To paraphrase Mark Twain: Reports of the death of the commodity supercycle have been greatly exaggerated.
While it's clear grain prices are headed south for the foreseeable future, long-term fundamentals still give bulls hope.
Historically there's a strong correlation between crop prices and 'hard' commodities says Philippe de Lapérouse, managing director at HighQuest Partners, a strategic advisory firm for global agribusiness. "This justifies the idea that crops are part of the end of that supercycle, but I'm not totally convinced."
Cereal prices have declined, but commodity prices overall are still near 2008 levels before the global financial crisis hit. If the global economy rebounds any time soon, would soft commodities not follow suit? Consider these other fundamentals:
Population: bigger and more urban - First, world population continues to grow, creating more mouths to feed. "By 2050 food supplies must nearly double," says Carl Casale, CEO of farmer cooperative CHS. "The world has to gear up to not only produce, but also deliver." In developing regions like Africa and Asia, growing populations are shifting from rural to urban. "That means populations are less reliant on themselves for food and will be relying on others to bring foodstuffs in," says Lapérouse. It also means more populations will depend on imports to meet their food needs.
Rising middle class – Despite recession, the working poor are projected to decrease dramatically over the next several years. Those newly minted middle class consumers want to eat more animal protein, a trend that is highly correlated with per capita GDP, especially in China. Chinese born in 2009 will consume 38 times more food than those born in 1960 thanks to higher incomes, says Casale. "In 1960, chicken and pork made up 4% of daily Chinese calories; by 2020 that will be 28%. China will raise more of its own meat protein, but will also need to import. In the big picture, Asia is where the future lies."
Environmental pressure - Another factor in play is the increasing need to produce more food from a smaller biosphere footprint – particularly water. Through 2050, BRIC countries (Brazil, Russia, India, China) will use at least 5 times as much irrigation water as OECD (developed) countries, so the ag sector will have to become much more efficient in how it allocates water.
"That's going to be a tall order for the industry to address when you consider climate change," Lapérouse says. "It's one of the major challenges for the ag sector going forward. The grain trade, in a sense, is a virtual trade for water."
Energy shifts – The world will see a major shift in energy consumption. In 2000 OECD countries used 58% of the world's energy and developing countries 42%; by 2035, OECD countries will use just 37% while non OECD countries will need 63%.
Renewable energy is a part of the shift, but no one is sure where future mandates and policies will land. "I don't think they're going to disappear," says Lapérouse. "Germany has invested $100 billion in renewable energy projects and there's a clear consensus among German voters that this is something they are committed to."
Climate change –This is a wild card for commodity prices. Climate change is "creating uncertainty in the market place regarding access supplies when they are needed," he says. "Those who have inelastic demand for commodities don't want to be caught off guard without having access. That's going to be a phenomenon we'll continue to live with and it will rear its head with different crops in different years for different reasons.
"While volatility in the occurrence of drought is not new, the stakes are much higher now," Lapérouse says. "What's different is we are less secure in our ending stocks than we have been in the past and we have new markets coming into play creating new demands."
Stalled yield trends - Historically yields have trended higher the past several decades; however, yield increases have either stalled or decreased the past three years. Can we reverse declining yield gains in major crops? In the past, biotech has helped push yields, but that's no longer a given, especially with growing weed resistance.
New demand potential – Ten years ago biofuels changed the demand equation. The next big change may be aquaculture. Nearly half of all seafood is now farmed, not wild caught. "That has huge implications for feed grains," says Lapérouse. "Tilapia has great feed conversion compared to a steer. Aquaculture growth exceeds growth in traditional animal proteins. This is new demand that will put additional pressure on the system to access feed ingredients."