2024 Elections Report: Risks & Opportunities for Commodities Sector
In the ever-evolving landscape of global commodities, the year 2024 stands as a pivotal juncture marked by transformative elections across diverse regions. As nations prepare to cast their ballots, the outcomes hold the power to shape policies and strategies that will significantly influence energy, trade relations, and resource management worldwide.
This report encapsulates the intricate intersections between political shifts and their repercussions on the commodities sector. London Politica’s Global Commodities Watch has made a selection of the most significant countries, and analysed the potential impact of elections based on election programmes, past policies, and scenario planning.
We’ve Got a Fungal Problem: A Looming Threat to Global Wheat Production and Food Security
Wheat is one of the most important staple crops in the world, providing food and income for billions of people. However, wheat production is facing a serious challenge from fusarium blight, a fungal disease that infects wheat ears and reduces grain quality and yield. It also produces mycotoxins, which are harmful to human and animal health. The fungus is influenced by weather conditions, especially temperature and rainfall, and is expected to worsen under climate change scenarios. This spotlight examines the current and projected impacts of fusarium blight on wheat production, prices, and security, and discusses the political implications.
Current Impacts of Fusarium Blight
Fusarium blight is a widespread and devastating disease of wheat, affecting all major wheat-producing regions in the world. The fungus lowers yields and reduces the quality of wheat grains by lowering their test weight, protein content, and germination rate. It also contaminates wheat grains with mycotoxins, such as deoxynivalenol (DON) and zearalenone (ZEA), which can cause acute and chronic health problems in humans and animals, such as vomiting, diarrhoea, reproductive disorders, immune suppression, and cancer. This presence of mycotoxins in wheat affects its marketability and trade, as many countries have set maximum allowable levels for mycotoxins in food and feed.
Fusarium blight outbreaks are highly variable and depend on several factors, such as the susceptibility of wheat cultivars, the timing and duration of flowering, and the weather conditions during flowering and post-flowering. Warm, wet, humid conditions during flowering favour infection by fusarium species, causing ear blights and seed-borne infection. Further rainfall and humid conditions allow secondary infections to occur, allowing further fungal growth and mycotoxin production. Therefore, fusarium blight epidemics are often associated with wet seasons or regions with high rainfall or irrigation.
In terms of specific numbers, the FHB epidemic has been reported to lead to a 10–70% of production loss during epidemic years. For example, in China, a 5–10% yield loss is common due to FHB, but it can reach up to 100% in epidemic years, affecting around 7 million hectares of wheat fields.
These factors can create a supply shortage, which in turn can drive up the price of wheat in the commodity market. However, the exact impact on wheat prices can vary depending on a range of factors, including the severity of the outbreak, the region’s reliance on wheat production, and the global wheat market conditions at the time of the outbreak.
Winter Wheat
Commodity wheat, sometimes referred to as winter or common wheat , accounts for the vast majority of production worldwide as it contains higher protein than other varieties, this allows for a wider range of uses and a higher number of possible products produced from the wheat itself. Winter wheat is planted in the autumn and harvested in the following summer. It is grown in temperate regions of the world, such as Europe, North America, China, and India. Winter wheat also provides soil cover and erosion control during the winter months.
Blight is much more common in winter wheat than in spring wheat because winter wheat has a longer exposure to the risk factors that favour fusarium infection. These risk factors include warm and humid weather during flowering, and susceptible varieties. Winter wheat also tends to flower earlier than spring wheat, which coincides with the peak period of fusarium spore production and dispersal.
Projected Impacts of Fusarium Blight under Climate Change
Climate change is expected to increase the frequency and intensity of extreme weather events, such as heat waves, droughts, floods, storms, and hail. These events can directly affect wheat production by damaging crops or reducing yields. However, climate change can also indirectly affect wheat production by altering the distribution and severity of plant diseases, such as fusarium blight.
The extent to which fusarium blight may affect the prices of winter wheat depends on several factors, such as the magnitude and frequency of fusarium epidemics, the availability and cost of fungicides and resistant varieties, the demand and supply of wheat in the global market, and the regulations and standards for mycotoxin contamination. Fusarium blight can reduce the quantity and quality of winter wheat, which may lower its market value and increase its production costs. Fusarium blight may also pose a threat to food safety and security, as mycotoxins can cause adverse health effects in humans and animals. Therefore, fusarium blight can have negative impacts on the income and welfare of farmers, consumers, processors, traders, and regulators.
Several studies have projected the impacts of climate change on fusarium blight using crop models coupled with disease models and climate scenarios. The results vary depending on the location, time horizon, emission scenario, and model assumptions. However, some general trends can be observed:
Climate change will advance wheat anthesis dates, the stage of the wheat life cycle that allows for full flowering, it is at this stage that wheat is vulnerable to blight and rainfall during this period is predictive of incidents of blight. Due to higher temperatures and shorter growing seasons this may reduce the exposure of wheat to fusarium infection during flowering, as the peak of infection may occur before or after anthesis. However, this may also increase the risk of heat stress and drought stress during grain filling, which can reduce wheat yields and quality.
Climate change will increase the incidence and severity of fusarium blight in regions where rainfall and humidity are projected to increase, especially during flowering. This may enhance the infection by fusarium species and the production of mycotoxins in wheat grains. However, this may also reduce the risk of water stress and increase the water use efficiency of wheat crops.
Climate change will decrease the incidence and severity of fusarium blight in regions where rainfall and humidity are projected to decrease, especially during flowering. This may reduce the infection by fusarium species and the production of mycotoxins in wheat grains. However, this may also increase the risk of water stress and reduce the water use efficiency of wheat crops.
Implications for Wheat Prices and Security
The impacts of fusarium blight on wheat production, quality, and trade have significant implications for wheat prices and security. Wheat prices are determined by the interaction of supply and demand factors in global markets. Supply factors include production, stocks, trade policies, weather shocks, and diseases. Demand factors include consumption, income, population growth, preferences, and biofuel policies. Wheat security refers to the availability, accessibility, utilisation, and stability of wheat for food and feed purposes.
Fusarium blight can affect both supply and demand factors of wheat prices and security. On the supply side, fusarium blight can reduce wheat production by lowering yields and quality. This can create a supply shortage in domestic or international markets, leading to higher prices. Fusarium blight can also affect wheat trade by reducing exports or increasing imports. This can create a trade imbalance or a trade disruption in regional or global markets, leading to price volatility. Fusarium blight can also affect wheat stocks by reducing storage or increasing disposal. This can create a stock depletion or a stock accumulation in national or global markets, leading to price instability.
On the demand side, fusarium blight can reduce wheat consumption by lowering preferences or increasing health risks, even as states maintain high standards, the share of global wheat that meets those standards will decrease thereby decreasing supply and decreasing the amount of high quality wheat products available to consumers. This can create a demand decline in domestic or international markets, leading to lower prices.
On the supply side, fusarium blight can also affect wheat income by reducing profits or increasing costs. This can create an income loss or an income transfer in producer or consumer groups, leading to price inequality. Fusarium blight can also affect wheat population by reducing growth or increasing mortality. This can create a wheat population decrease or a population displacement in rural or urban areas, leading to price insecurity.
Wider Consequences and Political Risk
The wider consequences of fusarium blight in winter wheat are related to its potential effects on food security, public health, trade, and environment. Fusarium blight can reduce the availability and accessibility of wheat as a staple food for millions of people around the world. Fusarium blight can also compromise the nutritional quality and safety of wheat products due to mycotoxin contamination. Fusarium blight can affect the trade relations between countries that produce or import winter wheat, as different countries may have different standards and regulations for mycotoxin levels. Fusarium blight can also have environmental implications, as it may increase the use of fungicides that can have negative effects on biodiversity and water quality.
The political risk of fusarium blight in winter wheat can be explained as the possibility of conflicts or disputes arising from the different interests and perspectives of various stakeholders involved in the production, consumption, and trade of wheat. For example, fusarium blight can create tensions between wheat exporters and importers, as the former may face lower demand and higher costs due to quality issues, while the latter may face higher prices and lower supply due to scarcity issues. Fusarium blight can also create challenges for policymakers and regulators, as they have to balance the needs and expectations of different groups, such as farmers, consumers, processors, traders, and environmentalists. Fusarium blight can also affect the stability and security of regions or countries that depend heavily on wheat as a food source, as it can cause food shortages, malnutrition, and health problems. Fusarium blight can also trigger social unrest or violence, as people may protest or riot against the authorities or other groups for their perceived failures or injustices related to wheat production or distribution.
Conclusion
In conclusion, fusarium blight emerges as a looming threat to global wheat production and security, with its multifaceted impacts on yield, grain quality, human and animal health, and international trade. The intertwined relationship between fusarium blight and climate change exacerbates the challenge, requiring comprehensive and adaptive strategies. Beyond its immediate economic consequences, the disease's far-reaching effects on food security, public health, trade relations, and environmental sustainability underscore the urgency for collaborative international efforts. Addressing fusarium blight demands not only innovative agricultural practices, resistant crop varieties, and stringent regulatory standards but also necessitates a holistic approach, involving policymakers, researchers, farmers, and consumers to ensure the resilience of global wheat production systems in the face of this pressing threat.
The ‘El Nino’ phenomenon and its impact on global commodities
As of May 15, 2023, there was an estimated 90% chance of an El Nino weather phenomenon happening later this year. El Nino is the biggest fluctuation in the climate system of the Earth and will potentially have consequences across a wide range of geographical regions around the globe. The term ‘El Nino’ is often employed to characterise the warming of the sea surface temperature that occurs every 3 to 7 years typically off the Pacific coast of South America and lasts for about two years, thereby causing large climatic upheaval across the globe. It is declared when sea temperatures in the tropical Eastern Pacific increase 0.5 degrees Celsius above the long-term average. El Nino is felt strongly in the tropical eastern Pacific with warmer than average weather, and its effects are felt most strongly often in December. Climate experts have been monitoring the effects of El Nino since 2016 when the last severe El Nino occurred, the largest since the 1997-98 episode, and it led to disruptions in the world’s food, water, health, energy, and disaster response systems. It led to the highest-ever global temperatures and it is predicted that this year temperatures could increase even further.
According to the International Monetary Fund, the extreme weather conditions caused by El Nino would constrain the supply of rain-driven agricultural commodities, lead to increased food prices and inflation and may lead to social unrest in commodities-dependent counties which rely primarily on imported food. El Nino could potentially cause even more supply disruption to already volatile global agricultural and energy markets, supporting weak commodity prices and increasing inflation.
El Nino’s effects vary across geographical regions and in their intensity. Often we see high temperatures and less rain across the Northern US, Asia and Australia and increased rain in the Southern US and Argentina. Importantly, this current fast warming of the Pacific Ocean comes after a near-unprecedented three back-to-back years of the opposite cooling La Nina weather disruption. The IMF took into consideration the economic interlinkages and spillovers between countries and analysed the macroeconomic transmission of El Nino shocks between 1979 and 2013 both on national economies and internationally, focusing on its effects on real GDP, inflation, and commodity prices. It found that El Nino has a large but quite varied economic impact across different regions. Australia, Chile, India, Indonesia, Japan, New Zealand, and South Africa face a short-lived fall in economic activity in response to a typical El Nino shock. However, in other parts of the world, the El Nino phenomenon actually improves growth, in some countries directly, for instance the US, and in others indirectly through positive spillovers from major trading partners. Many countries that the IMF analysed experienced a short-term inflation increase following an El Nino shock, its magnitude increasing with the share of food in the consumer price index, while energy and non fuel commodity prices also rose around the world. The inflation that could be caused in the aftermath of the ongoing El Nino, when potentially interacts with the high-inflation environment caused in the aftermath of the Covid pandemic and high energy prices due to the Russian invasion of Ukraine, would reduce people’s purchasing power and could lead to quite high levels of inflation.
It's important to break down any potential effects of the El Nino across the different commodity markets. A significant El Nino would potentially support many but not all agriculture markets. Firstly, it would reduce the supply of wheat, sugar, rice and cocoa, thereby increasing prices. Due to less rain available and higher temperatures to pivotal Indian and Thai sugar and rice producers, we would see less yield. It’s expected that major cocoa producers, in Ghana and the Ivory Coast, would experience drier weather and therefore lower yields. Moreover, it is expected that Australia’s wheat crop would experience dry weather and thereby bring an end to a series of three bumper crop cycles. Conversely, in the case of the USA and South America, this may be a positive change from the droughts and thereby boost yields and decrease prices. For instance, a wetter and warmer winter season would help the US corn and soybean belt and the currently drought-hit Argentina.
Breaking down El Nino’s potential effects across the energy markets, we need to understand the potential effects would be different access markets for different geographical regions. We would generally expect that in light of increased temperatures, it would boost the demand for oil and especially increase the demand for natural gas and depress the heating outlook. As Asia is the world’s biggest importer of oil and natural gas, hotter and drier conditions could boost their demand, especially if the droughts hit their hydroelectric capacity. In Northern Europe, El Nino would often cause colder winters and increase the demand for energy; in the north-west USA, a typically milder winter could potentially reduce demand for heating oil in its biggest market and finally, it would typically see a less severe June-November Atlantic hurricane season, thus the demand for energy would potentially decrease in the season due to less severe weather conditions. Thus, the effects on the overall demand for energy would differ across the different regions which face varying weather conditions due to the El Nino. The direction and magnitude of the overall impact on energy markets would be contingent on how people and markets change their demand for various commodities in light of changing prices and how intensive the varying weather conditions are in light of the El Nino.
Since growth, inflation, and commodity prices are sensitive to El Nino, governments should take into consideration the likelihood and effects of El Nino episodes when they construct and implement macroeconomic policies that could help to mitigate the adverse effects of such shocks. For instance, the IMF corroborated that in India changing crop varieties, rainwater conservation, judicious release of food grain stocks, and changes in import policies and quantities would help increase agricultural production in low-rainfall El Nino years. Such policies could include the rate of interest rates that the countries’ central banks would implement in light of inflation and any measures of forward guidance and quantitative easing/tightening in light of economic conditions in light of the El Nino. Moreover, on the macroeconomic policy front, countries’ central banks should closely monitor any increases in inflation coming from El Nino shocks and alter their monetary policies accordingly to avert second-round inflation effects. In the longer term, investment in the agricultural sector mainly in irrigation, as well as building more efficient food value chains, would serve as valuable insurance against future El Nino episodes.
In conclusion, the ongoing El Nino phenomenon would lead to temperatures never seen before and could have varying impacts on different community markets to a great extent. It would not spell doom for all economies and markets, as in certain markets and countries, it would boost demand for energy and other commodities as explained above, owing to varying weather conditions. However, to counter the adverse impacts of the El Nino on respective economies, governments and their central banks need to devise macroeconomic policies that ensure that the distributional consequences caused by increased commodity prices would be less disruptive to the lives of people, and countries need to make contingency plans to make sure that their economies have the resilience to face the economic disruptions caused by these weather conditions in the future. Moreover, there is a need for cooperation on the international front, as due to the globalised nature of the world economy, most countries would face the effects of the weather conditions and policies on the multilateral level could counter the negative economic consequences more effectively.
Emilia-Romagna Floods: Impact on Local Agribusiness
Since the start of May, the Northern Italian region of Emilia-Romagna has endured heavy rainfall culminating in flash flooding across the region. At time of writing, the region’s weather alert agency classified the provinces of Modena and Bologna at a moderate risk of flooding and gave high-risk flood warnings to the provinces of Ferrara, Ravenna, Forlì-Cesena, and Rimini. Bologna remains at high risk of landslides, although in neighbouring provinces there is only a moderate risk. Satellite imagery published by NASA’s Earth Observatory illustrates the severity of the flooding in farmland near the town of Lugo, in the Province of Ravenna.
Map 1 - Emilia-Romagna Provincial Map. Available here.
Emilia-Romagna is Italy’s fourth region in terms of GDP output behind Lombardy, Latium, and Veneto. The region’s diverse economy is made up of agriculture, manufacturing, and textiles sectors. In the first half of 2022, agricultural output was valued at €575 million ($621 million), just under two per-cent of all regional output. Although agricultural output in the primary sector does not amount to much of the region’s economic output, the processing of agricultural products in the secondary sector represents almost a fifth of Italy’s total agricultural value chain and agri-food exports represent over ten per-cent of the region’s exports, according to information published by the regional government of Emilia-Romagna.
The collateral damage faced by Emilian farmers is not just economic. The region’s farmers produce 44 geographically-protected agricultural products such as Parmigiano Reggiano, Parma ham, balsamic vinegar, and Lambrusco wine. In addition to this, the region’s farmers and their respective research partners are field-leading innovators of food safety farming practices. This has led Confagricoltura – an Italian farming association – to describe the situation as having the potential to trigger a significant socio-economic gulf within the region, due to the costs of rebuilding. Currently, Confagicoltura estimates a cost of approximately €40,000-50,000/hectare for fruit farmland ($43,250-$54,060/hectare) and €6,000/hectare for grain and cereal farmers ($6,490/hectare), not to mention the years it will take for affected farms to return to capacity-level production. Notwithstanding, the large part of the region’s spring harvests are pretty much written off as fruit trees suffer from root rot and 400,000 tonnes of wheat have been lost.
The figures reported above only represent the immediate cost for the 5,000 farms impacted by the floods, and do not consider the longer-term social and economic costs associated with the loss of assets and labour of Emilian farmers – not to mention the increase in costs of secondary food products which are the heart of gastrotourism in the region. For the Italian government, there is the question of financing reparations and rebuilding. At the moment, some €100 million ($108 million) have been approved by the central government for relief spending in Emilia-Romagna, as head of government Giorgia Meloni explores the use of the European Union’s Solidarity Fund.
Cover Image Credits: International News - The Chronicles of Life. Available here.
Adding palm-oil to the fire: Malaysia’s proposed ban of palm oil exports to the EU
On 9 January 2023, both Malaysia and Indonesia’s heads of government agreed to work together to “fight discrimination against palm oil”, in a reference to new European Union anti-deforestation legislation. Tangibly, the Malaysian plantation and commodities minister is threatening a wholesale ban on palm oil exports to the EU. Given that Malaysia and Indonesia combine for more than 80 per cent of the world’s palm oil supply and the EU is their third-largest market, the potential ramifications for any such moves would be significant.
How has an issue over palm oil trade reached such a point? For years, Malaysia and Indonesia have railed against EU import barriers on their palm oil, which they characterise as protectionist in favour of the EU’s domestic vegetable oil sector. The EU’s new law, which is expected to be implemented late 2024, obligates “companies to ensure that a series of products sold in the EU do not come from deforested land anywhere in the world” and is aimed at reducing the EU’s impact on biodiversity loss and global climate change. Whilst no country or commodity is explicitly banned, the new regulation covers palm oil and a number of its derivatives. Currently, both Malaysia and Indonesia have separate lawsuits at the World Trade Organization (WTO) pending over the EU’s palm oil trade restrictions.
Implications
To date, only Malaysia has explicitly threatened to ban palm oil exports to the EU. Were this issue to escalate and Malaysia to impose the suggested ban, it would have several consequences. First and foremost, Malaysia’s palm oil industry and wider economy would be hit; the industry makes up 5 per cent of Malaysian GDP, of which a non-negligeable 9.4 per cent of its exports are bought by the EU. Additionally, an abrupt ban is likely to harm producers who have contracts to sell in the EU. Alternative export destinations could be found, especially in food-importing markets such as the Middle East and North Africa, but these producers would struggle to pivot in the short-term and likely see financial losses. Even greater disruptions would be experienced by the few Malaysian palm oil companies that have established refineries in Europe, necessitating a reorientation in their supply chains. Yet the outlook is not entirely negative; palm oil’s lower cost as compared to its substitutes such as soybean oil or sunflower oil will sustain global demand. Overall the Malaysian export ban to the EU would cause a limited scope of economic damage in the short-term, and would see gradually less impact as time progresses and firms adjust.
The potential implications for the EU are equally significant. Firstly, if Malaysia were to enact an export ban soon, this would likely be in unison with Indonesia as the larger producer. A unilateral Malaysian palm oil export ban to the EU, with new regulations permitting, would simply lead EU imports to shift to Indonesia along with profits - hence Malaysia is seeking bilateral action. A joint ban on exporting to the EU would cut the EU off from around 70 per cent of its palm oil, meaning significant interruptions in processed food or biofuel production. New import regulations, however, will help the EU’s domestic vegetable oil sector, which is something that Malaysia asserts. Especially in biofuel production, oils such as soy, canola, and rapeseed would fill the palm oil gap and increase their respective market shares. This issue is further complicated by the EU and Indonesia seeking an elusive free-trade agreement, with negotiations routinely stalled by the EU’s palm oil regulations. This could be in the EU’s favour as free-trade negotiations would break Indonesian-Malaysian solidarity on the issue.
Ironically, the EU’s new regulation could also result in greater amounts of deforestation, instead of less. As the EU reduces its palm oil imports through stricter environmental regulations, Malaysian and Indonesian exports would shift even more to the two larger importers in India and China, with less stringent environmental regulations. The EU’s citizens may not be as directly responsible for deforestation, but worldwide deforestation may in fact increase as a result of this policy.
Market forecast
The immediate reaction from markets was nonplussed. Traders don’t see the threat of an export ban from Malaysia holding. This is reflected in palm oil futures contracts (FCPO: Bursa Malaysia Derivatives Exchange, the benchmark for palm oil), where prices remained stable since the EU’s law was proposed and Malaysia’s threat issued. This means the ban is currently not taken seriously, with Malaysian threats interpreted as a knee-jerk reaction. In any case, firms are anticipating decreased demand from the EU and have been exploring new markets to offset potential European losses. If this Malaysian export ban to the EU were to happen, this would nonetheless pale in comparison to the supply shocks experienced in 2022. A brief ban on all Indonesian palm oil exports globally in April 2022, amidst fears of food shortages and high domestic prices, resulted in record-high global prices. This is a level we are unlikely to see again, as stability returns.
On the supply-side the Malaysian Palm Oil Council expects production to recover in 2023 with estimates of a 3-5 per cent increase, after three years of decline amidst labour shortages linked to COVID-19. This is likely to have a greater impact on global markets instead of a ban or the threat of one, and both Malaysia and Indonesia’s output will continue to climb in the years to come.
Forecasting the demand side is more uncertain. Short-term projections suggest lower demand due to China’s surge of COVID-19 infections post-Lunar New Year, but this is more symptomatic of the wider Chinese economic reopening which will, on balance, stimulate demand. In the medium-term, the threat of recession facing the global economy will hurt palm oil demand, with a mild recession expected in the first half of 2023 followed by a gentle recovery. A longer-term positive outlook is observed in relation to biodiesel’s potential. Amidst high crude oil prices, the further development of biodiesel utilising palm oil would incite new demand.
Looking ahead, projections are uncertain given factors such as the Malaysian migrant worker shortage, the Chinese economy reopening, and potential global recession. This is in addition to Malaysia and Indonesia’s unpredictable regulatory environment, where any policy is subject to rapid change. Palm oil exports to the EU are likely to remain a point of contention between the two south-east Asian countries and their European counterparts. Because palm oil forms a significant part of Malaysia and Indonesia’s economies, their respective governments will continue to intervene.
As the two largest producers in this market potential cooperation between Malaysia and Indonesia over an EU export ban must be monitored- acting together would result in greater consequences for EU imports and worldwide prices. While the Malaysian threat to ban exports to the EU may be an empty one, decreased EU palm oil imports will be observed as it shifts towards more sustainable consumption. Combating climate change is the EU’s underlying aim, but this will necessitate a change in trade patterns.
Cry For Me Argentina: What the current soybean rally tells us about climate change and food security
Soybeans are a fundamental commodity for the global food chain. While only a tiny fraction of the crop is used directly for human consumption, soybeans are a crucial component of animal feed, and as such indirectly significant for human consumption. This means that soybeans can have a substantial impact on food prices in general. For this reason, the out of season increase in price of soybean futures (ZSH3: CBOT) and exchange-traded funds (ETFs) like the Teucrium Soybean Fund ($SOYB: NASDAQ) could be a potential warning sign of how climate change might adversely impact global food security. This is because many analysts are associating the increase in price to the ongoing summer drought in Argentina and Brazil – two key exporters, accounting for half of global supply of soybeans. Cultivation of the crop in Brazil occurs traditionally in the state of Rio Grande do Sul, whereas in Argentina cultivation is spread across the Argentine Pampas and the province of Santiago del Estero.
Reuters reported on January 12 2023 that up to 90-per-cent of the expected harvest in Rio Grande do Sul will be wiped out in the absence of heavy rainfall – this lack of rainfall in Rio Grande do Sul was also highlighted in the latest agroclimatic monthly report published by the Brazilian Meteorological Institute. Likewise La Bolsa de Cereales (Buenos Aires’ grain exchange) reports that in the event of a severe drought the country will miss its expected harvest by 12.5 megatons, while a mild drought would dampen this loss to seven megatons. According to the same report, the impact of this dry winter could be a reduction of two per-cent of the value of Argentina’s entire agricultural industry this year. The impact this has had on futures is not so pronounced, however. Since December 1 2022 the value of ZSH3 futures contracts maturing in March 2023 increased 3.75 per cent from $1,489.40 to 1,435.60, peaking at $1,546.40 on January 17 2023. Likewise in the same timeframe, $SOYB has risen a modest 1.48 per cent from $27.05 to $27.45, finding resistance at $28.50 on January 12 and January 17 2023.
In the context of near-record global inflation over the last year and a summer drought in South America, it is difficult to pinpoint the exact causal mechanism of the higher-than-average prices of soybean futures. However, the arid weather conditions in Argentina and Brazil have sprung short-term supply shocks which could be driving this out of season rise in soybean prices. Furthermore, other grain ETFs focussing on different crops, such as wheat ($WEAT) and maize ($CORN) are seemingly returning to pre-covid price fluctuations, although they are still dealing with spillover from the Russian invasion of Ukraine. In the long-term, increasing temperatures and decreasing rainfall will potentially reduce supply. Nevertheless, the impact on price remains unclear. Whether climate change will impact harvest cycles, and by extension price fluctuations, or if harvest cycles and price fluctuations occur with the same seasonality as they have done, thus far, remains to be seen.
The untimely nature of this modest increase in soybean prices and the timing of the droughts in Argentina and Brazil do raise concerns for the long-term supply and price of grains in the context of deteriorating climate change. Both in Argentina and Brazil, average temperatures have increased by over 1 degree celsius since records began in the 1930s. Although historical rainfall data for Brazil is not as readily available, the decrease in average rainfall in Argentina since record-keeping began has been around 50mm/year.
Whilst the recent links between extreme climate events, crop cycles, and commodity prices are cause for concern in the long-run, we ought to be prudent in overstating the negative impacts on crop prices and food security. Yield gaps – the difference between attainable/expected yield and actual yield – in economically developed countries exporting barley, maize, soybeans, and wheat have been decreasing as total output has marginally increased. Other environmental and physiological concerns impacting crop health – such as disease and crop resilience – have also been improving yields with the help of new technologies.
In summary, the current supply-side issues will probably make for a very expensive year for soybean futures and, because of the crop’s use in animal feed and oils, probably will have some impact on supermarket shelves too. The impact of the current drought could well be corrected if inflation subsides or indeed, if a recession occurs. But this remains to be seen. With this and next week’s forecasts pointing to some rain in Junín, Buenos Aires – one of the larger soybean pastures in the province – and Rio Grande do Sul in Brazil, there is still hope that some of the South American soybean harvest can be rescued.
Potash supply in a de-globalising world
International sanction regimes are disrupting supply chains across the world. In this research paper, analysts from London Politica’s Global Commodities Watch (GCW) provide an overview of the major stakeholders, critical infrastructure, trade routes, supply and demand side risks, and forecasted trends for potash.
Potash is a fertiliser, essential for increasing agricultural yields and feeding the growing population of the world.
Wheat supply in a de-globalising world
International sanction regimes are disrupting supply chains across the world. In this research paper, analysts from London Politica’s Global Commodities Watch (GCW) provide an overview of the major stakeholders, critical infrastructure, trade routes, supply and demand side risks, and forecasted trends for wheat.