As we head towards the second half of 2011, the crop production picture of northern hemisphere crops looks pretty up-in-the-airy, leaving supply outlooks a little confused, as a bunch of crops could either recover from early struggles, or slump if stressors go on much longer.
But the picture seems far more murky for demand, and yet we in the ag markets world seem to spend much less time on demand than supply. I think that’s because demand is far more nebulous, and supply is simpler, even if tough to get right. After all, you can conceivably work out how well a crop out there somewhere in the world is growing, but you’re not nearly as likely to be able to figure out the strength of demand from middle class Chinese consumers who are moving up from crap oil to high quality vegetable oils like imported Canadian canola oil, and moving up from mostly rice, grains and vegetables to more yummy pork-assisted suppers -six months from now. What’s going to keep them confident and buying more? What’s going to rattle them and send that back to rice and noodles?
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Commodity demand is all about the confidence of buyers in future economic strength and the confidence of consumers, and that’s a heck of a hard thing to work out. So we tend to just look at the present trend, and assume that continues. And then we make up some numbers to fit that outlook.
Generally it’s not a bad approach, but at times confidence can collapse, and commodity prices – including crop and meat prices – can collapse right along with it. Remember 2008? First an outlook for a continually booming world economy among almost everybody suggested there’d be tonnes of confidence among consumers around the world to buy everything, so commodity prices got priced sky-high. Then the U.S. financial system imploded, and expectations of confidence collapsed and prices went into the toilet. Did supply play much of a role with that? On the ag side, you could claim it did, because the northern hemisphere produced bigger crops than expected. But that doesn’t explain why ag prices fell almost exactly the same speed and distance as copper and crude oil.
Supply is a pretty real thing, but demand is darned awkward. It’s just the expectation of a completely psychological thing. Most commodities don’t really need to be bought, especially if people are scared. Sure, you need to buy food, but you don’t need to buy as much. So in the ag world we tend to focus relentlessly on supply, and give much less attention to demand. We have an unbalanced equation.
I’ve been trying to think about demand a lot in the past couple of weeks, because I recall from the beginning of 2011 a lot of the analysts I listen to said they expected to see a strong first half of the year, but the second half could be ugly, as a bunch of cans kicked down the road get tripped over at the same time. I’ve been calling around various economists and market analysts and getting views, and the situation is exactly as many thought it would be at the beginning of the year: demand is a gigantic question, because a bunch of confidence busting things could happen – soon. Or not happen.
We have: 1) Eurozone debt problems and the likely bankruptcy of Greece et al; 2) the U.S. economy slumping back into stagnation after a weak recovery, as QE2 ends; 3) China trying to not come flying apart by clamping down on investment and spending, something that could easily go too far;
One export-focused economist I spoke with this week summed up the situation nicely, I thought. We are on the brink of a true recovery, in which booming economic growth will allow economies to recover at the same time as allowing governments to repair their finances without causing a recession – but the pile of economic troubles I listed above could stop the world ever getting over the brink we’re standing on and into that cheery world.
He also added natural disasters and continued political unrest in much of the Arab world as factors that could send a shock through the system that could turn confidence around.
That’s not a cheery outlook for farmers looking forward right now and hoping for higher prices, or at least for their crops to get into better shape so they can feel confident forward-selling them, but we should remember crop prices are still near historical levels and a few years ago we couldn’t have dreamed of these present prices.
And to leave you with a cheery note for the weekend, this economist and a leading analyst I also interviewed both said they think crop prices will be relatively insulated from possible broad commodity weakness, because corn is so very low-stocksy these days. Food is the last thing people will scale back on, continuing to consume it well after they have cancelled plans to buy flat screen TV, Tata cars, fancy new sunglasses and Winnipeg Jets season tickets.
But from the perspective of right now, I don’t think farmers should be assuming uncritical bullishness is the only way to look at the ag markets: supplies don’t look scary, but demand for what we produce is far from a sure thing.
