Running circles around crop forecasts

Demand for agricultural products is expected to swell by 15% over the coming decade, but pressures on the industry to reduce its carbon footprint and mitigate climate change could see more tactical use of land and an evolution in crop choices.

The OECD-FAO Agricultural Outlook 2019-2028 sees a growing global population continuing to use increasing amounts of agricultural products as food, feed and for industrial purposes, with much of the additional food demand coming from regions with high population growth, in particular, Sub-Saharan Africa, India, and the Middle East and North Africa.

But there are challenges to the healthy demand growth outlook. On the supply side, the OECD lists “the spread of diseases such as African Swine Fever, growing resistance to antimicrobial substances, regulatory responses to new plant breeding techniques and responses to increasingly likely extreme climatic events” as risks to its ten-year growth picture. On the demand side, risks include “evolving diets, reflecting perceptions with respect to health and sustainability issues, and policy responses to alarming trends in obesity”.

And with nearly one quarter of all greenhouse gas emissions coming from the agriculture, forestry and land-use change sector, according to the OECD, there is significant pressure on the sector to tackle its carbon footprint.

Trade mix

Generally, a growing and more affluent global population and its increased food and raw material needs will drive demand for agricultural commodities over the next ten years. For example, global food use of cereals is expected to increase by 147 million tonnes over the OECD’s projection period. A total of 42%, or 62 million tonnes, of that increase is projected to come from Africa; about 90% of the expansion in African cereals consumption can be attributed to population growth, according to the OECD.

Likewise, demand for animal feed products will necessarily increase as larger herds are maintained to meet the rising demand of a larger population. As such, feed crops such as maize and soybeans are expected to rise in importance in the global crop mix.

In terms of trade development, the OECD expects the Black Sea region will consolidate its position as a leading exporter of wheat and maize over the ten-year forecast, with most of its exports going to the Middle East and North Africa. Latin America and the Caribbean are also expected to see export growth. However, export growth in North America is expected to be flatter in line with weaker agricultural production trends.

Partly as a result of slower population growth, Europe – including the Russian Federation and Ukraine – is now a net exporter, a development which is not expected to change.

While net imports for China and Africa have been on a strong upward track, the OECD sees Chinese import growth slowing over the next ten years. Africa on the other hand, still promises strong import growth: a swelling population and increasing incomes will support demand for imported rice and wheat, in particular.

“The impact will be especially pronounced for rice, where Africa’s share of world imports is expected to grow from 35% to 50% over the outlook period,” noted the OECD.

One country to watch for agricultural trade signals over the next ten years is India. Currently, India is neither a major importer nor a major exporter. But, given the country’s size, changes in its trade balance could have a sizable effect on freight and trade markets, said the OECD.

Fuelling economies

Meeting demand for greener fuel, biofuels formed a major source of crop demand growth between 2000 and 2015. But while the OECD expects production of biofuels to continue, expansion of these is expected to be lower over the coming decade.

The shift to biofuels in Brazil, the EU and the US started in the early 2000s, driven by policy change and today, a sizable share of the maize, sugarcane and vegetable oil crops in these countries is dedicated to renewable fuels. Further growth in the EU and US is expected to be limited, but the mantle could well be picked up by emerging and developing countries as they turn to mandating greater use of biofuels. As a result of this, the OECD predicts biodiesel use will rise by 18% over the coming decade, with a new mandate in Indonesia that seeks to increase the biodiesel blending rate to 30% driving much of this growth.

There will be subtle shifts in demand from the EU too as the bloc looks to increase its support of second generation biofuels and move away from first generation technology. One outcome of this will be an expected reduction in the use of vegetable oil for biodiesel. More generally, the EU is also planning to reduce its consumption of total diesel use over the medium term, which will underpin a “projected 4% decline in biodiesel use”, said the OECD.

Globally, ethanol use is on the rise and is anticipated to increase 18%, or 21 billion litres by 2028. China will account for the lion’s share of this growth, demanding an additional 5.4 billion litres. Meanwhile Brazil, the world’s second largest consumer of ethanol, is expected to add 7.6 billion litres over the forecast window through a law mandating a 10% reduction in emissions from transport fuel by 2028, which will incentivise the expansion of sugarcane for biofuel use.

In summary, traders and brokers should look to emerging economies for commodity trade growth, but should not expected the crop mix to remain static over the next decade.

The next Baltic Exchange Advanced Freight Modelling & Trading course will take place in London March 11-12, 2020.