As the agricultural marketplace has reached the middle of the second decade of the 21st century, its fortunes have become increasingly hard to predict. This was the message delivered by David Lehman, managing director, commodity research and product development for CME Group to attendees at the 2015 Mid America CropLife Association (MACA) annual meeting.
According to Lehman, the biggest wildcard when looking at agriculture today ties to the world’s most populous nation, China. “Most of what’s been going on in all commodities markets today relates back to China,” he said at the start of his presentation.
But before diving too deeply into the Chinese puzzle, Lehman discussed global consumption trends over the past 20 years. Between 1990 and 2011, average daily calorie consumption per capita grew by 9.6% worldwide. Over this same time period, the global population increased 33.8%.
“Moreover, consumption of meat and dairy grew faster, 52.6% and 74.9%, respectively,” he said. “Meanwhile, the consumption of vegetable oils has also soared almost 70%.”
As for China, its consumption of products has steadily grown as the country’s wealth has increased. The country now consumes greater amounts of meat, dairy products and eggs than ever before while cutting back on such products as sugar and grains such as wheat.
For several years now, added Lehman, U.S. agriculture has relied heavily on Chinese consumption patterns to boost its bottom line. But this might not remain the case for much longer.
“China’s growth potential is probably fairly limited,” he said. “Its economy is likely to shift to a slower growth trajectory and its caloric intake is now close to the world average. China’s real gross domestic product growth rate is decelerating, probably into the 4% to 6% range over the 2015-18 period.”
Further muddying the read on China is its changing demographic outlook. Because of the country’s 40-year one-child per family policy, the country’s overall population is rapidly aging. This is similar to what previously happened in both Germany and Japan over the past 20 years, and which path China follows will make a big difference to agriculture.
“As China’s population begins to age, will its per capita calories consumption fall like it did in Japan or will it rise like it did in Germany?” asked Lehman. “The outcome will have an enormous impact on world food demand — -2% if China’s per capita calorie consumption falls like Japan’s did or =2% if it rises like Germany’s did.”
No matter which direction China goes regarding consumption, the outlook for U.S. agriculture will remain mixed. According to Lehman, U.S. crop production is on the rise, leaving the country’s supply risk nearly eliminated. USDA figures place the U.S. corn yield at 168.8 bushels per acre for 2015, up from earlier estimates. Meanwhile, soybean yields are expected to hit 46.9 bushels per acre – the second highest yield ever recorded for the crop. In addition, as countries such as Brazil, Argentina and Australia have increased their crop production, the U.S. share of the world’s crop trade has declined from 45% in 2000 to 30% today.
Naturally, all this has had a negative impact on crop prices. “After a bumper harvest, wheat and corn prices are close to their 2009-10 levels and 50% below their 2013 highs,” said Lehman. “Soybean and soybean meal prices are about 40% off of their highs after a strong harvest in 2014.”
As a result of this, net farm income has been in a freefall the past few years, dropping from more than $120 billion in 2013 to less than $60 billion projected for 2015. Still, added Lehman, farmers haven’t significantly changed their debt levels during the high commodity price years.
“Farmer’s debt-to-equity ratio has remained relatively stable in the 14% to 16% range,” he said.
(Source – http://www.croplife.com/editorial/global-agriculture-outlook-the-china-syndrome/)