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Banks says trade war will alter global trade flows in year ahead and beyond if it continues.
November 16, 2018
While the global food price environment remains relatively stable, ongoing geopolitical tension, the threat of El Niño weather system and diseases affecting livestock bring great uncertainty to the outlook for 2019, according to research from Rabobank, the specialty food and agribusiness bank.
In its annual outlook reports, which analyze the prospects for more than 15 agricultural commodities, meat and seafood, Rabobank said a “melting pot” of risks, including the U.S. trade war with China, the African swine disease outbreak and extreme weather, will threaten global food price stability next year. The annual outlook reports are produced by Rabobank’s team of agricultural commodity market researchers and animal protein analysts based around the world.
“The agri-commodity price environment may be relatively stable currently, but it’s difficult to remember a time there were so many threats to food commodity prices on so many fronts, from trade wars to currency movements to weather threats and livestock disease,” said report co-author Stefan Vogel, head of agri-commodity markets at Rabobank.
Justin Sherrard, global strategist for animal protein at the bank, said while not all of these threats may come to pass, food producers need to be prepared for a “difficult and worrying” year in 2019.
U.S. faces trade wars, currency headwinds
According to Rabobank, the trade war between the U.S. and China has shaped 2018. If it continues into 2019, which is expected, it will alter global trade flows in the year ahead and beyond.
The report said soybeans are the most affected. China currently imports 60% of the world’s soybeans, but Rabobank forecasts that the country’s intake will fall below 90 million metric tons in 2018-19 due to import restrictions. As such, U.S. farmers face an oversupply of soybeans and will likely see stocks more than double to record levels by the end of 2018-19, the bank added.
Brazil, on the other hand, will see crop prices supported, Rabobank said, adding that this will make soybean farmers the principal beneficiary of the trade war. However, it will also put heightened feed cost burdens on the livestock sector.
In animal protein, U.S. meat and seafood exporters will be looking to new trading partners outside of China, the outlook noted. This provides a window of opportunity for Brazil, Canada and the European Union, which will all be looking to fill demand for pork in the Chinese market, Rabobank said.
In regard to currency, the U.S. dollar is currently at an 18-month high and is anticipated to continue to strengthen into late 2019 before stabilizing, the report noted. As a result, U.S. exports will continue to suffer from a lack of competitiveness abroad, further challenging U.S. farmer profitability.
In Brazil, Rabobank said long-standing domestic political uncertainty has kept the real weak, in turn helping to make sugar and coffee exports competitive in export markets. However, a surplus of coffee beans and sugar is keeping a lid on prices. Still, Brazil has benefited from China buying more pork, the bank said. The world’s second-largest economy has turned to China – and to Europe – which Rabobank expects to continue into 2019.
“The largest threat for farmers is the U.S.-China trade war. Depending on whether the superpowers can reconcile, we’re likely to see commodities like U.S. soybeans continue to take a real hit as China snubs them,” Vogel said. “This is causing American crop farmers financial pain, while our expectation that the dollar will remain strong deep into 2019 is also a challenge for them.”
Despite the challenges, Vogel said U.S. soybeans are cheaper than Brazil's beans, given levels of surplus crop, with U.S. farmers turning to other soybean importing nations to sell stock.
“China might partly switch back to buying from the U.S. if and when the dispute is resolved, but a full recovery of this trade flow seems unlikely.”
Biosecurity risks likely to spread
According to Rabobank, the spread of African swine fever (ASF) is going to continue to have a global impact on pork production, proving especially harmful in China, which faces a decline in supply, rising prices and increased imports. Europe still has an oversupply of pork, and this will become a particular issue if the ASF outbreak hits production levels and results in a drop-off in export opportunities, the bank noted.
However, “with pork being the animal protein most at risk of disease, it’s likely to impact consumer perceptions and, as a result, demand,” Rabobank suggested. “It’s a similar story in the poultry market, as the growing risk of avian influenza continues to cause consumer concern, leading to significant volatility in trade streams.”
Sherrard said since the severity of disease outbreaks shows no signs of being curbed, especially in pork and poultry, biosecurity will become a higher business priority for livestock producers in the year ahead.
“Major outbreaks are affecting global trade flows and consumer preferences, and as a result, we expect to see a shift to beef and seafood consumption in some markets,” he said.
El Niño on the horizon
With an 80% chance of El Niño being formally declared by the end of the winter in the Northern Hemisphere, Rabobank expects the weather event to drive further uncertainty across commodity markets.
Wetter weather in the U.S. southern Plains could mean a lift in wheat production, according to Rabobank.
“Should the weather phenomenon come to fruition, yields of palm oil, sugar and Robusta coffee are likely to take a hit. This will alter, in parts, trade flows in those currently oversupplied markets, given global demand for coffee and sugar is expected to remain robust,” the bank explained.
While the fish meal supply has been increasing since the last El Niño event, with the early 2018 Peruvian quota being the highest in recent years, at 3.3 million metric tons, unstable climate conditions may result in a lower quota. This will add upside pressure and volatility to fish meal prices in 2019, Rabobank said.
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