China and Black Sea will drive greater volatility

Agricultural markets are set to become more volatile, at higher price levels, over the next three to five years, according to a Rabobank report.

It says “profound shifts” in China’s self-sufficiency of key feed grains and the knock-on effects of the drought in Black Sea regions this year will be the main drivers of this increased volatility.

For the first time in 15 years, China will import a “meaningful amount” of corn this year and its need for feed grains is likely to increase sooner than previously predicted as the country industrialises meat production, Rabobank global strategist David Nelson said.

“It is still official Chinese policy to be 95% self-sufficient in grain. This contrasts sharply with the dramatic rise in their soybean imports, from negligible levels in the late 1990s to over 50m tonnes this year.

“China’s potential need for corn imports is enormous, in the tens of millions of tonnes annually. This could have significant implications for the industry globally.”

But this increased demand was coming to a commodity market facing a tight supply and demand balance following this year’s weather-related problems in key production areas, such as the Black Sea region, which has become the leading incremental producer of world grain.

The region produces around 8% of world grain, but accounted for 19% of world production growth between 2000 and 2009.

“The 2010 drought will severely impact grain exports from the Black Sea region for at least one year and probably several more,” Mr Nelson said.

This could be exacerbated by growing international demand as Russia moves towards self-sufficiency in chicken and pork production. “Beyond grain, this will have a longer-term impact on protein trade, causing shifting trade patterns, and threatening big meat exporters, unless new markets are found,” he added.

Rabobank also said India would play a key role in world agricultural markets, particularly for buffalo beef. The country is the world’s fourth-largest exporter of beef.

“This product is different from beef from cattle, so we need to be careful in how directly we compare the two products. Nonetheless the large volume of buffalo beef being exported from India makes it an important factor in considering the global animal protein situation.”

India was also likely to shift from being a soymeal exporter to an importer over the next few years, representing about a 6m-tonne swing.

Mr Nelson said the increased volatility meant that “while the cost of being wrong has gone up, so has the benefit of being right”.

Click here for a short pdf version of the report, “Looking for Delta: Tectonic Shifts Toward Higher and More Volatile Agricultural markets”.