Prices of agricultural commodities are very low. This is a result of the trade war

Jul 12, 2018 3:09 PM|Marcin Lipka

"Even though the prices of agricultural commodities are at their lowest in 27 years, food consumers will not benefit. The recent deepening of price falls is largely due to growing concerns about the trade war. This generates an inefficient use of resources and will hit households sooner or later," writes Marcin Lipka, Conotoxia Senior Analyst.

The lowest levels of agricultural goods index from Bloomberg (BCOMAG) since 1991 have been recorded in the first half of July. It includes soya, sugar, corn, wheat, coffee and cocoa, among others. What are the reasons for overestimations and why should they be worried rather than happy?

Weather, demand and a supply sensitive market

Agricultural commodities are generally characterised by significant price changes. This is mainly due to natural factors (weather), as well as the relationship between supply, demand and stocks. Many goods have to be consumed in a relatively short period of time, which means that even a small percentage of overproduction leads to strong price falls. On the other hand, demand, which is growing faster than expected, or natural disasters in agricultural areas generate sudden price increases due to an inability to quickly increase production, e.g. of cereals.

BCOMAG index has fallen sharply over the last few quarters. This was due, for example, to the sharp decline in sugar prices (by half since the beginning of 2017) and approaching the lowest levels in a decade. Record high stocks, strong export growth from the main producers (India, Thailand), a deregulated sugar market in the EU and lower than expected demand (e.g. due to higher taxes on sweetened beverages in the UK) contributed to price reductions of this popular product.

Standard factors also affected soybean prices. According to data from the European Commission (Oilseeds and Protein Crops market situation) from the end of June, the expected production of this commonplace oil plant is to meet demand for 2018, while stocks (in the US and globally) are likely to remain close to record levels. However, soybean has fallen by another 20% in the US market in the last few weeks. Where has this sudden acceleration in price reduction come from?

Slight profit today, losses tomorrow

The soybean market has fallen sharply as a result of trade disputes between the United States and China. The 25% customs duty imposed on soybean imported from the USA via Beijing is set to sharply increase its stocks in the US. The Americans exported about 30 million tonnes of soya to China annually, with production at 130 million tonnes, according to data from the US Department of Agriculture (USDA).

Today, US soybean will either have to be cheaper to reduce higher customs costs or China will find other suppliers, from Argentina or Brazil, for example. In the long term, of course, this will lead to an inefficient use of resources.

Among other things, US farmers will lose out due to overproduction. Even without customs problems, they are already making the lowest profits in a decade, according to the USDA. Chinese consumers will not benefit either. The price of soya in China has not fallen because of the imposed duties. It will not fall in the near future either, due to uncertainties in trade relations. Farmers will also not be able to choose the right plantation for their crops, fearing that other restrictions on foreign trade will be introduced by chance. One paradox here is that the votes from the agricultural states contributed to Donald Trump's victory in the elections...

Commercial gameplay also has global repercussions, as the agricultural commodities market is sensitive to any disturbance. Now farmers from Brazil and Argentina can be satisfied because demand from China will be considerable. If, however, the relations between Beijing and Washington warm up in the future, their expectations of higher demand may not materialise. This risk will translate over time into higher prices (despite the current decreases) due to an inefficient use of resources.

Jul 12, 2018 3:09 PM|Marcin Lipka

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