|08 March, 2018

Commodities outlook: Agriculture- an ill wind?

Huge growth that has taken place in the oil seeds market over the past 20 years, but will it last?

Wheat field with money in Northamptonshire, UK. Image for illustrative purposes only.

Wheat field with money in Northamptonshire, UK. Image for illustrative purposes only.

Getty Images/Dan Brownsword

Agricultural commodities traders around the world may have become too complacent about the lack of volatility in prices in recent months, a senior economist told the recent Dubai Global Commodity Outlook event.

Speaking on a panel discussing agricultural markets at the event on February 11, Erik Norland, who works as a senior economist at CME Group, which operates some of the world's biggest commodity exchanges, said: “We are in this extremely low volatility environment. At CBOT (Chicago Board of Trade) we see that reflected in the prices of options on corn, wheat and soy, which are all trading at near-record lows over a long period of time."

He said that over the past two decades, the realised volatility (the level of fluctuation in options pricing) has stood at about 23 percent once daily volatility is annualised, but over the past few months the implied volatility of options on soy, wheat and corn has dropped to 12-14 percent.


"They're trading at half of their long-term cost," he said.

He said that although there were no "majorly disturbing weather phenomenon" currently on the horizon that might suggest a disruption to supply, a recent cooling of waters along the equator in the central and eastern Pacific Ocean indicates the potential for a 'moderate' La Nina weather system.

"One thing that we've seen over these past eight episodes of La Ninas that occurred over the last half-century is that they have the potential to create extraordinary high levels of volatility in agricultural goods markets," he said, adding that during such periods volatility rates can reach above 30 percent.

"The extraordinarily low cost of options in these markets makes me a little bit nervous that the markets are being a little bit complacent," he said.

James Wild, managing director of Dubai-based brokerage Wild Agri, argued that one reason volatility is lower is due to supply changes. Russia used to be a net importer of wheat, for example, but this year is expected to export 35 million tonnes of the crop.

"It's a predominant reason why volatility isn't there. Production is going to be good again this year. Maybe not as good as the prior year, but they're carrying so much stock I don't think that's a worry for the 2018/19 campaign. It's difficult to see prices pushing up."

Jonathan Grange, a grains broker at Switzerland-based Sunstone Brokers, argued that 2018 "is probably not going to be a great year for agriculture, and 2017 was already very, very difficult".

"We have a situation in the world of agriculture where supply is, in general, very decent and demand is, if anything, slightly slowing down. So unless there is a weather issue in Northern Europe when we go into planting and harvesting in the middle of this year, it is difficult to see any big, big structural changes in a single year for agriculture."

Sanjay Sethi, a sustainability director at Phoenix Group, which is involved in agribusinesses in the Middle East, India and Africa, argued that distinctions needed to be made between crop types.

"When it comes to corn and some of the phosphates I agree (about the lack of demand), but when it comes to rice I am quite bullish on that. There is quite a bit of demand coming from China," he said.

Food or fuel?

Grange pointed to the huge growth that has taken place in the oil seeds market (for rapeseed and soy bean crops) over the past 20 years, which he said has partly been fuelled by increased demand for meat (soybean is used in animal feed) in Asia, but also for use in biofuels.

"Biodiesel is nonsense. It is not economic, it's not ecological, it's not environmental," Grange said. He argued that 35 tonnes per year of food was turned into biodiesel, and that 40 percent of the U.S. corn crop is turned into ethanol.

"At long last, humanity is starting to work out that we are converting food into energy for our cars, which makes no sense at all. It's not going to happen tomorrow, but over the next 20 years, biofuels are off the agenda," he argued.

Others disagreed. Wild said that although the plants using corn or beans may have only been built because they receive government support, they would continue until that support is withdrawn.

Norland agreed: "There is a political logic to it. A lot of congressional districts in the U.S. and legislative districts in Brazil are in rural areas that benefit from producing biofuels, so it becomes extremely difficult to get rid of them."

"Likewise, in the European Union you have enormously powerful farm lobbies. These lobbies are not going to go away quickly."

Click here for our special coverage on the outlook for commodities in 2018

(Reporting by Michael Fahy; Editing by Shane McGinley)

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