Re-entering Agflation - World Food Prices to Hit Record High
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
Re-entering Agflation World Food Prices to Hit Record High
Re-entering Agflation
World Food Prices to Hit Record High
Luke Chandler
luke.chandler@rabobank.com
Nick Higgins
nicholas.higgins@rabobank.com
Rabobank International Disclaimer: This document is issued by Coöperatieve Centrale Raiffeisen-Boerenleenbank B.A. incorporated in the Netherlands, trading as
Rabobank International (“RI”). The information and opinions contained in this document have been compiled or arrived at from sources
Agri Commodities Market Research believed to be reliable, but no representation or warranty, express or implied, is made as to their accuracy, completeness or correctness.
This document is for information purposes only and is not, and should not be construed as, an offer or a commitment by RI or any of its
Food & Agribusiness affiliates to enter into a transaction, nor is it professional advice. This information is general in nature only and does not take into account
Research and Advisory an individual’s personal circumstances. All opinions expressed in this document are subject to change without notice. Neither RI, nor other
legal entities in the group to which it belongs, accept any liability whatsoever for any loss howsoever arising from any use of this document
agrimarketsresearch@rabobank.com or its contents or otherwise arising in connection therewith. This document may not be reproduced, distributed or published, in whole
www.rabotransact.com or in part, for any purpose, except with the prior written consent of RI. All copyrights, including those within the meaning of the Dutch
Copyright Act, are reserved. Dutch law shall apply. By accepting this document you agree to be bound by the foregoing restrictions.
© Rabobank International Utrecht Branch, Croeselaan 18, 3521 CB, Utrecht, the Netherlands +31 30 216 0000
Contents | i
Contents
Page
Executiv e summar y . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1
The price of food will incr ease fur ther . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Not a case of déjà vu for food prices: Why 2013 will be different to 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Regional effects: Asia, the Middle East and North Africa to slow demand . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Free markets are out the window when food prices are on the table . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 2
Global agr icultur al prices spik e, again . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Agricultural commodity prices to remain high for some time yet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Speculative influence has diminished . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Demand rationing to hit biofuels and animal protein industries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Second order impacts—the knock-on effects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Grains and oilseeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Animal protein . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Chicken . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Pork . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Beef . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Dairy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Beverages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Soft drinks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Beer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Value-added processing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Farm inputs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Executive summary | 1
Executive summary
Skyrocketing agricultural commodity prices and, consequently, we expect agricultural
are causing the world to re-enter a period of commodity prices—particularly for grains
agflation, with food prices forecast to reach and oilseeds—to remain at elevated levels
new record highs in 2013. for at least the next 12 months.
• Agricultural commodity production has This time around, the most affected
plunged as droughts in the US, South commodities are largely used in animal feed
America and Russia have diminished crop and are not core food staples of the world’s
prospects and tightened already low developing economies. This is a very different
inventory levels. scenario from that in 2008, when declining
wheat stocks and several national bans on
• The social impact should be different to
rice exports limited the amount of grains
2008 as this time around crop shortages
available for direct human consumption.
are affecting feed intensive crops such as
We estimate that world corn (soybean) stocks
corn and soybeans, rather than core food
will fall to only 51 (73) days of use at the
staples such as wheat and rice.
end of 2012/13, compared to 62 (83) days in
• Food security remains a highly sensitive 2007/08, whereas wheat and rice stocks are
issue in many regions, and we expect to expected to improve over the same period
see a return of government interventions, (see Figure 0.2). Stocks of core food staples,
which could exacerbate food and such as rice and wheat, are forecast to
commodity price volatility. comprise a larger share of total grain and
oilseed stocks in 2012/13 at 61 percent versus
• The rally in grain and oilseed prices will
53 percent in 2007/08. As a result, while corn
have a significant knock-on effect to
and soybean prices are at record highs, wheat
animal protein industries and other
and rice prices are more than 30 percent
processing supply chains−raising prices
lower than their 2008 peaks.
for meat consumers and challenging
processor margins around the globe. A more subdued non-food inflationary
environment will result in less social pressure
Food price inflation is once again
from rising food prices this time around. Non-
accelerating, triggered by the worst drought
food inflationary pressure relative to 2008 will
the United States (US) has seen in nearly a
also be reduced by weaker global growth,
century and exacerbated by droughts in
lower energy prices and reduced freight costs.
South America and Russia. Rabobank analysis
However, as in 2008, increased government
suggests world food prices may reach an
stockpiling, trade restrictions and other forms
all-time high in Q1 2013, peaking in Q3 2013
of intervention remain a significant threat as
(see Figure 0.1). In order for demand rationing
governments look to abate the local effects
to take place and encourage a supply
of higher international prices.
response, prices will need to stay high
2 | Rabobank Re-entering Agflation
The impact of higher grain and oilseed prices
will be significant for the animal protein and
dairy sectors as they are likely to be squeezed
by higher feed costs. The long production
cycles of the animal protein and dairy
industries will have lingering effects on global
food prices as herds (especially cattle) take
longer to rebuild—maintaining upward
pressure on food prices. The full effect of this
commodity price rally and the subsequent
lower meat and milk output, will be a multi-
year rebuilding of herds, which will sustain
high price levels of these products.
Meanwhile, effects on the beverages and
value-added products (VAP) sectors will be
more muted as grains and oilseeds constitute
a smaller part of the overall production costs.
Figure 0.1: Rabobank forecasts that the FAO Food Price Index Figure 0.2: Soybean and corn inventories are set to decline to
will hit new record highs in early 2013 lower levels than 2008, while wheat and rice are more abundant
550 275 110
500 250 100
global stocks (million tonnes)
450 225 90
400 200
80
index
index
350 175
70
300 150
250 60
125
200 100 50
150 75 40
Mar 01
Mar 11
Mar 00
Mar 02
Mar 03
Mar 04
Mar 05
Mar 06
Mar 07
Mar 08
Mar 09
Mar 10
Mar 12
Mar 13
Corn Soybeans Rice Wheat Combined
S&P Agri Index FAO Food Price Index (RHS) Average (97-06) 07/08 12/13f
Source: FAO, Rabobank, 2012 Source: USDA, Rabobank, 2012Section 1 The price of food will increase further | 3
1 The price of food will increase further
The coming year will likely see the world Q1 2012. These impacts, combined with
economy re-enter a period of agflation as a less certain outlook for Australian grain
grain and oilseed stocks decline to critically production, have accelerated the trend
low levels, pushing the FAO Food Price Index of decreasing inventories across the grains
above record nominal highs set in February and oilseeds complex and pushed agricultural
2011. These high food prices have been commodity prices near record highs. Global
triggered by droughts in several key growing grain and oilseed stocks are now forecast to
regions, led by the 2012 US drought, the worst decline for the third consecutive year, and
since 1936. At the end of August, severe (or higher food prices are still needed to meet
worse) drought conditions covered over the clear and present need for a reduction
42 percent of the US mainland (see Figure 1.1). in global demand.
As a result, 2012/13 grain and oilseed
Our modelling suggests that the FAO Food
production is likely to see a reduction of
Price Index will rally another 15 percent from
over 8 percent YOY, from already depressed
31 August 2012 levels to 243 points by
levels. Despite higher planted acreage, this
30 June 2013 (see Figure 1.2). July readings of
year has also seen a drought in Russia as well
the index saw a 6 percent increase after prices
as La Niña-related dryness, which impacted
had fallen during the previous four months,
the harvesting of South American crops in
although the index stagnated in August.
Figure 1.1: Drought conditions in the US are the worst since 1936, the Dust Bowl era
L S
SL
SL SL
SL
SL L
SL
SL SL
SL
L L
Drought Impact Types:
L
Delineates dominant impacts
L L S = Short-term, typically 6 months
(e.g. hydrology, ecology)
D0 Abnormally dry D1 Drought - moderate D2 Drought - severe
D3 Drought - extreme D3 Drought - exceptional
Source: USDA, Rabobank, 20124 | Rabobank Re-entering Agflation
We expect future gains in the FAO Food Price for placement onto feed lots (CME Feeder
Index to be faster in the near term, with food Cattle) are expected to increase by 6 percent
prices expected to rally 12 percent from 31 and 8 percent, respectively, over that same
August levels by the end of 2012 and growth period. Price rallies in these markets lag those
slowing to 2 percent for the first half of 2013. of grains markets due to the downstream
Peak aggregate food prices, according to our nature of the industry, with animal protein
current estimates, should therefore occur companies needing to adjust to higher feed
during the Q2/Q3 transition in 2013. costs. This involves reducing the size of the
animal herd, initially creating a supply glut,
Fundamentals remain much tighter than
which then leads to higher prices as supplies
current official market estimates, with existing
drop. Dairy prices are expected to respond
food price records, set in 2011, likely to be
more quickly as herd reductions translate into
broken as the severity of the situation
higher milk prices on a shorter scale—
becomes clear. As a result of droughts in
although rebuilding dairy herds also has a
key exporting countries and rapid demand
long cycle, prolonging any shortage created.
growth in developing countries, the
Grain and oilseed prices are not expected to
combined global wheat, rice, corn and
be major direct contributors to further food
soybean stocks-to-use is expected to fall to
price moves, with average grain prices
19.6 percent in 2012/13—only 0.4 percent
increasing 6 percent by 30 June 2013, offset
above 2007/08 levels. Combined stocks-to-
by falling CBOT Soybean prices, which we
use for these key commodities had fallen
expect to fall nearly 12 percent over the same
14 percentage points in the eight years
period. Divergence between grain and oilseed
to 2007/08. Although the timing of price
prices is driven by the relative importance of
changes remains uncertain, we believe that
South America in the oilseeds complex, where
the FAO Food Price Index provides a useful
a good harvest is expected to relieve some of
proxy for prices paid by world consumers
the supply-driven price pressure.
for food, and gives an indication of how
agricultural commodity prices may translate
Not a case of déjà vu f or f ood pr ices:
into prices at the local shop. The model uses
Why 2013 will b e diff erent to 2008
our house forecasts for commodity futures
The spike in world food prices this year is
prices, futures curves for livestock prices,
expected to ration animal feed, unlike the
and momentum factors to anticipate
staple grain shortage of 2008. We estimate
future changes.
that world grain and oilseed stocks will fall
Meat and dairy prices, which comprise to only 71 days of use by the end of 2012/13,
52 percent of the FAO Food Price Index, are the compared to 70 days in 2007/08. Despite
primary drivers of our forecast for further food the two events seeming similar, we expect
price increases (see Figure 1.3). The price of social pressure for food availability to be
pork, demonstrated by the lean hog futures lessened as consumers switch consumption
curve, is expected to rally 31 percent from from animal protein back towards staple
spot prices by 30 June 2013. Cattle ready grains—an option not available in 2007/08
for slaughter (CME Cattle) and cattle ready due to severe shortages of wheat and rice.
Figure 1.2: The FAO Food Price Index is forecast to rise to new Figure 1.3: Meat and dairy prices comprise 52% of the FAO Food
record levels in 2013 Price Index
550 275 Sugar 7%
500 250
450 225
S&POils
FAO Agri
Food14%Index
Price Index (RHS) Meat 35%
400 200
index
index
350 175
300 150
250 125
200 100
150 75 Cereals 27%
Mar 01
Mar 11
Mar 00
Mar 02
Mar 03
Mar 04
Mar 05
Mar 06
Mar 07
Mar 08
Mar 09
Mar 10
Mar 12
Mar 13
Dairy 17%
S&P Agri Index FAO Food Price Index (RHS)
Source: FAO, Bloomberg, Rabobank, 2012 Source: FAO, Rabobank, 2012Section 1 The price of food will increase further | 5
Our analysis indicates that world stocks of in five of the thirteen marketing years since
soybeans in the 2012/13 season will fall to the turn of the millennium (see Figure 1.4).
just 73 days of use (-6 YOY) while corn stocks
In fact, world wheat stocks are expected to
will fall to just 51 days of use (-4 YOY). These
end this season with 90 days of use (-14 YOY)
numbers compare to 83 days and 62 days,
and should remain considerably higher than
respectively, for the 2007/08 season. As this
the 76 days of use reached in 2007/08
season’s decline in stocks is concentrated in
(see Figure 1.5). Rice stocks are also significantly
corn and soybeans (used largely in animal
more plentiful this time around with 81 days
feeds), stock tightness can be alleviated
of use (-2 YOY) compared with just 69 days in
through reduced meat and dairy consumption.
2007/08. Export bans in major rice exporting
These effects will be masked in the shorter
countries, including India and Vietnam, were
term as higher slaughter rates temporarily
a key component of the 2008 record rally in
increase meat supply. The longer term effect
rice prices, with August 2012 rice prices of
will be reduced animal herd sizes, which will
USD 15.6 per cwt still 34 percent below the
drive down production and increase prices.
2008 peak. While there have been some
Unlike in 2007/08, higher prices will linger this
concerns with the sub-par Indian monsoon,
time, even if increased production alleviates
at this stage production has not been as
pressure on underlying grain fundamentals
adversely affected as in 2008. Additionally,
as herds take time to rebuild.
non-grain and oilseed prices have remained
The crisis of 2008 was many years in the more subdued, with sugar—a large food-
making, with stocks-to-use declining across price component—falling 16 percent YTD.
the grains and oilseeds complex beginning However, with the reference #11 sugar price
in 2000 as emerging market and biofuel trading at USc 20 per lb, prices remain well
demand accelerated. The 2008 crisis was above the 2008 average price of USc 12 per lb,
a signal that there was not enough growth with prices declining from their peak of USc
in production or investment in agriculture 35 per lb in February 2010.
to meet the accelerated growth rate in
Meat consumption will be significantly more
consumption. The subsequent price response
affected than the consumption of grain
incentivised the largest grain and oilseed
(e.g. bread) as demand rationing will be
harvest ever in 2008/09. However, the record
focused in the feed grains complex. One
crop was not sufficient to rebuild depleted
direct consequence of this, due to the long
inventory levels as consumption growth
animal protein and dairy production cycles,
kept pace with production increases.
will be that price effects will linger longer as
Ultimately, prices dropped and output
herds (especially cattle) take longer to rebuild.
faltered in 2010/11, prompting another
As herds are liquidated this will increase
agricultural commodity rally. The coming
supplies in the short term and depress prices.
decline in world grain and oilseed stocks
In the medium/longer term this will maintain
reinforces the longer term trend of
upward pressure on food prices as meat
consumption surpassing production,
and dairy supplies contract.
with production only outpacing supply
Figure 1.4: Combined world stocks-to-use for wheat, rice, corn Figure 1.5: Combined world stocks-to-use for wheat, rice, corn
and soybeans began to decline in 1999/2000 and soybeans improved following 2007/08, but are forecast
to decline for the third consecutive year in 2012/13
34 2,400 120
32 2,300 110
days of use (world stocks)
30 2,200 100
million tonnes
28 2,100 90
percent
26 2,000 80
24 1,900 70
22 1,800 60
20 1,700 50
18 1,600 40
00/01
10/11
99/00
01/02
02/03
03/04
04/05
05/06
06/07
07/08
08/09
09/10
11/12
12/13f
07/08
08/09
09/10
10/11
11/12
12/13f
Stocks/use Consumption (RHS) Production (RHS) Corn Soybeans Rice Wheat Combined
Source: FAO, Rabobank, 2012 Source: USDA, Rabobank, 20126 | Rabobank Re-entering Agflation
Low growth, lower oil prices and weaker that the share of global demand reduction
consumer confidence levels are all likely to will be proportionally larger in the Middle
lessen the impact of higher food prices this East, North Africa and Asia, where demand
time around. Persistent economic output is more elastic and where lower incomes
gaps relative to pre-2008 levels have recently drive consumers to reduce animal protein
contained, and will likely continue to contain and milk consumption in favour of staple
inflationary pressures. This is an important grains (see Figure 1.7).
difference compared to 2007/08 as there was
Higher prices will stall the long-term trend
no output gap in that period and broadly
towards higher animal protein diets in
based inflationary pressures drove food prices
developing economies. Rabobank expects
higher. The US dollar—the currency commonly
the developing world—with its high demand
used for pricing world grains—has depreciated
elasticity, especially to meat—to ration import
11 percent since its peak in late 2008, which
demand of grains, oilseeds and meat most
also helps to alleviate the food price pressures
heavily, leading consumption growth to slow
of the first half of 2012 in importing nations.
and even recede for a period as prices rise.
Crude oil prices are lower than in 2008,
Ultimately, the extent of this season’s price
reducing bullish pressure on input costs such
hikes for corn and soybeans is likely to reduce
as fertiliser and fuel, which are highly related
meat consumption growth in the coming
to energy prices, and therefore alleviating
years, moving counter to the longer term
some pressure on agricultural commodity
trend of increasing animal protein
prices (see Figure 1.6). Despite this, some
consumption. This is a form of demand
pressure remains, with a mild US economic
rationing—as on a calorie-for-calorie basis
recovery underway, strong emerging market
meat and dairy products require multiples
growth, and geopolitical tensions in the
of grain inputs used in direct grain
Middle East inducing average prices of over
consumption—and will reduce pressure
USD 110 per barrel for Brent crude oil over
on global grain and oilseed balance sheets.
the last 12 months. If economic growth picks
up and oil prices rise, there could be further Meat demand reduction in the Middle East
bullish pressure on agricultural commodity and North Africa is likely to cut grain imports
prices in 2013. 9 percent YOY in 2012/13. Meat price elasticity
in these regions averages -0.5, in line with
Regional eff ects: Asia, the M iddle E ast Asia, but likely understates the true sensitivity
and N or th Africa to slo w demand to price increases due to high income, small
Rabobank expects that emerging market population states such as Kuwait. However,
demand for animal proteins will be most reduction in grain import demand in some
affected by higher food prices. Although high countries (Morocco is one such case) will be
prices will be felt chiefly in the meat and dairy limited by post-Arab spring wariness as
sectors, and although the developed world higher prices for staple grains are commonly
consumes a disproportionate share of these considered a key catalyst for the kind of
products, food makes up a smaller share of unrest seen in recent years. In order to limit
developed world budgets with consumers the risk of another period of widespread
less responsive to price changes. This means social unrest, governments in these regions
Figure 1.6: Agricultural commodity prices and energy prices
remain strongly correlated
600 160
550 140
500
120
450
index value
100
USD/barrel
400
350 80
300 60
250
40
200
150 20
100 0
2000
2002
2004
2006
2008
2010
2012
Brent Crude Oil S&P Agri Index (RHS)
Source: Bloomberg, Rabobank, 2012Section 1 The price of food will increase further | 7
Figure 1.7: Meat price elasticity of demand is highest in the developing world where meat comprises a larger share of household budgets
Very high (-.50 to -0.65)
High (-.45 to -0.50)
Medium (-.40 to -0.45)
Moderate (-.25 to -0.40)
Low (-.25 to -0.35)
No information available
Source: USDA, Rabobank, 2011
may choose to keep domestic prices imports will remain supported with the
artificially low. Large hard-currency reserves, region maintaining a share of nearly a third
generally derived from oil export revenue, of global wheat imports (see Figure 1.8).
provide additional support for government
Asian demand is also expected to decline as
purchases. Despite this, Rabobank expects the
increasing prices interact with high animal
regions to import under 78 million tonnes of
protein demand elasticity, with much of the
grain in 2012/13—the lowest amount since
region lacking protectionist policies. Although
2007/08. Imports would be even lower, but
the region may move to adopt more
base import demand has been increased due
protectionist measures (see pages 9 to 11)
to lower yields in 2011/12 in grain producing
we believe that higher food prices will
areas of North Africa. Although feed grain
ultimately lower animal protein consumption,
demand is likely to fall, we expect that staple
and therefore reduce meat imports.
Figure 1.8: The Middle East and North African regions rely heavily on grain and oilseed imports,
comprising a third of global wheat trade
Tunisia Syria
Afghanistan
Morocco Israel Iraq Iran
Jordan
Kuwait
Algeria
Libya Egypt
Saudi Arabia
Oman
Yemen
Share of global wheat trade8 | Rabobank Re-entering Agflation
Meat price elasticity averages -0.52 in South of the recent rally is expected to be more
Korea, Vietnam, Malaysia and Indonesia. Even benign, with the recent rally in international
if governments undertake protectionist prices seeing them gain (but not meet)
measures to encourage imports, as mooted higher Chinese prices (see Figure 1.9).
by South Korea in early August, we expect
Domestic inflationary pressure will also
that animal protein imports (chiefly those
be alleviated by falling asset prices as the
from the US) will fall as the US domestic
Shanghai Composite Equity Index, down
animal protein sector is squeezed by higher
14 percent from its May 2012 peak, is
costs. In this way, we see much of the decline
correlated, with a nine-month lag, to
in US feed demand, and subsequent meat
food price inflation (see Figure 1.10). This
production, ultimately falling on Asian
relationship between equity prices and food
consumption—tempering the recent trend
price inflation suggests that wealth effects
of rapidly increasing US meat exports into
may drive part of Chinese households’
this region.
consumption behaviour. Lower perceived
Demand rationing is expected to be limited wealth may therefore temper growth in
in China, the world’s largest net importer of per capita meat consumption.
food, with net imports of grains and oilseeds
Demand from developed net importing areas
increasing to new record highs in 2012/13.
is generally unresponsive to changes in food
This will see net imports jump 19 percent to
prices. Europe and Japan are the second and
89 million tonnes in the 2012/13 marketing
third largest importers of global grains and
year, with soybean imports the chief driver of
oilseeds, respectively. They are also the only
demand—although corn and wheat imports
developed economies included in the world’s
are also expected to increase. Soybean
top 30 importers. Demand for grains in these
imports, of which China imports 70 percent
countries is so inelastic that responsiveness
of world trade, are expected to be 62 million
to price changes is statistically zero—though
tonnes in 2012/13, a 4 percent increase YOY.
higher meat elasticity is expected to result
Despite higher prices, it is the government
in some reductions in animal protein
rather than consumers that will face
consumption. Despite low price elasticity, we
international markets, muting the
expect demand in Japan and Europe will slow
transmission of higher prices to the Chinese
marginally, with importing end users acting
consumer. The Chinese government’s ability
to protect profits through stock drawdowns,
to act quickly was exemplified by the
but otherwise ultimately able to pass higher
21 August announcement that China will
prices through to the consumer. However,
redistribute commercial importers’ unused
longer term consequences of food price
2012 quotas for wheat, corn, rice, sugar and
inflation may be particularly visible in Europe,
cotton (there is no soybean quota). This
potentially increasing pressure on
signals the Chinese government’s desire
governments to repeal bans on growing
for imports to continue. Chinese domestic
genetically modified (GM) crops or to reverse
prices for corn and soybean have been above
biofuel mandates. Stagnating economic
USD 8.00/bu and USD 16.00/bu, respectively,
growth provides additional support for this
since early 2011. Therefore, the price shock
Figure 1.9: Chinese soybean prices have long been higher than Figure 1.10: China’s food prices are closely correlated to the
those in the US (and internationally) with the recent rally performance of financial assets, such as the Shanghai
seeing the margin decrease Composite Equity Index presented below
850 7,000 30
750 6,000 25
20
650 5,000
USD/tonne
15
550 4,000
percent
index
10
450 3,000
5
350 2,000
0
250 1,000 -5
150 0 -10
2005
2006
2007
2008
2009
2010
2011
2006
2007
2008
2009
2010
2011
2012
Dalian Soybeans CBOT Soybeans Shanghai Composite CPI - Food (RHS)
Source: USDA, Bloomberg, 2012 Source: NBSC, Bloomberg, Rabobank, 2012Section 1 The price of food will increase further | 9
hypothesis as cost conscious consumers are developing nations—a figure which expands
more likely to react to higher meat prices, to 27 percent once fish and dairy
increasing the popularity of policies that consumption are included—which means
increase grain production and reduce prices. an increase in commodity prices will have a
larger impact on household budgets in these
Rising feed costs will have a substantial
regions compared to developed countries.
impact on the US livestock industry but
With food comprising such a large share
domestic meat consumption will be less
of spending, especially in Asia, increases
affected. The US has the lowest meat price
in food prices could possibly have knock-
elasticity in the world, with consumption
on effects in demand growth of other
least likely to drop in response to higher
commodities and consumer spending
prices. However, the effects on the US
more broadly (see Figure 1.12).
livestock complex will be extensive and,
despite inelastic domestic demand, meat
Free mar kets ar e out the windo w
product exports are likely to fall. The US
when f ood pr ices ar e on the table
became a net exporter of animal protein in
Increases in commodity stockpiling and
2006, with rapid increases in Asian demand
other interventionist measures, such as export
driving exports up by 14 percent per annum
bans, are a distinct possibility in 2012/13
since (see Figure 1.11). Relatively inelastic
as governments react to protect domestic
demand in the US should see this trend
consumers from increasing world food prices.
reversed in 2013, with meat imports rising
Rabobank sees Asian and Middle Eastern
while exports fall as other countries are
countries as the most likely first movers, with
unable to afford the higher prices that US
large foreign currency reserves and large
exporters will demand. This trend could be
portions of household expenditure exposed
exacerbated by increases in grain stockpiling
to food prices encouraging early action to
as other nations protect domestic industries
protect social order (see Figure 1.13).
and consumption, supporting US grain and
Increased government intervention will likely
oilseed exports while slowing the animal
add to increasing world commodity and
protein export complex.
food prices with domestic stockpiles meaning
Ultimately, we expect that the effects of that a larger portion of already low global
higher global prices will be contingent upon stocks sits idle. We expect that localised
the political sensitivity of higher price moves efforts to increase stockpiles would be
as well as the size of government foreign counterproductive at the global level, with
reserves. We believe that many of the largest those countries least able (or willing) to pay
importing countries will be able to stabilise higher prices likely to see greater moves
domestic prices by implementing domestic in domestic food price inflation. This is a
procurement programmes, which could vicious circle, with governments committing
offset the effects of higher global prices to domestic stockpiling and other
and cushion domestic consumption. interventionist measures earlier than
Grains, oilseeds and meat make up at least usual—recognising the risk of being left
20 percent of discretionary income in out as exportable stocks decline further.
Figure 1.11: US pork, veal and beef exports should come under Figure 1.12: Food comprises a much larger share of consumer
pressure as Asian importers reduce demand due to budget in Asia than in higher income countries,
higher prices such as the US Exports
production
4 25 50
3.5 45 Imports
23 40
3
35
21
million tonnes
million tonnes
2.5 30
percent
2 19 25
1.5 20
17 15
1
10
15
.5 5
0 13 0
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
Philippines
India - CPI
Vietnam
Indonesia
Thailand
China
Malaysia
Hong Kong
Taiwan
Singapore
Korea
US
Imports Exports Production (RHS)
Source: USDA, Rabobank, 2012 Source: Bloomberg, Rabobank, 201110 | Rabobank Re-entering Agflation
Figure 1.13: Higher food prices had significant geopolitical consequences in 2008 as riots occurred in many regions
Food riots, 2007-2008
Source: USDA, Rabobank, 2011
Russian export bans may not be imposed, but • A Mexican entity purchased the fourth-
we expect the effects to be similar, with largest single order of corn ever from the
demand for exports in the Black Sea region US. A chicken import tariff was introduced
outstripping available supplies for export. in response to reported US dumping of
These pressures have risen again due to chicken legs and thighs.
intense drought crippling Black Sea wheat
• South Korea is currently considering
production. Grain export bans, emanating
whether to introduce a domestic
from the Black Sea region—led by Russia—
purchasing regime for grains and oilseeds.
have historically been a threat to grain price
stability, although recent comments by the • China’s soybean purchases show little to
Russian government suggest bans are no sign of slowing down, with 12 million
unlikely in the near term. We expect that if tonnes of the 2012/13 US soybean crop
export bans are not imposed by Russia, sold—a 14 percent increase in new crop
internal Black Sea region trade will grow to sales compared to this point in 2011.
see Kazakhstani wheat moved into Russia in
• Iran—a country that is usually self-
early 2013 to offset the rapid pace of Russian
sufficient in wheat, importing only
exports seen in Q3 2012. This will have an
0.5 million tonnes in 2010/11—has
effect similar to an export ban: reducing the
reportedly transacted several sales of over
available Black Sea region surplus, albeit with
1 million tonnes of wheat from both
lower near-term price volatility. This solution
Pakistan and India, and purchases of rice
still means the market has to adjust to lower
and corn could follow, placing further
wheat supplies but delays the impact—
pressure on global grain and oilseed
kicking the can further down the road.
balance sheets.
Rabobank has been monitoring several
• Indonesia is repealing import tariffs on
events that could be the beginning of a
soybeans to protect domestic tofu
trend towards larger government purchases
processors, and has announced plans to
in 2013.
increase grain stockpiles.Section 1 The price of food will increase further | 11
Expectations of further increases in food
prices and high supply uncertainty will see
competition for world food inventories
increase, resulting in reduced stocks in major
exporting countries. China and India have
increased their shares of global stocks in
the past five seasons in order to combat high
domestic prices (see Figure 1.14). The
increasing shares of China and India have
come at the expense of US inventories; the US
is forecast to have 11 percent of global stocks
in 2012/13, down from 20 percent in 2005/06.
As the scale of damage to the US corn and
soybean crops becomes more apparent,
Rabobank expects there will be a renewed
tendency to increase domestic stockpiles in
China, but this will be constrained by the low
supply. As US stocks have continually fallen
since 2005/06, and are now at pipeline levels
for most grains and oilseeds, further increases
in US exports to support stockbuilding
in China are not possible. Chinese imports
will have to originate from further afield,
increasing competition and disrupting
traditional trading partnerships. Other
countries will therefore have to outbid
incremental Chinese demand, placing
further pressure on agricultural commodity
prices. Given the high prices and low
availability of exportable supply, we
anticipate the Chinese share of global
stocks will fall in coming seasons as their
strategic reserves are drawn down.
Figure 1.14: The share of wheat, rice, corn and soybean stocks held
by the world’s largest countries has declined since 1999/2000
100
90
80
global stocks (percent)
70
60
50
40
30
20
10
0
00/01
10/11
97/98
98/99
99/00
01/02
02/03
03/04
04/05
05/06
06/07
07/08
08/09
09/10
11/12
12/13
China India US Other
Source: USDA, Rabobank, 2012Section 2 Global agricultural prices spike, again | 13
2 Global agricultural prices spike, again
Global grain and oilseed prices are currently Many comparisons have been made to the
experiencing their third major rally in only devastating drought of 1988, when corn
five years as a combination of adverse production fell 31 percent YOY. However,
weather and robust demand keeps global according to heat and precipitation records,
stocks at record low levels (see Figure 2.1). the damage to this year’s crop may be even
As often occurs in major agricultural price more severe. June to August precipitation and
rallies, the trigger in 2012 has been a heat in the central US, where most of the US
weather-induced supply shock. This has row crops are produced, is likely to result in
been supported by a sustained period of the least favourable growing conditions seen
strengthening agricultural commodity since the Dust Bowl (peaking in 1936), and
demand; all the while, inventory levels have the third worst in over a century. Our crop
been unable to be replenished. Over the past modelling indicates that there may still be a
five seasons, low grain and oilseed stocks considerable downside from current official
have left the market without any buffer to production forecasts, which reflects our bias
adverse growing conditions. This is a short- that prices are unlikely to have reached a high
term versus long-term problem, with the at this stage of the season. The market may
short-term supply response thus far unable still need to price in further reductions to
to meet the requirements of longer term output as well as a risk premium associated
demand for feed grains to supply the animal with the coming South American crops.
protein consumption growth in emerging
Production setbacks this season have not
market economies and the rapid acceleration
been limited to the US, with a number of key
in world biofuel demand experienced over
regions suffering adverse seasonal conditions
the past decade. Given the inability for prices
in 2012. Widespread droughts in South
to incentivise a sufficient supply response
America and Russia together with a sub-par
during these recent price rallies, we expect
Indian monsoon, disease issues in China and
the 2012 price reaction will need to be
some dry conditions in Western Australia,
strong and sustained.
have all negatively impacted world grain and
The primary catalyst of the current oilseed production this season. We estimate
agricultural price rally has been devastating that this season’s adverse weather has slashed
droughts in the US, South America and Russia, over 165 million tonnes from the global grain
which have slashed grain and oilseed and oilseed balance sheet. Taken together
production expectations. US corn production with already tight stock levels coming into
is now forecast to fall 29 percent below the season, this underscores the need for a
initial USDA expectations, a 14 percent relatively unprecedented amount of demand
decline YOY and the lowest level in nine rationing in the global grains and oilseeds
years, despite record plantings this season. sector. Global corn consumption is likely to14 | Rabobank Re-entering Agflation
Figure 2.1: Wheat, corn and soybean prices are experiencing
their third major price rally in five years—setting records for
soybeans and corn
18
16
14
12
USD/bushel
10
8
6
4
2
0
2011
2003
2004
2005
2006
2007
2008
2009
2010
2012
CBOT Wheat CBOT Corn CBOT Soybeans
Source: Bloomberg, Rabobank, 2012
decline YOY for the first time in 17 years. However, we still expect prices to remain
However, total global grain use is likely to above long-run average levels, unless there
exceed production for the seventh time is a major demand shock in the market, such
in 14 years. as a major policy change (e.g. biofuels) or a
global recession.
Agricultur al commo dit y pr ices
The scale of the production setbacks this
to remain high f or some time y et
season will underscore the need for an almost
Record high agricultural commodity
unprecedented amount of demand rationing.
prices will be required over the next 12 to
We believe that this will be a much more
24 months in order to cut demand and
difficult task than current livestock and
encourage a production response from
ethanol production margins would suggest.
the world’s farmers next season. We expect
Entrenched demand, feedback effects from
agricultural commodity prices will peak
animal protein price increases, hedged
somewhere between Q4 2012 and Q1 2013
production margins within the hog and
as new crop prospects in Brazil and Argentina
cattle sectors and the US ethanol mandate
are showing signs of trend line yields being
(Renewable Fuel Standard-RFS) will likely
achieved for corn and soybeans. Beyond this
mean that elevated agricultural commodity
period, we anticipate an easing in prices if
prices will be required for the entire
seasonal conditions normalise and world
marketing year and beyond in order to
inventory levels can recover (see Figure 2.2).
sufficiently limit both US and global use.
Figur e 2.2: Rabobank quar terly a verage gr ain and oilseed pr ice forecasts
Q4’09 Q1’10 Q2’10 Q3’10 Q4’10 Q1’11 Q2’11 Q3’11 Q4’11 Q1’12 Q2’12 Q3’12 Q4’12 Q1’13 Q2’13
Wheat (CBO T) USc/bu 522 496 467 653 707 786 745 690 615 643 642 860 880 900 920
Wheat (Matif ) EUR/tonne 129 125 132 200 225 252 233 199 186 210 212 255 261 267 273
Corn USc/bu 386 370 355 422 562 670 731 696 620 641 617 790 800 810 820
Soybeans USc/bu 1,002 955 957 1,035 1,245 1,379 1,361 1,356 1,175 1,272 1,426 1,725 1,685 1,600 1,450
Soy oil USc/lb 38.1 38.6 38.1 40.2 51.0 57.0 57.2 55.7 50.6 52.9 52.2 53.0 52.5 52.0 51.0
Soymeal USD/ton 306 278 281 305 338 367 353 352 302 339 413 510 490 420 375
Palm oil MYR/tonne 2,309 2,577 2,527 2,650 3,293 3,675 3,362 3,097 3,016 3,219 3,245 2,850 2,900 3,000 3,100
Source: Bloomberg, Rabobank, 2012Section 2 Global agricultural prices spike, again | 15
Several key factors are likely to support commodity prices are needed to encourage
US domestic demand, reducing world export improved production in South America, the
availability and supporting prices into Black Sea region and the US in the short term.
2012/13 and beyond as global grain and High fertiliser prices, which are linked with
oilseed stocks decline more than expected: stubbornly high energy prices, remain a
key cost of production for agricultural
• US broiler egg sets are up 1 percent YOY,
commodities (see Figure 2.3). Other rising
and chick placements are flat YOY as of
production costs, such as improved seed
8 September.
technology and rising land rents, will also
• The US pork industry had the opportunity prove to be increasing hurdles to farmer
to use futures markets to lock in profit profitability, and will require higher prices
margins for 2012, which would likely as an incentive to invest in expanded
shield margins from rising feed costs production. Additionally, the bulk of potential
until 2013. acreage gains are in countries with high
political risks, causing a larger risk premium
• US consumers are able (and historically
to be associated with the investments
willing) to pay high prices for animal
required. Despite these opportunities to
protein. The USDA estimates that the US
build production, it is unlikely that inventories
has the most inelastic meat demand of
will be substantially rebuilt in only one
any country.
season, with consecutive seasons of
• Despite the US ethanol mandate, use favourable conditions and increased
is likely to prove inelastic even if the plantings required to alleviate the pressures
mandate is relaxed as oxygenate of low inventory levels within the global
requirements and strong blending grains and oilseeds complex.
margins above USD 0.60 per gallon
Weather risks remain, with intensifying
support demand.
concerns in Russia, India and Western
• Declining corn use for ethanol Australia, supporting wheat prices
production also detracts one-third of and limiting the amount of wheat-for-corn
a bushel of distillers dried grains (DDG) substitution in global feed rations. Wheat
feed for every bushel used for ethanol— substitution in feed rations has been a major
intensifying soymeal and corn use in feed mitigating factor to short corn supplies in
rations. We expect there to be a loss of the past 12 months. However, weather risks
4.5 million tonnes YOY of high protein are threatening production in major wheat
DDGs production in the 2012/13 producing regions, namely Russia, where
marketing year. wheat production is now forecast to fall
30 percent YOY, albeit from record high
The incremental cost of increasing
levels. Given the magnitude of the wheat
agricultural output, which is vital to rebuilding
production shortfall in Russia, there are
global buffer stocks, is growing larger and
lower estimates of available export surpluses.
supporting higher equilibrium agricultural
Restrictions on exports are likely to come
commodity prices. Higher agricultural
either in the form of a ban or Russia importing
Figure 2.3: Despite lower oil prices than in 2008, cost of US corn Figure 2.4: Substantial threats to rebuilding stocks from
production remained higher as land rental and seed prices current levels remain, with rice yields likely to deteriorate
rose strongly if El Niño eventuates
700 3 24
600 2 18
500 1 12
USD/acre
0 6
percent
400
index
300 -1 0
200 -2 -6
100 -3 -12
0 -4 -18
2000/01
2010/11
1990/91
1995/96
2005/06
2011
2012f
2013f
2005
2006
2007
2008
2009
2010
Seed Fertiliser and chemicals
Fuel, lube, and electricity Land rental equivalent Other Rice yield Southern Oscilation Index (RHS)
Source: USDA, Bloomberg, Rabobank, 2011 Source: BOM, USDA, Bloomberg, Rabobank, 201216 | Rabobank Re-entering Agflation
Kazakhstani wheat, removing Black Sea weather-risk premiums during early phases
region wheat from the international market. of the growing season. This will be especially
evident during the first half of the calendar
A strengthening El Niño pattern threatens to
year when Northern Hemisphere summer
erode non-US seaborne grain supplies as the
row crops are being planted.
Australian East Coast growing areas often
experience drought during El Niño periods.
Specula tiv e influenc e has diminished
The risk of lower Australian East Coast
The recent rally in global grain and oilseed
production this season seems relatively minor
prices has been predominantly driven by
as precipitation to date has been sufficient,
fundamentals. The speculative positions in
although a lack of moisture on the West Coast
corn, the most heavily traded agricultural
still stands to reduce production from last
futures market have been lower than the
year’s record crop. El Niño would also place
previous price rally in 2010/11. A possible
pressure on global rice balance sheets with
reason for this is the uncertain macro
global yields historically correlated to the
environment this time around, due to
Southern Oscillation Index as dryness
economic troubles in the EU and slowing US
hampers planting (see Figure 2.4). These
growth, which has created a more cautionary
ongoing production risks are another
environment. However, there has been a
factor that will likely keep global grain and
significant inflow of investor money as the
oilseed prices at elevated levels over the
severity of the US drought became clear.
next year due to the need for increased
weather risk premiums. Managed money has doubled its net long
position in the agricultural complex, growing
Longer term agricultural commodity prices
from 430,160 contracts to 811,152 contracts
are expected to be supported by the
since mid-June, but down from 2010 peaks
increased number of extreme weather events
(see Figures 2.6 and 2.7). Over half of the
which continue to hamper inventory building.
increase has come from position building
Extreme weather reduces the ability of global
CBOT Corn contracts with managed
growers to respond to increased demand,
money net long positions rising from
with heat stress during critical summer
260,154 contracts to 323,629 contracts over
periods offsetting higher planted acreage
the period. This inflow of long positions may
and increasing pre-harvest abandonment.
have helped sustain the upward momentum
Heat stress risks were recently highlighted
of prices. However, the direction and for
in a multi-decade study by NASA showing
the most part, the magnitude of the price
mean summer temperatures and volatility
move needed have been the result of
increasing uniformly since the 1960s
fundamentally driven events this season.
(see Figure 2.5). Price shocks as a result of
low grain and oilseed stocks will likely Evidence from recent rallies demonstrates
continue to be exacerbated by adverse differing outcomes with speculators
weather. Subsequently, we expect commodity withdrawing 92 percent of their net long
prices in futures markets to reflect increased positions following the 2007/08 peak, and
Figure 2.5: Changing temperature anomalies, as observed by NASA, show volatility has been
increasing; the flattening of this distribution shows that a wider range of extreme temperatures is
now occurring compared to past decades
Reference years 1951 to 1980
Source: NASA/Goddard Space Flight Center GISS and Scientific Visualization Studio, Rabobank, 2012Section 2 Global agricultural prices spike, again | 17
prices falling 47 percent over the same evident in reduced ethanol production in
period. However, the next largest drawdown the US and then, as hedge coverage declines
in net long positions, -73 percent in 2011, into Q1 2013, in the North American animal
saw prices fall 26 percent, suggesting that protein sector. Ethanol production will remain
fundamentals following this period required a feature in the US, although it will decrease
still higher prices than speculators were for the first time in 17 years in 2012/13. There
willing to bet on. If fundamental data are indicators that this decrease may begin
continues to deteriorate, and demand soon, with current ethanol production margins
for agricultural commodities proves as near the worst in the industry’s history.
entrenched as we forecast, speculative net
World feed consumption demand is nearly
longs in the agricultural complex should
impervious to price shocks in the short term,
continue to rise, surpassing record levels set
with global demand rising in 36 out of the
in September 2010. Further supporting the
last 47 years and only declining 5 percent YOY
fundamental, rather than speculative, backing
on two occasions in the 1974/75 and 1988/89
of the 2012 rally is that much of the gain in
marketing years (see Figures 2.8 and 2.9).
prices pre-dated the speculative increases.
This remains the most difficult portion of
This is in sharp contrast to 2008.
the balance sheet to forecast as strategic
geopolitical decisions, including stockpiling,
Demand r ationing t o hit biofuels and
tariffs and export bans, will determine how
animal pr otein industr ies
much strain is placed on major grain and
Demand rationing for grains and oilseeds use
oilseed exporting nations—the largest of
is expected to be strongest in the US ethanol
which is still the US. Rabobank expects
industry, where corn use is expected to
combined global soybean and corn trade of
fall 11 percent YOY in the 2012/13 season.
191 million tonnes in 2012/13, up 4 percent
Although US ethanol and short-term animal
YOY, spurred by Chinese soybean demand.
protein production are both relatively
This will place further pressure on the US
inelastic, the scale of the US drought will
internal stock situation and, ultimately, prices
require significant demand destruction across
for consumers. This will especially be the
both industries, in order to contain shortages
case if government stockpiling increases
in feed grains. Importantly, we see declines
and low demand elasticity means larger price
in ethanol use happening within the bounds
increases are needed in the US as a result.
of the ethanol mandate, dictated by the
needs of gasoline refineries, with further Diminished US soybean production and
declines possible (but not likely) whether or subsequent evidence of inelastic Chinese
not the mandate is waived in the near term. demand suggest higher prices are needed
Global corn and soymeal use for animal feed to ration demand in 2013. Prices for soymeal
is forecast to decline over 6 percent from and soy oil have also risen, maintaining crush
initial 2012/13 USDA estimates in May, margins, and driving import demand for
although it is still set to rise 1 percent from China. Soymeal is seen as the limiting factor
2011/12 levels. Rabobank expects that in the oilseeds complex, demonstrated by its
demand rationing will initially be most 69 percent outperformance of soy oil YTD.
Figure 2.6: Net long positions by managed money in the Figure 2.7: Speculative net longs have been relatively more
agricultural complex have increased to levels seen in 2007/08 concentrated in the grain and oilseed complex during the
but are below 2010/11 highs current agricultural commodity rally
1,400 600 1,400
1,200 550 1,200
thousand contracts
500 1,000
thousand contracts
1,000
450 800
index
800
400 600
600
350 400
400 200
300
200 250 0
0 200 -200
Jun 10
Jun 11
Jun 12
Jun 06
Jun 07
Jun 08
Jun 09
2011
2006
2007
2008
2009
2010
2012
Managed money net length S&P GS agri commodity Index (RHS) Grains and oilseeds Soft commodities Livestock
Source: CFTC, Liffe, Rabobank, 2012 Source: CFTC, Liffe, Rabobank, 201218 | Rabobank Re-entering Agflation
Figure 2.8: Global feed use in the grains and oilseeds complex Figure 2.9: History suggests that significant, and recurrent, price
has increased in 36 out of the past 47 marketing years despite increases are required to significantly ration global feed demand
escalating prices
450 900 20 80
400
800 15 60
350
300 700 10 40
million tonnes
USD/tonne
percent
percent
250
600 5 20
200
150 500 0 0
100
400 -5 -20
50
0 300 -10 -40
70/71
90/91
66/67
74/75
78/79
82/83
86/87
94/95
98/99
02/03
06/07
12/13
80/81
00/01
64/65
68/69
72/73
76/77
84/85
88/89
92/93
96/97
04/05
08/09
12/13
Feed price Feed use (RHS) Change in feed use Change in average price (RHS)
Source: USDA, Bloomberg, Rabobank, 2012 Source: USDA, Bloomberg, Rabobank, 2012
We expect that higher prices for downstream would only be feasible if the RFS mandate
soy products (at the consumer level) are were repealed, something that we are not
inevitable in open markets, with adjustments expecting at this point.
to US production likely to see the US domestic
As corn production losses cannot be
crush fall 175 million bushels YOY to
completely taken out of US ethanol
1,530 million bushels in 2012/13. China’s
demand, we expect US livestock corn feed
soybean imports continue to grow, reaching
to be reduced by 400 million bushels YOY
5.87 million tonnes in July 2012, up
to 4,150 million bushels in 2012/13. The US
10 percent from July 2011 before declining
government introduced a USD 383 million
2 percent YOY in August to 4.42 million tonnes.
drought relief package, mainly for the
We expect that near record-high prices need
livestock industry, which amounts to less than
to be sustained as supplies in Brazil, Argentina
46 million bushels of corn at current prices.
and the US dwindle into early 2013.
While demonstrating the scope of support
We believe that US refinery demand for behind the livestock industry, this is equal to
ethanol, the only feasible oxygenate only 1 percent of the industry’s corn use in
for gasoline in the short term, could push the 2011/12 marketing year. This will have
ethanol prices above current gasoline little-to-no effect on the scale of demand
prices. Ethanol margins averaged negative rationing undertaken in 2012/13. Although,
USD 0.06 per gallon over the month as will be discussed on page 19, many
during August, with production falling livestock producers have hedges currently
to 820,000 bushels per day, which, if held in place, the strength of market pressures is
constant during the 2012/13 marketing year, extraordinary, with US livestock herds likely
would imply corn ethanol use of 4,500 million to be liquidated at an accelerating pace in
bushels—in line with Rabobank forecasts. 1H 2013. Near record-low hog margins of
The potential reductions in corn demand negative USD 60 per head should begin to
for ethanol, initially the most elastic form reduce production in the US pork industry,
of demand due to excess oxygenation with other countries following in lock-step
of gasoline in the last two years, will see as lower margins shift the supply of animal
production fall 500 million bushels short protein to a lower base (see Figure 2.10).
of the 5 billion bushels implied by the RFS
mandate. In the short term, a 20 percent Second or der impac ts—the k nock-on
fall in ethanol production would require an eff ects
extra 200,000 barrels per day of oil imports, Rabobank believes that the new records
increasing pressure on retail gasoline prices. being set in grain and oilseed prices will have
Longer term, should negative blending long-tailed effects on a number of F&A supply
economics at the refinery level be sustained, chains. Short term, we will see significant
the relatively abundant supply of natural pressure on quickly processed parts of the
gas-derived oxygenate substitutes could global grains and oilseeds complex, such as
be supported and would pose a threat milling, brewing and ethanol. Longer term,
to the sustainability of the conventional and most importantly, sustained higher prices
biofuels industry in the US. However, this and lags in animal protein herd adjustmentsYou can also read
