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Global Commodity Outlook: Thriving on the Commodity Tightrope

Spring 2016

The recent pain of depressed commodity prices across grain and oilseed markets has left many asking questions like, “What’s the root cause of the falling prices?” and “Will this pain continue or will prices rebound?”.

A simple scan of various news sites for information that could impact commodity markets yields headlines that might be obvious in their market impact and others that are more subtle, but may nonetheless have a large impact on commodity markets overall (Figure 1). As agribusinesses search for insights to try and make sense of commodity markets and where they might be heading, it is important to understand the history/current state of the market as well as identifying possible future trends.

Figure 1: Recent News Headlines
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Over the last ten years, volatility has been rampant across key crops like corn, soybeans and wheat. For example, record prices were seen in 2012 (largely due to the impact of drought conditions) with soybeans reaching $17.90/bu in July and corn reaching a price of $8.49/bu in August. This drought was followed by record crops in 2014 & 2015, depressing prices by almost half to current levels (Figure 2).

Figure 2: Historical US Production and Average Yearly Price Received
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Pulling back the curtain to understand the reasons for recent commodity volatility reveals both obvious and subtle drivers, including:

  • U.S. ethanol mandates, which stoked corn demand and prices for the last 10 years, have not been increased, leading to ethanol-related demand plateauing at around 5B bushels.
  • Weather volatility has led to some years of low production due to drought and therefore record prices, as well as years of record yields (national corn yield of 171/bpa in 2014 and national soybean yield of 48/bpa in 2015) and substantially suppressed prices.
  • The recent strength of the U.S. dollar relative to currencies of many of our trade partners has in some cases cancelled out much of the buying benefit of lower commodity prices, causing exports to stall.
  • Substantial production increases in South America and the Black Sea region continue to erode the U.S. share of world trade. (See Figure 3)
  • China’s economy has had an increasing impact on agriculture commodities, spurring demand for more protein. However, complications due to commodity price protection for domestic production of Chinese crops also skewed international trade and built up Chinese commodity stocks.

Figure 3: 5-Year Regional Exports by Commodity (Million MT)

Corn graphic Global articleSoybean graphic global grain article

While many factors have gotten us to where we are today, key questions still linger: “where will these headwinds take us?” and “are we in a new steady state of lower prices or will there be future volatility creating further swings?”. Long-term baseline projections from the USDA indicate that the current state of farm-level prices for corn, wheat, and soybeans is likely to trend pretty consistently over the next ten years. In addition to the USDA projections, The Food & Agricultural Policy Research Institute (FAPRI) also projects corn prices to remain at or below the $4.00/bu mark through 2020. Even with projections that depict a pretty consistent future state, there are inherent uncertainties impacting the markets. Given the future uncertainties, it is more crucial than ever that agribusinesses dealing directly and indirectly with commodities not only deftly manage pricing risk, but also have the foresight to maximize future opportunities- both domestic and international.

Savvy agribusiness leaders should be asking themselves, “What are potential factors that could impact commodity prices even further?” While no one can predict the future, possible scenarios resulting in a positive impact on prices could include an increased demand for protein by many developing countries turning the corner (i.e., SE Asia and LATAM) or new biofuel mandates domestic or abroad. On the other hand, a global macroeconomic recession or substantial yield boosting technologies without matching demand could cause prices to remain static or even decline. Successful companies should have a well-defined risk management plan with the ability to navigate the impact of different commodity price scenarios.

While navigating periods with headwinds can be turbulent, The Context Network has decades of experience along with in-country expertise throughout the world to identify key trends and factors that could impact our global industry. Context is well positioned to help organizations across the agribusiness value chain to synthesize and understand the myriad of factors, both obvious and subtle, that impact the overall industry and their specific bottom lines. For more than 20 years, Context has helped agribusinesses navigate the price effects of commodity supply and demand, serving as a partner to clients in developing strategic frameworks to capitalize on market opportunities. With our recent acquisition of expertise in commercial and specialty commodity systems and risk management, we are able to uniquely tailor our consulting services to our clients’ specific needs.

For more details about how Context can assist your organization in this space please contact:

Mark Holland  | 870.919.6800 | mark.holland@contextnet.com
Jason Jimmerson | 406.581.9798 | jason.jimmerson@contextnet.com
Kim Kazemi | 406.544.6511 | kim.kazemi@contextnet.com
Tyler Uden | 217.493.2136 | tyler.uden@contextnet.com

Sources
Des Moines Register
Financial Times
The Ethanol Mandate & Corn Price Volatility
Trading Economics
USDA NASS
USDA Foreign Agricultural Service
USDA Grain & Oilseeds Outlook
USDA Agricultural Outlook Forum:
USDA – ‘Slowing Economy: Effect on China’s Agricultural Imports’
US Grains Council – ‘China’s Potential Future Imports of Feedgrains & Oilseeds’
Farm Service Agency – ‘2016 Grains and Oilseeds Outlook’
USDA Agricultural Projections to 2025
FAPRI US Baseline Briefing Book – Projections for Agricultural & Biofuel Markets
Bloomberg Argentinian Peso Article Headline
US News & World Report El Nino Article Headline
USDA Foreign Agricultural Service