For the global commodity markets, if 2017 was full of event risks, 2018 may be no different. the key themes to watch could be the divergence in economic growth, geopolitical uncertainties, monetary policy tightening , currency gyrations and, of course, the risk of trade disputes .
One of the key factors impacting world agriculture is crude oil. For instance, high crude prices push up the price of synthetic fertilisers, raise the cost of mechanised farming and also increase the cost of processing and transportation which in turn increase the cost of agri commodities. Also, crude prices influence policies relating to biofuels with higher prices encouraging greater diversion of traditional food crops for fuel purposes.
The global agricultural markets are sure to be on tenterhooks at least in the first half of the year as oil prices are expected to remain at higher levels.
However, one mitigating factor is the large inventories, especially grains and oilseeds following five years of steady harvests since 2013. This is sure to cap the upside risk to prices unless a major disaster strikes the sector. This is the reason why speculative capital has stayed in the sidelines so far.
The US dollar has been volatile in recent months, but indications are that it would stabilise over the year as the US Federal Reserve is set to hike interest rates at least three times. Even a fourth hike is possible or not ruled out, according to some experts. That’s sure to lend strength to the greenback.
‘Weather’ factor
Generally, benign weather over the last five years — from 2013 to 2017 — has meant large harvests, larger inventories and, of course, softer prices. Is this likely to change in 2018? Currently, there are incipient signs of an emerging La Nina, but it is unclear if it would extend to summer months or fade away. This weather phenomenon often brings excess precipitation. For the northern hemisphere, and especially for Asia, it may be beneficial.
Outlook
Agricultural commodities are expected to display no dramatic movements but stay relatively quiet. As for grains, large inventories of corn (maize) and wheat have kept prices on leash, but in 2018 with expectation of a drawdown in stocks, prices have the potential to rise, albeit marginally. India is readying to harvest once more a large crop of wheat.
Cotton prices are expected to stay under pressure for a few months, given large production and ample availability both globally and in India. However, in the second half of the year, the market may move up marginally with supplies tightening and stocks drawn slightly down. China’s import policy will decide the price trajectory.
The sugar market has turned softer with production rebound expected especially in India. However, there is risk that the market may be lulled into complacency. India can yet face tight fundamentals in 2018 as the production and consumption numbers projected are far from convincing.
Brazil will crush less cane for sugar and divert more for ethanol given the current crude prices. So, sugar surplus will be small. The sugar market has upside potential if crude continues to trade around $ 70 a barrel in the first half of the year. It should come as no surprise if sugar moves above 15 cents a pound. The price action will be exacerbated by speculative capital quickly moving in.
Lastly, under the lead of palm oil and soybean oil, the global vegetable oil market will face a surplus. Production is set to rebound in Malaysia and Indonesia while palm oil inventories are already rising. There are, of course, consumption demand-related challenges that palm oil is facing in parts of the world. Fundamentals will push prices down, making them more and more consumer friendly.
In India, many agri-commodities, especially pulses and oilseeds, will continue to face price pressure. The government will continue to face the challenge of providing price support. How much attention the Budget 2018-19 will give to agriculture remains to be seen. The forecast of south-west monsoon sometime in April and its onset early June will determine the future market trajectory.
The writer, a policy commentator, is global agribusiness and commodities market specialist. The views are personal