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How Geopolitics Will Define Agricultural Markets

Hedder - Sun Dec 3, 2023

Geopolitics could lead to a continued de-globalization of global trade flows in the next few years, as political and other non-trade issues create barriers.

In this interview, Doug Christie, an ex-Cargill agribusiness executive and author of the newsletter Agricultural Commodities Focus, takes us through what that could mean for agricultural markets, and how market participants might prepare for this.

What will be the most significant agricultural trend that will define the next five years, and why do you think it will have such a profound impact on the industry?

Christie: In looking at what trends might be driving the agricultural industry over the next five years, I think we need to look at what some of the key drivers leading into this period have been, and what might change going forward. 

The one that I think has a lot of potential to change the agricultural industry is the pattern of largely free trade and globalization in supply chains that we have had. What we’re seeing – and could continue to see – is a de-globalization of trade flows. This means instead of having a very broad flow where crops get produced in North and South America and shipped to China and Southeast Asia pretty freely and transparently, we may over the next few years have more regionalized trade, or less of a broad cross-border flow of commodities, where sometimes political concerns or other issues may prove a barrier or impediment to trade.

And that could be a big driver for agricultural trade going forward. We've relied very much on being able to broaden the production base for ag commodities. South America has emerged as a really huge producer of critical commodities like corn and soy, and China has been a huge consumer of those products. And that cross-border flow has really driven agricultural investment, gains in agricultural productivity, and just global trade in general. 

I think the risk is that we start to see more political or non-trade barriers come up that limit the flow and limit the access to markets both from a supply perspective and a demand perspective. And that would be a major change in the dynamic of ag trade that we have not had to deal with in the last few years. 

How quickly that comes to play out is obviously a matter to be seen, but I think there's some concern in the fact that there seems to be more willingness today to erect barriers and less of a commitment to broad cross-border flows than we've seen over the last couple of decades. 

You say it's going to be a major change - what is it that we will potentially see?

Christie: If we talk about the potential for a major change in ag markets, I think one of the things that drives ag markets is the transparency of price signals moving from one market to another. In other words, when a price is allowed to move, and that signal can be acted on by participants in the market.

There’s a self-regulating nature to supply and demand, and price signals mean people can take action. But there could be a disruption in that. 

For example, if we have a production base in Brazil that's competitive and produces ag products like soy and corn, farmers are incentivized to make money doing that, and we're building this pool of production. If that production isn't allowed to flow to where it's needed most -- in recent days, that would be something like Chinese livestock markets that need soy and corn to feed their population, and to feed animals.

If that signal gets disrupted or that movement gets disrupted, then we end up with a result where we've got a distressed or isolated supply in Brazil and unmet demand in China. Then the market needs to take action to get rid of the surplus in Brazil and meet a deficit in China in ways that aren't as efficient. It can result in an artificially low price in Brazilian soy, and an artificially high price in a place like China. 

The lack of trade as a regulator can therefore change price signals, and the end result of that is inefficiency in markets, pools of products that are either in surplus or in deficit, and price disparities across different locations. That would be a change in how markets have reacted and would probably result in less overall liquidity and a less dynamic futures market than what we see today.

Do we already see tangible signs of this movement that you're describing, like the disruption of the market and supply chains? 

Christie: We have started to see some examples of this, where there’s been a change in cross-border trade flows. And to date they haven't been particularly disruptive, but there's potential going forward. 

An example might be the cotton market, where China has been a dominant player for the last several years, as the single largest buyer of cotton from the global market. But over time, there have been some concerns about the overall supply chain of cotton going into China, and about some production practices within the country that have restricted the flow of textiles back out from China. As a result, a lot of players who have the potential to diversify their supply chain have done that. They've looked at Vietnam, Bangladesh, Pakistan, and other markets to decrease their reliance on China and diversify their supply chains.

In the case of cotton, that has been beneficial, or at least it has been possible because there are other alternative markets to drive trade flow into other countries. In the case of soy and corn, if China were to restrict its purchases or diminish its reliance on imports, there really isn't another go-to market of the size and scale of China is for those markets. That kind of a barrier would really prove to be pretty disruptive for soy and corn because we couldn't easily replace China in those markets. 

So, where barriers get erected or where globalization or deglobalization pressures are felt can really vary depending on the commodity and depending on what alternative markets there might be in place. 

Is there any way that market participants can position themselves or prepare for this change in overall global or geopolitical trends?

Christie: I think one way that this can play out in markets, and people can look to position or anticipate this, is to make sure that there's an understanding of not just cross-border flows, but also what's happening domestically in countries that contribute to the ag space

As an example, we've talked about, and the market has focused a lot on, the flow of corn and soy from North and South America into China, but there's also a big production base within China. If, as an example, China was to lessen its reliance on imported corn and soy, market participants would begin to understand what the potential is within China to replace those products and whether China could produce more of its own soy and buy less from the world market.

Understanding where that could happen and how that could happen is one way that traders could anticipate, or at least understand, what the impact of a cross-border flow change might be.

Switching focus to the plant-based movement, there has been a lot of innovation going on in the food space, particularly with the emergence of plant-based products. What are some of the important innovations that might change the nature of agricultural trade going forward?

Christie: Onepotential trend or change in ag markets could be how we produce and consume protein. A big growth driver for ag over the last couple of decades has been the growth in global meat consumption, largely driven by China producing more chicken and pork to feed to consumers. And to produce that chicken and pork, we've relied largely on corn and soy as feed ingredients to raise those animals to produce that meat. 

Increasingly, we see a lot of development when it comes to producing protein for human consumption, not in the form of meat, but in more plant-based proteins. An increase in plant-based protein consumed by humans could really change some of the production patterns that we see for major ag products. Instead of growing grain and soy to feed to animals, we might be producing things like oil seeds, peas and pulses to produce vegetable-based proteins that would feed human consumption.

That's an interesting dynamic when you also look at the fact that in terms of big population bases, today India has, by most estimates, surpassed China as the largest single population. And India is a country that relies much more on vegetable-based protein for human consumption than it does meat consumption. You've got a large population base that's vegetarian by culture. 

The emergence of India as a global population leader with a growing income and a propensity to consume plant-based protein rather than meat-based protein, that would be a change in the global dynamic and could shift away from corn and soy production to more oil seed and pea type production to feed that protein demand. That's something that we're starting to see, and I think we might see that accelerate as the pace of growth in China flattens and the pace of growth in India increases.

One other area of innovation in ag that we'll see play out over the next couple of years is on the supply side. Increasingly, there's awareness about the impact of agricultural production on the climate and the planet in general the need for production to be sustainable

Steadily increasing ag productivity has been a really remarkable trend for the world and has really helped fuel income and livelihoods. Going forward, we'll need to see how that productivity can be maintained while also managing other concerns about impact. And how to use inputs and other maybe environmental features that are competing for importance in productivity or competing with productivity for importance in agriculture. 

So, looking at trends and technologies that can manage that dynamic will be an important trend going forward. Which crops can be profitably grown and sustainably grown will be a feature in ag markets going forward.

Related reading: 

Global Ag Trade: A Fundamental Analysis


On the date of publication, Hedder did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.