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.
Report summary2022 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
Weather Will Likely Continue to be Adverse
Energy and Oil Markets Flying Hot Into 2022The 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 DollarWith 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.
Where to go from here
Carlos MeraHead of Agri Commodities Markets Read more
Michael MagdovitzSenior Commodity Analyst Read more
Don CloseSenior Analyst - Animal Protein Read more
Andy DuffHead of RaboResearch Food & Agribusiness - South America; Global Strategist - Sugar Read more
Mary LedmanGlobal Sector Strategist – Dairy Read more
Christine McCrackenSenior Analyst – Animal Protein Read more
Oscar TjakraSenior Analyst - Asia