Tight competition on the global market during pandemic COVID-19 and economic downturn - Denis Drechsler

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APK-Inform

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Each season has its own features, but 2020/21 MY can be called exceptional. With high world production of major crops, trade was carried out under the conditions of COVID-19, which influenced also the cost of production. APK-Inform Agency talked to Denis Drechsler, Project Manager of the G20 Agricultural Market Information System (AMIS) about the main developments in global grain markets in 2020/21 MY and prospects for 2021/22 MY.

 

- Firstly give us a short review of what the Agricultural Market Information System (AMIS) is and its mission and scope?

- The Agricultural Market Information System (AMIS) was launched by the G20 in 2011 in response to the 2007-2010 food price spikes. Its mandate is twofold, namely to enhance transparency in global food markets by providing regular, reliable and timely updates on the food market situation and outlook; and to promote policy coordination among the main players in global food markets. AMIS participants include all G20 Members plus Spain as well as seven countries that have been invited based on their significant share in the global food commodity markets, including Ukraine. Jointly, these countries represent around 80 to 90% of global production and exports of the crops monitored by AMIS, which are wheat, maize, rice and soybeans. The initiative is supported by an inter-agency Secretariat of ten international organizations and is hosted by the Food and Agriculture Organization of the United Nations (FAO).

 

- In your opinion, what current trends are affecting the world economy? Can you highlight the keynotes?

- Summarizing today’s macroeconomic context in a couple of words is impossible but there are a few main trends and developments. Of course, the world is still under the impression of COVID-19 and the sharp global economic downturn that followed. While projections have improved successively since the outbreak of the pandemic, global GDP growth in 2020 is still seen down by 3.3%. The resulting unemployment and income loss, coupled with ongoing trade policy concerns led many market observers to expect a deep slump also in agricultural markets, and agricultural trade in particular.

However, agricultural markets proved quite resilient in the face of the crisis, with agricultural prices decreasing much less than, for example, metals and especially energy, and agricultural trade even increasing in 2020. Now, the big question is of course how markets will react to the gradual re-opening of economic activity.

 

- In the season 2020/21, there was a sharp increase in food prices approaching their historical peaks. What caused this increase?

- Many factors could be listed here, but two possibly stand out: a rebound in demand (especially from China for agricultural imports) and a weakening US dollar. As the greenback lost value, food prices started to rise. This inverse relationship between the US$ and food prices can be illustrated when looking at the broad dollar index which measures the value of the US$ against a basket of other currencies and the FAO Food Price Index (a measure of the monthly change in international prices of a basket of food commodities). As most commodities, including agricultural commodities, are traded in US$, a weaker dollar stimulates demand, which in turn increases the nominal price.

 

- Let us have a quick look at world grain markets. What will be the main trends?

- Cereal production, utilization, and trade in 2021/22 MY are all forecast to reach all-time highs. Supported by continued strong demand, especially for feed and industrial use, markets could see some tightness, especially if harvests do not turn out as favorable as currently expected. With global cereal utilization outpacing the increase in world production, and global cereal stocks only marginally increasing after three consecutive seasons of declines, the global cereal stock-to-use ratio may drop further, from 28.6% in 2020/21 MY to an 8-year low of 27.9% in 2021/22 MY. As for international trade, which increased substantially last season driven by record imports by China, growth in 2021/22 might be less pronounced, but much depends on China’s future import demand.

 

- How will the main trends on the world wheat market change in 2021/22 MY? What is the world balance for this crop in the new season?

- Global wheat production in 2021 is currently forecast at about 786 million tons, which would be 11 million tons (or 1.4%) higher than in 2020. This increase is particularly due to an expected rebound in the world’s largest producer, the European Union, where output is anticipated about 9 million tons (or 7%) higher than last year.

Global wheat utilization in 2021/22 MY is expected to increase by 2.5% to 779 million tons, mostly driven by feed demand in view of high prices of other feedstuffs, notably maize. World wheat trade is also set to expand in 2021/22 MY, supported by increased demand from several countries in Asia and North Africa. Sales from Russia, the world’s largest wheat exporter, are expected unchanged at about 39 million tons due to large domestic supplies and competitive export prices. As for Ukraine, we expect wheat exports slightly up to reach 17 million tons.

Preliminary forecasts for world wheat stocks by the close of the season in 2021/22 MY are pegged at a record level of 299 million tons, up 2.6% above their opening levels. However, the situation remains somewhat tight in major exporters. Wheat inventories in China are forecast to rise further in 2021/22 MY, accounting for the bulk of the anticipated increase, along with anticipated rebounds in the EU and Ukraine following consecutive years of tight supplies.

In view of the good production prospects, international wheat prices have recently come down but remain at elevated levels.

 

 

Source: FAO

 

- Maize demand from China increased substantially in 2020/21 MY. How do you estimate the level of maize supply in the new season? 

- Despite a possible record production of maize this year, 2021/22 could see another drawdown of global stocks, the fourth consecutive annual drawdown since 2017/18, to a 7-year low. Thanks to increased outputs in China, the EU, Ukraine and especially the US where farmers responded to the high maize prices by expanding their acreage, global maize production is currently forecast to reach a new record at 1199 million tons, an increase of 3,7% compared to last season. However, in view of strong maize demand for feed and industry applications (e.g. biofuels), consumption could exceed production. After unprecedented maize imports from China this season, many of these forecasts critically depend upon future import demand from China. While imports might be slightly lower this season, we continue to see China as a leading driver of world maize trade, along with a likely increase in purchases by the EU, Mexico, and Turkey. On the export side, we see a strong increase of shipments from Ukraine, the world’s fourth largest exporter, reaching 28 million tons (up almost 25% from 2020/21) and slightly lower shipments from the world’s top three exporters: the United States (65 million tons/down 7.8%), Argentina (34 million tons/down 5.6%) and Brazil (31 million tons/down 11.4%).

 

- Global soy markets tightened significantly in 2020/21 MY with stocks contracting to a 7-year low due to firm demand basically from China. What trends do you see for the new season?

- In 2021/22, soybean production could rise to a record-high, primarily tied to expectations of higher plantings in the US and Brazil, as well as a sizeable output recovery in Argentina. Utilization is anticipated to expand by 2,6% year-on-year, which constitutes an average rate of growth, mostly driven by steady consumption growth in China – linked to further expansion in livestock production. Trade in 2021/22 (Oct/Sep) is forecast to expand at a subdued rate, reflecting modest import growth from China, while South American exports would expand, in part at the expense of shipments by the US. Global inventories could recover partially from the 7-year low in 2020/21, but global stock-to-use ratios remain well below the level recorded in recent years. This relative tightness in global soy markets continues to be reflected in international prices, which remain at elevated levels and would require a record crop to retreat.

- In your opinion, what factors could lead to a revision of the world balance of agricultural crops in 2021/22 MY?

- As with all forecasts, there are many uncertainties to keep in mind. For example, weather conditions may influence final production outcomes. In Brazil prolonged dry conditions are currently a concern for this year’s maize production potential. It is also important to consider the continued spread and/or recovery of animal diseases, e.g., the growth of the pig herd in China after African Swine Fever will be critical not only for the livestock sector but also for feed markets. In addition, the impact of COVID-19 on global demand and the speed of economic recovery should be taken into account as well as the further evolution of exchange rates since a continued weakening of the US dollar could lead to higher commodity prices (and vice versa). Last but not least, developments in energy markets will have to be watched closely due to their strong effect on agricultural prices. In 2020, oil prices have been very volatile, even slipping into negative territory, but have since made steep gains so it is difficult to predict which way they will go in the coming months.

 

Interviewed by Anna Lysenko, APK-Inform Agency

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