Agri Commodity Markets Research Outlook 2022: Hell in the Handbasket

2021 has been a year of unprecedented challenges on different fronts. The world is still fighting Covid and its economic and social consequences, which are still largely uncertain. Climate has been extreme in a number of geographies, with clear adverse effects on crops, and climate change awareness is growing, potentially leading to higher demand for biofuels ahead. Generally, demand for agricultural commodities has been stellar, not always for consumption but also for ’just in case’ stocks, putting pressure on supply chains that are already stressed on a number of fronts. Inflationary pressures extend upstream to inputs, and downstream to animal protein and the general economy.

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Report summary

2022 will likely bring fewer Covid-related disruptions, but when it comes to agricultural commodity prices, any sense of normalcy looks unlikely, and inflation in this space is almost certainly not just ‘temporary’. Any significant drop in agricultural futures prices will likely be met by significant pent-up consumer hedging, which has been restricted in this period of high prices. 2022 will start from a position of low stocks in many agricultural commodities, which should lead to heightened volatility.

Higher commodity prices lead to food inflation

It is highly unlikely that food prices will go back to the five or ten-year averages in 2022, as commodity prices are now supported by inflation in the general economy, including high shipping costs (astronomical for containers), energy and fertiliser prices, as well as a shortage of labor in many countries.
As we move into 2022, an element of panic buying might subside in some commodities as vaccination rates improve, Covid-related deaths go down, and lockdowns become less likely, shorter and/or less severe. With less strict social distancing measures, ports worldwide might be better able to cope with the backlog and increased demand. However, a ‘normalisation’ of the supply chain in 2022 is unlikely and players will have to find solace in just a bit of a price drop off historical highs, and hopefully fewer booking cancellations. 
Higher farm input costs, expensive shipping and good demand provide for a grim combination. We should see these inflationary pressures upstream move along the supply chain to reach consumers in 2022, with uncertain social consequences. The proportional increase in prices on supermarket shelves will of course be much smaller, as commodity prices are usually only a relatively small proportion of the prices of final goods. But social discontent is already being felt in a few countries and more is likely to come in 2022.

Weather Will Likely Continue to be Adverse

We are under La Niña conditions, the second such event in as many years, and the weather cannot be expected to be normal until Q2 2022 at the earliest. The last time agricultural commodity prices were this high was in 2012, after two consecutive La Niña events (between mid-2010 and mid-2012). La Niña is clearly a bullish influence, as it correlates with dryness in Argentina (already present in the last few months), the south of Brazil and the southern part of the US. 
We have seen also weather events not necessarily correlated with La Niña. On top of an extended drought, Brazil saw the worst frost in over two decades on July 20, 2021. North America is still suffering under a major drought that started in the west in late 2020, but it was extended to the north in mid-2021. This drought is likely to expand into Kansas and surrounding areas in the coming months. Europe saw strong rainfall and some flash floods over the summer. Europe as a whole, and Canada, broke maximum temperature records, leading us to worry about the frequency of extreme weather events in the future. In the short term, however, the risks are salient: low stocks in a number of commodities will make it hard to absorb further supply shocks, resulting in demand being rationed.

Energy and Oil Markets Flying Hot Into 2022

The outlook for the broader energy markets and oil markets in particular is quite promising heading into 2022. For starters, global oil demand has bounced sharply higher from the pandemic lows and growth is now penciled in for next year as air and sea travel normalize. On top of that, oil demand expectations for this winter have increased anywhere from +500,000 b/d to +1m b/d, following the explosive rally witnessed in global natural gas prices during the second half of this year, which will result in more oil being used in power generation given current economics. On the supply side, OPEC+ is in full control of the market and has gained increased pricing power given US crude oil production remains -1.7m b/d below the pre-pandemic highs. Furthermore, US shale drillers are facing mounting inflationary pressures across their budgets, ESG investor pressures, and political headwinds at home. Moreover, the sharp rise in consumer inflation has triggered meaningful inflows into commodity index products this year, as large asset allocators look to mitigate growing inflation risks to bond and equity-heavy portfolios. This is a trend we only expect to accelerate next year as institutional fund managers chase what looks like very strong commodity returns for the current year. Importantly, oil markets will be on the receiving end of a large portion of those capital inflows, given that energy markets hold a very high weighting in most commodity indices, providing a strong investor tailwind in addition to the tight fundamental balances at play.

Currencies: The (Further) Rise of the Dollar

With recent positive US economic data and the possibility of a Fed rate hike in 2022, we expect that the USD will be a favored currency in the months ahead. A strong economic recovery in the US should provide a positive impulse to the global economy. However, the USD’s dominance in the global payments system has always meant that a stronger USD has unwelcome secondary implications, likely to impact developing nations in particular. Most obviously, the prices of commodities denominated in USD have an inverse relationship to movements in the dollar. Clearly, this has implications for the external trade accounts of commodity exporters, many of whom are emerging economies.
  • Carlos Mera

    Head of Agri Commodities Markets
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  • Michael Magdovitz

    Senior Commodity Analyst
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  • Don Close

    Senior Analyst - Animal Protein
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  • Andy Duff

    Head of RaboResearch Food & Agribusiness - South America; Global Strategist - Sugar
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  • Mary Ledman

    Global Sector Strategist – Dairy
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  • Christine McCracken

    Senior Analyst – Animal Protein
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  • Oscar Tjakra

    Senior Analyst - Asia
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