A few years ago, the global grain markets could be described as relatively predictable. The prices reacted especially to the jolts of the weather. However, in recent years the grain markets faced increased volatility. The markets are bracing for additional uncertainties beyond their own fundamentals. Price volatility makes planning for farmers and buyers the world over extremely difficult. In this first issue of 2020, we tried to give further insight into the factors causing market volatility.
Grain is of utmost importance for world agriculture and sustainable food security. International grain trade is dynamic and represents about 10% of global trade in food products. According to the International Grains Council (IGC), grain trade is expected to reach a new all-time high of 375m t (+3% y/y) in 2019/2020. At 2,162m t, world total grains production in 2019/20 was forecast to rise by 1% y/y, as bigger crops of wheat and barley were seen outweighing a decline for maize. Total grains consumption was also predicted to climb to a new high of 2,188m t.
A few years ago, the grain markets could be described as ‘flat’ and relatively predictable. The prices reacted especially to the jolts of the weather. Grain markets are bracing for some additional uncertainties beyond their own fundamentals. Macroeconomic and geopolitics affect grain markets. They directly affect production and related costs, with demand, exports, imports and ending stocks adjusting while markets find a new equilibrium. Higher oil and freight costs and financial markets have increased their share of volatility. As for the jolts of the weather, they are now more frequent with larger amplitude due to global warming and stronger reactions from largely financialized markets. Price variations are now characterized by their suddenness and brutality.
Grain trade helps to answer possible food production shortages due to climatic or other reasons. It contributes to the prosperity of farmers, industries, and consumers. In recent years, global grain markets faced increased volatility, directly impacting stakeholders of the food chain. Price volatility makes planning for farmers and buyers the world over extremely difficult and may result in political unrest, like in the recent food prices peak in 2007-2008. Price volatility in the food supply chain threatens the long term competitiveness of agriculture. Therefore it is important to understand it and to identify the drivers and factors causing market volatility.
What are the most important factors affecting the global grain trade? What are the most important challenges grain traders are facing today?
Speaking to Miller Magazine, Andrey Sizov, managing director of SovEcon, lists the key challenges as ‘low prices, low margins, farmers becoming better educated and informed.’ Another prominent expert Dmitry Rylko, Director General of the Moscow-based Institute for Agricultural Market Studies (IKAR) also agrees with Mr. Sizov. “The biggest challenge all over the world is associated with the fact that farmers get smarter and bigger (especially in our part of the world) and their awareness and bargain power have grown quite dramatically,” he says. He also complains that grain traders are lagging behind the digitization process. “The second challenge is associated with the fact that the world around us has become digital, while grain trade is falling behind these processors. The question is how to digitalize our traditional values: reputation and personal relations.”
The trade tension between the US and China is one of the key concerns for the world grain market. “Beyond the fundamentals of supply and demand, one of the key challenges for global grains trade in recent years has been increased tensions between major market players. However, impediments to trade take many forms and non-tariff measures (NTMs) have increased in number and complexity over many years, and today represent one of the key challenges to the free flow of global trade.” IGC says.
Societal demands also are a key driver in shaping the markets. Changing global consumption trends affects global trade flows. Consumers show increasingly pressing expectations towards food, extending beyond food affordability to issues such as health, nutrition, food safety, sustainability, origin, convenience, environment, climate change, animal welfare, etc. At the same time, global consumption per capita is increasing, as well as self-sufficiency in some parts of the world. This will likely change global trade flows. Sizov analyzes the effect of the changing global consumption in two parts: “1-Developed countries: sometimes it's awareness, sometimes it's miseducation (ie popularity of non-gluten diets). Somewhat lower meat consumption, especially red, and lower feed demand for grain. New CRISPR wheat varieties may attract new customers to new bread and pasta products. 2-Developing countries: still a good (but slower) growth of consumption of meat and poultry, bigger demand for feed grain.”
There are also concerns about the outbreak of African swine fever in Asia among the grain traders. However, Mr. Sizov reminds that domestic consumption of grain feed in China almost hasn't changed.
“Contrary to oilseeds markets the effect of ASF is muted,” he said. Mr. Rylko also expressed a similar view. “In my view, the impact is rather modest in comparison with Mr. Trump's tweets.”
BLACK SEA EFFECT
World grain trade will continue to grow as global demand strengthens. Therefore, competition between the exporting regions is becoming fierce. The Black Sea Basin has grown considerably over the past five years, with Russia and Ukraine in the lead, and currently accounts for 1/3 of the world grain trade. And the experts predict that the dominance of the Black Sea region would continue in the long run. When asked whether Black Sea countries will be able to gain more market shares, "Yes, no doubt. The interesting thing is that in its price discovery and risk management the world continues to rely on the modest US item, named SRW, while the bulk of physical trade has shifted "from (Mexican) gulf to (Black Sea) see basin," Rylko answered.
Mr. Sizov is more cautious about that. “It won't be easy. In fact, in 3 recent years exports from the region have been stagnating. I feel that both countries need reforms to climb to the next stage. In the case of Ukraine, such reform could be a farmland market liberalization,” he said.
COVER STORY INDEX
- Main opportunities and challenges for 2020 on the grains and oilseeds market
Amy Reynolds - Alexander Karavaytsev - Darren Cooper, International Grain Council
Today global trade in grains is part of our food system ensuring to fill the gap between supply and demand. The patterns of global grains and oilseeds trade are constantly evolving, as rising incomes and urbanisation of expanding populations contribute to changing dietary preferences. IGC secretariat bring you a good landscape of what would be the main opportunities and challenges for the year 2020 on the grains and oilseeds market.
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- 10 foes of grain trading at the start of 2020
Christina Serebryakova, Head of Analytical Department & Agricultural Commodities Broker, Atria Brokers
“It is quite sad, but nowadays grain trading has more and more political coloring. Fundamental factors could be easily neglected by trade time to time, when Trump tweets, and China retaliates. There is a lot of challenges in grain trading on the start of 2020. We will cover at least 10 of them.”
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- Challenges in grain trading
Natalja Skuratovic, Senior Manager Sales CIS, PETKUS Technologie
“Markets are constantly in a state of uncertainty and flux and money is made by discounting the obvious and betting on the unexpected.”– George Soros
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