Record-high stock levels are set to keep worldwide food prices low during 2017 even as inflation starts to rise in many developed economies.
Staple food commodities like wheat, corn, and soybeans – a key part of livestock diets across the world – are being stored in record volumes, weighing on the prices that are expected to be paid to farmers this year.
In its comprehensive report, Rabobank Global Outlook 2017 – which looks at the prospects for 13 crucial food and agricultural commodities – Rabobank highlights the role of China in creating further uncertainty in the market.
The world’s most populous country has huge stocks of many key commodities, with estimates suggesting it holds 60 percent of global cotton supplies, more than half of corn, 40 percent of wheat, and 21 percent of soybeans.
If China decides to begin selling some of these reserves, this could depress global prices for commodities including cotton, sugar, corn, soybeans, and vegetable oil.
Rabobank expects U.S. inflation to increase to around 2 percent during 2017, while prices are also expected to rise in the U.K. and, to a lesser extent, the Eurozone. Even these small increases may be enough to attract attention later in 2017 to commodity index funds, which offer a hedge against inflation while agricultural prices remain low.
Commenting on the 2017 Global Outlook report findings, report author and Rabobank’s head of agri commodity markets, Stefan Vogel, said: “After three years of declining prices and extreme weather wrecking crops in many important agricultural regions, 2017 looks set to bring some much-needed stability to food prices. Nevertheless, record global stock levels mean prices are likely to remain stubbornly low – good news for consumers but less so for the world’s farmers.”
A Joker in the Deck
“Yet the most striking wildcard in this is China. Given the size of its population, its economic growth, and its massive share of global agri commodity imports, it exerts a colossal influence on world food prices.
“And with huge stocks of many of the most important commodities – including corn, wheat, and soybeans – any decision by China’s policymakers to begin selling down these reserves would have a profound effect on world markets as Chinese imports would decline.”
Volatile Currency Markets
Elsewhere, Rabobank predicts that volatility in the global currency markets will move agricultural commodity prices during 2017, with the euro likely to depreciate as a result of French, Dutch, and German elections during 2017.
The potential impact of such currency fluctuations can be seen in the U.K., where the decline in the value of the pound since the Brexit vote in June 2016 has pushed up the price of food imports by as much as 16 percent while boosting agricultural exports. As a result, British grain sales abroad are at their highest level for almost 20 years.
The Trump Factor
Following the election of Donald Trump as president, Rabobank is cautious on the outlook for the United States. During his campaign, Trump suggested he may pursue protectionist economic policies.
Such action could have wide-reaching effects on American imports and exports of commodities if trade agreements are revised.
On the Money
Rabobank predicts the ongoing shift of developing countries to more meat-based, Western-style diets will continue to drive consumption – and therefore support the prices – of soybeans, which play a major role in feeding livestock, pork, and beef. Dairy prices are also forecast to rise during 2017 as demand steadily increases.
While farmers, consumers, and commodity traders will all be keeping an eye on potentially volatile currency prices during 2017, Vogel says that the fundamentals remain strong overall.
“The global population is growing and prosperity is rising, fueling the switch to more expensive, meat- and dairy-rich diets,” he added. “In our view, global food prices should, in the main, hold up, even if farmers are braced for little or no commodity price growth during the year.”