends on how foreign exchange rates affect farmer returns and on government programs such as those in the U.S. that protect crop returns from falling too far too fast.
Canadian farmers are in a better situation because the loonie has fallen 25 percent. However, they are still at a disadvantage because currencies such as Brazil’s real and Russia’s ruble have fallen 50 percent.
