A changing agriculture landscape

Fundamental changes in agriculture markets make return to "normal" unlikely

Agriculture markets, always volatile and opaque, are now facing a powerful combination of forces that accentuate those traits at a time when food – how it’s produced, who consumes it and how it trades – is under ever greater scrutiny.

The market was already shifting from a hub-based structure to a more decentralized market of markets, driven by underlying conditions. On top of that is the combined impact of economic, environmental, governmental and other forces that are creating new levels of volatility, opacity and risk in the agriculture market.

The magnitude of change means prior methods of managing risk and monitoring the market have become obsolete. There’s now a premium on independent market and price intelligence that enables participants to adapt to a changing environment.

The immediate challenge is not the long-term dynamics, where modest growth in cropland is offset by continued gains in crop yields. A growing population and an expected increase in calorie intake per person combined with increasing demand for biofuels to support sustainable transportation will result in growing pressure on the agriculture market to feed mouths and machines, even with yield growth.

The immediate challenge is the short-term dynamics that affect the market now and decrease the ability for traders to rely on outmoded models or methods to understand, or price, the market.

5 key forces affecting the market today

1. Bumpy Covid-19 recovery

Broader economic changes are taking place as nations seek to overcome the impacts of Covid-19. The combined effect of monetary policy and supply chain issues has increased inflationary pressures (5.3% food inflation in the US: Oct 20 to Oct 21). Transport and logistics bottlenecks are complicating delivery and causing material loss of produce that is creating a 5x increase in container costs. Inflationary pressures are also cascading to farmers who are seeing increased fertilizer costs driven by elevated input prices – creating margin pressure and influencing planting decisions. Monetary policy is changing in part to address inflation – the cost of money will increase across the globe and suppress agriculture prices in 2022. The result is that macro economics are having a sizable and specific impact on market volatility.

2. Russia’s uncertain tax regime

Evolving and unstable tax policy in Russia, along with broader changes in government policies, can significantly impact price and compel market participants to look elsewhere for trade.

3. China’s slowing growth rate

China’s economy, affected by the combined impact of significant debt, a possible real-estate bubble, and slowing growth, may significantly impact agriculture supply and demand.

4. Extreme weather

Severe and unseasonal weather is affecting yields and transport, from critically low rivers in Argentina, heavy rains in China and Germany, fires in Greece and the US, hurricanes, cyclones, and severe cold that are predictably causing unpredictability.

The last few seasons are awash with examples; the 2018/19 season when US rains truncated corn’s growing season and flooded logistics and fields washed out production. Quality issues arose across portions of the US and actively drove shifts in trade flows. Or 2020, when South America’s La Nina trashed Argentina’s Up River hub, but the nation still delivered near-record export and production levels. Finally, in the Black Sea, where prolonged dry conditions last year blunted sunflower crop production and fed into a wider surge on oilseed markets.

5. Sustainable transport

While biofuel-powered cars will see moderate growth (5.4% of road transport in 2025), we will see hyper-growth from other transportation modes, as illustrated by the soaring demand for sustainable aviation fuel.

Uncertainties abound

Any one of these factors can affect the market. But all of them – at the same time – are buffeting the agriculture market and creating a higher level of uncertainty and risk for planners and traders.

The reality is that this is not a blip and we will not collectively return to some prior normal. The underlying shift to a more decentralized market combined with distinct factors such as an economic policy to recover from Covid-19 and address inflation, extreme weather, and governmental policies are driving new and elevated levels of volatility and opacity into the agriculture market.

Old models to gain insights and understand price dynamics are no longer fit for purpose and can create a competitive risk to traders that rely on the prior way of working. More to the point, competitive advantage will go to those able to capitalize on market and price signals that give a persistent, reliable view of where the market is and is going.

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