After two successive years of generally benign weather that triggered a massive expansion of grains crop harvest, traders are beginning to wonder about supply possibilities in 2015 and by implication price performance of major agricultural crops.
Will the world once again witness a supply surge for the third year in a row? To be sure, inventories of major crops (wheat, corn, oilseeds and others) around the world have been rising in recent months following massive harvests and a modest slowdown in demand growth.
No wonder, prices have come under pressure; and the south-bound movement has been accelerated by the combination of strengthening of the dollar and low crude oil prices.
The latter is expected to push production costs down through the synthetic fertiliser route, mechanisation and transport costs. Additionally, across the board, commodity prices have been falling, and agriculture crops are too vulnerable to defy the price gravity.
Although the current and emerging situation poses a tough challenge to forecast prices, it is clear that there is increasing pressure on the supply side of market to respond to low prices.
So, the big question is whether 2015 will witness a ‘supply response to low prices of 2013 and 2014’.
On current reckoning, given the large inventory as well as currency, crude oil and weather outlook, one can expect grain prices to trend lower in the first half of the year. By implication, barring major adverse weather events, agricultural prices will continue to remain consumer-friendly and food inflation modest.
Normally, there is the usual supply response to low prices. The negative margin environment of the last few months is sure to discourage growers, especially in countries with industrialised farming.
One can expect growers to destock and reduce outlay on inputs such as seeds, fertilisers and agro-chemicals.
This can potentially hurt yields and in turn translate to a reduction in grain supplies (mainly wheat and corn) in the upcoming season.
In contrast, soyabean enjoys a great chance to buck the trend. In the US and elsewhere, corn acreage may shift to soyabean because of inventory pressure and less-attractive prices of corn (less than $4/bushel). On the other hand, robust soya export in recent months has ensured attractive revenues. So, one can expect higher planted area and one more year of strong surplus. Simply put, in terms of prices, soyabean is expected to underperform.
From a currency perspective, the dollar will continue to remain strong, but further gains would be rather slow.
The world crude market is likely to begin to rebalance from the third quarter of the year and possibly there could be some price recovery. Weather is big known-unknown.
If geopolitical instabilities and weather aberrations combine, the outlook for agricultural markets will get murky.