Outside Influences on the Grains & Oilseeds Industry Q4 2021

Our Grains & Oilseeds analysts take their quarterly look at what RaboResearch F&A's insights into other sectors mean for the G&O industry.

Correction in Dry Bulk Freight Rates Benefits G&O Exporters and Importers

After reaching a multi-year high index level of 5,679 in early October 2021, the Baltic Dry Index (BDI) decreased by 49.6% to 2,861 in mid-November 2021. The decrease in BDI in Q4 2021 was due to easing port congestion in China and expectations that Chinese demand for iron ore, coal, and minor bulks import will decline QOQ. Meanwhile, global container freight rates have also decreased slightly from their peak in September 2021, but remain historically high in mid-November 2021. The Freightos Baltic Index (FBX) stayed above USD 10,000 in November 2021, against an index level of ~USD 2,200 in November 2020. Current global container shipping freight rates are arguably very high due to structural reasons, and are likely to stay high in 2022.
 
Impacts on G&O: Lower dry bulk freight rates will reduce the landed cost of G&O in importing countries. This will help G&O processors in importing countries improve their processing margins. Meanwhile, G&O exporters located further from their destinations will also become more competitive. Even though the majority of G&O exports are shipped as dry bulk, containers are also partially used to ship G&O to destination ports that do not have dry bulk vessels discharging equipment as well as to ship specialty G&O. Containerized G&O exporters and importers need to develop contingency plans to move their cargoes (if they have not already done so), as the shortage of containers will likely continue through 2022. 

Animal Protein Markets Will See Increased Feed Grain Demand in China and Brazil in 2022

A higher, and more volatile, animal protein market is set to continue in 2022. Higher input costs for animal protein supply chains, together with general strength in demand will continue to push up prices and challenge margins. Beef production in the US is expected to decline 2.7% YOY, but pork and poultry production will both rise marginally. In China, the continued recovery from African swine fever (ASF) means pork production is expected to continue to rise in 2022. In Brazil, beef production is expected to rise around 1% YOY in 2022 after experiencing a 3.5% YOY decline in 2021, with growth expected in exports to China in addition to domestic consumption.
 
Impact on G&O: A declining cattle herd and corresponding reduced beef production in North America will likely see the volume of feed consumed decline for that sector, while more grain will flow to the pork and poultry sectors, where production is rising. With the continued recovery from ASF in China, demand for feed grain will continue to recover in the pork sector, with the total feed grain volume required for all species expected to rise 7%-8% YOY in 2022. The marginal rise in beef production in Brazil will see an increased use of feed grain locally. On balance, demand for animal feed grain is expected to remain buoyant and provide a key support base in the broader grains and oilseed market.

Cutting GHG Emissions by Food Companies to Push G&O Suppliers to Adopt Sustainability Measure

In a recent report, the Intergovernmental Panel on Climate Change (IPCC) stated that, greenhouse gas (GHG) emissions must be reduced by 45% from 2010 levels by 2030 in order to keep the target alive, with consumer food companies playing an important role in reducing GHG emissions along the entire value chain. Since more than 90% of their emissions fall under the Scope 3 category – these relate to emissions released during the production of its inputs – consumer food companies have shifted their sustainability efforts to emissions in their supply chain and to their ingredient suppliers. The breakfast cereals and confectionary subsectors have the highest percentage of Scope 3 reduction targets, given that they are dominated by large companies with more public-eye exposure.
 
Impact on G&O: Consumer food companies are likely to increase pressure on suppliers to adhere to sustainability and science-based targets in order to meet their own requirements in reducing Scope 3 emissions. This is particularly true for suppliers of grains – such as oats and corn – to cereal companies. It should urge suppliers to adopt sustainable farming practices, such as regenerative agriculture and the use of innovative technologies such as precision agriculture. Moreover, changes in how and where inputs are sourced should incentivize crop production locally or in regions with a lower GHG impact. However, unless the vast majority of the big food companies requires those changes from suppliers, producers would need incentives to adopt such measures.

Farms Margins Squeezed From Every Angle

A ‘perfect storm’ has developed around the global fertilizer market, with prices exploding to the upside due to the rise in energy prices and China’s curtailing of urea and phosphate exports. There is concern there will be further price increases between now and spring 2022. Likewise, prices for seed and agrochemicals are also rising. In addition, there are concerns about supply shortages due to scarcity of active ingredients.
 
Impact on G&O: Producers in the G&O space will see margins squeezed in 2022 from every which way – seeds, fertilizers, land costs, machinery costs and labor. Brazilian producers are not only dealing with high prices, but also with delays and cancellations of their input orders. There is growing concern about yield drag. However, Rabobank believes producers will apply nitrogen to maintain yield, but they will forgo phosphorus and potassium (P&K) applications and depend on residuals in the soil. The full impact of high input costs on yield may not be felt until 2023.

Talking Points: The War on Sugars

Caloric sweetener demand in the US has fallen by about one-fifth this century, but our waistlines are not reflecting the same reduction. And what does this have to do with the G&O sector? An academic article in 2004 suggested a correlation between high fructose corn syrup (HFCS) and obesity. It is also suggested that HFCS became social media’s first scapegoat as Facebook was founded in the very same year – another spurious correlation?
 
Impact on G&O: Since 2004, the demand for HFCS has continued to decline and as a result the corn wet milling industry has suffered through contraction, consolidation and plant closures. Demand for food, seed and industrial products has been stagnant for the past 20 years with a compound annual growth of only 0.27% compared to a growth rate of 3.6% over the previous 20 years. The lack of growth in this demand component is part of a larger narrative of where new corn demand will come from. Despite the dismal growth prospects of HFCS particularly in the US, the corn wet milling industry is seeing growth in glucose, dextrose, polyols, maltodextrin, corn syrup solids and starches. 
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  • Maria Afonso

    Senior Analyst – Sugar, Grains & Oilseeds
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  • Stephen Nicholson

    Senior Analyst - Grains & Oilseeds
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  • Oscar Tjakra

    Senior Analyst - Asia
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  • Dennis Voznesenski

    Analyst – Agriculture
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