Outside Influences on the Grains & Oilseeds Industry in the Post-Covid World: August 2020

Stefan Vogel, global strategist for Grains & Oilseeds, takes his quarterly look at what RaboResearch F&A's insights into other sectors mean for the G&O industry.

Pork, Poultry, & Dairy: Beyond Covid Uncertainties

Covid-19 is reshaping global pork supply chains. China’s pork imports have slowed due to Covid-19. The EU’s pork production is forecast to fall 0.5% in 2020. Massive US inventories have pressured prices to multi-year lows, which should result in declining sow herds, and Brazil has benefited from strong pork exports, but domestic demand is soft. Still, African swine fever remains the major influence on pork markets globally. As the global poultry industry recovers from the Covid-19 storm that hit in 1H 2020, the outlook is gradually improving, with global demand forecast to be more bullish in 2H 2020. In dairy, government aid has stimulated production in many regions, but once it dries up, market fundamentals will face a slower economy. Dairy inventory build-up will put downward pressure on prices in the months ahead in an environment of competition for reduced import demand as China, the world’s largest dairy import market, is forecasted to reduce imports 15% YOY in 2020.

Impact on G&O: With high global supplies of G&O, market analysts may be tempted to estimate strong growth for feed use on their balance sheets, but meat supply chain issues and the recession might dampen the year-on-year growth of G&O for feed, making the world even more reliant on China’s ASF recovery.

Can Companies Do Well... Without Doing Good?

Companies are accelerating their pursuit of purpose as well as profit, including, for example, Barilla. The importance of valuing all stakeholders (and not just shareholders) is high and provides companies a chance to get closer to their consumers in a meaningful way, while the greater risk now lies on inaction. If you want your business to do well, then you've got to do good – not just talk about it.

Impact on G&O: As agriculture plays a major role in many environmental (e.g. carbon footprint, deforestation) and social (e.g. employment, labor and land rights) issues, it is not surprising that leading G&O players are committed to meeting very ambitious targets within their own companies in a relatively short time period, as well as supporting the whole supply chain to move toward ‘doing good.’

Digital Pathway to Power: The Trigger for a Deeper Relationship Between Farmers and the Supply Chain

“Two major hurdles limit the capacity of technology to play a central role in farm decision-making. Firstly, technologies lack ability to collect data from the required number of variables, and in many cases, analysis tools do not account for different relationships between variables. Secondly, the process of collecting data, analyzing it, and acting on it is arduous and complex.”

Impact on G&O: “Once a foundation is laid to digitally optimize decision-making and execution, we argue that the relationship between the farmer and the supply chain will be reshaped, unlocking a whole new set of opportunities for companies and farmers. Most significantly, this will enable the role of farm inputs suppliers to expand from supplier to coach.” Further downstream in the supply chain: “Over the next decade, we expect that many global food markets will segment between a low-cost, low-margin product and a high-cost, high-margin product. On one side, technology will maximize efficiency and reduce the costs of production for growers servicing the price-sensitive consumer. On the other hand, for growers pursuing the quality route, technology will enable transparency and bring traceability.”

EU Farming Margins and Crop Input Costs

Three years of low rainfall pressure European crop margins more than Covid-19, but at least fertilizer costs are low, as heavy global supplies of all nutrients weigh on prices.

Impact on G&O: G&O farming margins aren’t great, but they don’t encourage massive consolidation of EU farms. However, with an already high average farmer age in the EU and the EU’s Farm-2-Fork policy draft, which is calling for 25% organic land use in the EU by 2030 (up from 8% currently), as well as a 50% reduction in chemical pesticides use and risk and a 20% reduction in fertilizer use, it seems highly likely that EU G&O and dairy farming (due to pasture land), as well as the related supply chains, are up for sizeable changes in the next decade.

Detailed Regional Outlooks From Farm to Fork

China: China’s soybean imports remain strong. Domestic corn prices reached record highs, due to low stocks. Likewise, pork prices have surged in the low season, while poultry demand recovers. Meanwhile, China’s foodservice industry faces a swoosh-shaped recovery.

Australia: While May-July rainfall in most regions was below average and below 2019, the probability of a La Niña event has risen, indicating that parts of Australia may still receive above-average spring rainfall in eastern, northern, and southern regions.

Brazil: Soybean and corn margins are above their five-year averages (helped by a weak Brazilian real), driving 2020 fertilizer demand to grow 1.5% YOY. The upcoming soybean plantings are likely to rise well above last year at >3%, especially as Brazilian soybean farmgate prices reached record highs in August, up 5% MOM and 54% YOY, pushed mainly by tight local stocks, a weak currency rate, and strong demand from the crushing industry.

North America: The North American outlook is encumbered by issues in the livestock and G&O sectors and a foodservice sector that will only fully recover by mid- to late 2022.