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Commodities

Consequences of low grain prices

by Hugues Rinfret

While the rise of the middle class continues to support the long-term demand for grains, short-term challenges on the supply side need to be addressed. With global grain production outpacing demand and resulting in record high inventories and low prices, crop farmers around the world have more incentives than ever to pull back from record output levels. We expect a supply response to start materializing in 2016, leading to lower global output within the next two years. This will be the first step toward improving prices for major crops since grain demand has already posted a near-term high.

Livestock feeding, by far the largest demand component, accounts for about 45 percent of U.S. corn demand, while another 29 percent is directly captured for the production of corn-ethanol, leaving a 16 percent share to be traded on the export market. Despite a temporary slowdown, the long-term demand for agricultural commodities remains strong as the size of the middle class continues to make steady gains in emerging economies.

Recent market trends suggest the U.S. livestock production is expected to accelerate in 2016, resulting in a corresponding increase in feedgrain demand. After posting a decline in production in 2015, the beef sector is poised to boost output in response to lower feed and energy costs. This increased beef production, coupled with moderate growth in the pork and poultry sectors, will increase total feedgrain demand and help alleviate record crop inventories. Corn-ethanol production essentially quadrupled between 2004 and 2014 as the industry boomed to take advantage of a favorable energy policy with the mandate to increasingly use ethanol as the oxygenate in the gasoline supply. However, growth has stalled and is expected to grow very slowly. The industry has matured as it reached the so-called blend wall with ethanol already accounting for 10 percent of the U.S. gasoline supply. Further gains in ethanol consumption will require going beyond the statutory 10 percent blends.

Regarding export demand, U.S. agriculture has benefited from remarkable growth over the past decade. U.S. agricultural exports have hit more than $100 billion in sales since 2010 and
reached an all-time high of $152 billion in 2014 as wealthier foreign consumers bought more protein-based foods. The weak U.S. dollar during that period added a tailwind to export flows. However, the dollar started to significantly appreciate by late 2014, causing a drag on U.S. exports as they became more expensive to foreign buyers. Agricultural exports are estimated to be down 8 percent to $140 billion in 2015 and down another 6 percent to $131 billion in 2016. Large Asian importers such as Japan and Korea have shifted some of their purchases to other major agricultural exporters — including Australia, Brazil and Europe — because the stronger U.S. dollar is making purchases in these countries cheaper.

The long-term rise in protein-based diets across the world, particularly in emerging economies, will drive demand for agricultural commodities. This is indicative of resilient demand, although the flipside is limited additional consumption when commodities prices are low. So, the supply side is left with the burden of adjusting downward to clear excess inventories. This will not be an easy task, but it is needed to trigger a turning point in agricultural commodity prices.

 

Hugues Rinfret is director of research for the agricultural finance group at MetLife.

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