Agri Commodity Markets Research Outlook 2024: Buyers sail home on rising supplies

The last three years have been extremely volatile and challenging for farmers, traders, and food processors. Successive waves of drought, disease, and war pushed agricultural commodity prices to record levels and left even the most experienced buyers in uncharted territory. We had already predicted the challenges for consumers, as we saw consumer demand erode in response to affordability. The US Federal Reserve tightened lending conditions, raising rates and strengthening the dollar, which, in conjunction with a weaker Russian ruble and Chinese yuan, further depressed prices of commodities such as wheat and soybeans.

Our 2024 outlook marks the prompt arrival of “amber waves of grain” that cool food inflation and dampen price volatility before more fulsome relief arrives, particularly for El Niño-exposed commodities like sugar, robusta coffee, and cocoa. Indeed, while agricultural prices are generally falling, soft commodities like sugar, robusta, and cocoa have been rallying through much of 2023, in part due to the fact that El Niño-correlated dryness has been present in much of Southeast Asia, India, Australia, and parts of Africa. Yet, El Niño's relatively short duration and improvements in sugar production in areas like Brazil will limit the pain period, allowing prices of these commodities to join the downward trend of feed grains and oilseeds at a later stage. The main beneficiaries of a downward trend in agri commodities should be baking, dairy, and animal protein producers, who can expect lower prices for grain-and-oilseed-heavy ingredients.

After a year of historic demand contraction in corn and soybeans, 2024 will deliver enough well-priced supplies to support a natural rebound. World coarse grain demand will rise 2% YOY and stocks nearly 4%. Global oilseed crush will rise a modest 3% in 2023/24 while stocks expand 10%. Naturally, as prices fall, demand will increase further, both for consumption and in China’s case also for storage, but buyers are wary following a lengthy period of double-digit food inflation that will take time to unwind. Over time, producers of all species – and ultimately consumers – stand to benefit from falling feed prices. The early 2024 return of South America – from La Niña drought to full G&O production – would mark the major inflection point for volatility and signal cheaper prices ahead.

El Niño at play

Following the exit of La Niña in 2023, NOAA officially declared El Niño factors are present as of June 2023. As usual, the event is expected to be at its strongest between November and January, when it’s expected to peak around two degrees Celsius above normal temperatures – a level categorized as “historically strong.” A strong El Niño event will create new challenges in different parts of the world: A number of crops in varying locations can be adversely impacted by El Niño in the coming months, in particular Indonesian palm oil and Australian wheat. At the same time, there is potential for some crops to benefit, like those in southern Brazil, Argentina, and parts of the US.

Can policymakers stick the landing?

Monetary and fiscal policymakers in the big economies are all in a gymnastic balancing act that aims to achieve a ”soft landing”: getting inflation under control without causing too much damage to the economy and/or financial markets. History and common sense suggest that success is by no means a given.

Over the next four quarters, we forecast a mild recession in both the US and the eurozone, but their timings differ. Whereas the eurozone has already fallen into a contraction in 2H 2023, we expect growth in the US to decline below the zero line by the end of this year or early next year. Annual growth in the US is projected at 0.2% next year after 2% this year. Eurozone GDP growth is projected at 0.5% for both 2023 and 2024. After accelerating to 4.8% this year, the Chinese economy is expected to grind lower to 4.5% in 2024 as (largely controlled) debt deleveraging weighs on activity and the authorities do not appear to have the appetite for a large boost to demand. All in all, that’s a global economic landing of sorts, but not one that juries usually award a lot of points for.

Energy

The era of increased volatility for crude oil, refined products, and natural gas markets will continue in 2024. OPEC and Russia have shown a willingness to cut production (and, in Russia's case, temporarily ban exports of refined products) to buoy prices and cause economic harm to their geopolitical rivals. In addition to the ongoing war in Ukraine, the Israel-Hamas war that began in October provides massive geopolitical risk to crude oil markets and liquified natural gas prices. The threat of closures and disruptions to energy flows remains a large support to prices across the board, with the possibility of further spikes on escalation.

(Tail) risks on both sides remain considerable

Moreover, there are significant (and more than usual) risks to both sides of this “baseline” projection. First, there is still considerable uncertainty over whether the rate hike cycle has been sufficient to achieve a timely and sustainable return of inflation to central banks’ targets. Although we believe most central banks are done hiking, they will probably have to keep rates at elevated levels for longer than the market is projecting. At the same time, the hiking cycle has been so aggressive and swift that its full impact is unlikely to have been felt already.

Secondly, accelerating changes in climatological conditions and in global security pose significant risks in the form of new stagflationary shocks. The worrying developments in the Middle East are just the latest example in a long string over the past eight years. Against the backdrop of high public and private debt and structurally higher inflation, interest rates, and budget deficits, they also raise major future policy dilemmas. The risks of global economic (and, eventually, military) conflict have risen in tandem. At best, this leads to slower growth in international trade and finance that is manageable for governments and businesses. At worst, it leads to a severe fragmentation of the global system.

Currencies: US dollar – short of alternatives

Although the US jobs market started to loosen toward the end of 2023 in response to monetary tightening, the aging demographic suggests scope for worker shortages across most of the Organization for Economic Cooperation and Development in the years ahead. Adverse weather conditions and the changing nature of geopolitical risk also suggest plenty of scope for inflationary forces to reemerge over the medium to longer term. This reinforces the view that neither inflation nor interest rates are likely to return to the lows recorded after the global financial crisis. The higher-for-longer interest rate theme, along with slow growth in China, and the scope for technical recession in the eurozone in late 2023 and potentially in the US in early 2024 will weigh on risk appetite. This favors the safe haven of the US dollar. Traditionally, the US dollar has an inverted relationship with risky assets, suggesting that it may hold firm until the Fed is on the brink of cutting rates.