Soft Commodities

In the tumult of the recent downturn in commodity prices, it’s easy to lose sight of the long-term picture and, at least for agricultural commodities, the outlook is far from bleak. Rising income levels and a growing world population will lead inevitably to an increase in feedstock and agriculture demand in coming years. This will benefit agricultural commodity producers and exporters. In addition, the implementation of the Trans Pacific Partnership agreement will likely give a further boost to certain producers by opening up protected sectors like Japan’s beef industry.

Most commodities from crude oil to iron ore, gold and agricultural goods have taken a beating since 2014 as investors question the outlook for global growth. As money flees the sector, it is important to keep an eye on long-term trends in food consumption and population growth that are distinctly different from the structural shift in the Chinese economy that’s weighing on the outlook for hard commodities.

Soft commodity prices have historically been less volatile than crude oil as the demand for agricultural produce is less elastic to economic recessions and booms. The previous article in our series pointed out that the ageing population of China will support consumption demand including food. This is true in general for the growing population of the world. Rising income levels in developing economies like China and India along with an increase in world population is now creating a structural shift in the demand for agricultural commodities as the share of protein in what people consume grows. For example, world meat consumption from four major sources – poultry, lamb, beef and pork – has risen from 27.5kg per capita in 1995 to 34kg in 2014 (Source: OECD).

 

Structural-Change-2-Chicken&Eggs

Chart 1: Global Chicken consumption per capita has doubled since 1990

The Outlook For Agriculture

Over the next decade, per capita meat consumption from these four sources is expected to rise by 1.48kg out of which 1.4kg will be due to rise in poultry consumption. The direct fallout of these trends will be an increase in feedstock demand for rearing pigs, chicken and cattle. In 2013, China’s production of corn, which is used among other things as feed for poultry, exceeded production of rice for the first time. The Asian nation is currently the thirteenth largest importer of corn and also imports more than 70% of the world soybean production for rearing livestock. Even in a traditionally vegetarian country like India, government statisticians revised up the weight of meat and fish in India’s consumer price index in 2015.

The main beneficiaries of these structural trends will be countries that are net suppliers of these soft commodities. Leading suppliers of corn and soybean include the US, Brazil and Argentina while top broiler meat exporters include Brazil, US, EU, Thailand and China. India, Brazil, Australia, the U.S. and New Zealand will also benefit as red meat exporters (beef and pork).

The historic Trans Pacific Partnership (TPP) deal signed by twelve countries in February 2016 has bound together 40% of the global economy into a free trade agreement. Hitherto fiercely protected sectors like the beef industry of Japan will gradually be opened up to international beef suppliers. This will have significant benefits to some livestock and agricultural goods exporting nations like Australia and New Zealand. The TPP members already account for one third of New Zealand’s sheep and beef exports and more than half of Australia’s beef, sheep and offal exports. These shares will only increase as the agreement gets implemented in the coming years.

 

Janki Sharma is a freelance economist based in Singapore and writes for Macrovue

[1] Based on change in levels of S&P GSCI Crude Oil Index, S&P GSCI Agricultural Index and S&P GSCI Gold Index between 30/6/2014 and 13/03/2016; sourced from Factset

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