Trade war, currency variations threaten food price stability: Stefan Vogel

Relatively cheap vegetable oil prices will benefit imports into India, as India is importing massive volumes of edible oils every year, says Stefan Vogel

Agri commodities are largely facing downside risk in 2019 in view of trade war and strengthening dollar, which means weak currencies of producing countries making their exports viable and putting pressure on commodity prices. Stefan Vogel, Global Strategist for Grains & Oilseeds, Rabo Bank said in an interview to Rajesh Bhayani that following changing scenario in global food and agri sector, trading companies are moving closer to the consumer by either trying to become food companies or by delivering advanced food ingredient solutions to food companies. Excerpts:

How currency volatility amidst US Dollar's strength is impacting agri commodities?

The strong USD makes US exports less competitive against competing countries with weaker currencies. The relatively weak Brazilian Real and Argentine Peso are supporting exports out of those two countries which ultimately means that prices in US Dollars face some pressure from the strong USD. Especially coffee and sugar have been heavily influenced by the Brazilian Real given Brazil is a major producer and exporter of those commodities.

We expect the USD to stay fairly strong which will continue to keep pressure on US Dollar prices at key exchanges.

What is your outlook for major agri commodities?

A "melting pot of risks" including US trade war with China, currency fluctuations and extreme weather threaten global food price stability next year. 

For soybeans and ultimately grains our price outlook heavily depends on the developments of the trade war between the US and China. The recent agreement at G20 in Argentina might allow for a 90 day temporary period in which US soybeans can be traded into China, but in the long run a real resolution is needed. We expect soybean prices to stay depressed and close to $9/bushel at CBOT as long as the trade war continues. A resolution might help to lift prices by up to 10%. This will also impact prices for vegetable oils, which is a key import product for India.

Palm oil prices and soybean oil prices will also stay under pressure in 2019 as supplies globally are high. We see prices of palm oil close to MYR 2000/tonne in 2019. The recent abolishment of Indonesian export taxes added further price pressure.

Wheat prices will stay supported in the first half of 2019 as global supplies are tightening after droughts in several key regions (EU, Australia), but we expect for 2019 a higher acreage and with more normal weather, the global supplies as from mid 2019 should improve allowing for prices at CBOT to stay close to or even below $5/bu.

India has become the largest sugar exporter in the world and those heavy supplies are a major driver for globally depressed sugar prices with 2019 ICE~11 prices to stay close to USc 13-14/lb. Corn faces upside risk as global supplies are forecast to shrink further in 2019. 

How will India get impacted from these developments?

Relatively cheap vegetable oil prices will benefit imports into India, as India is importing massive volumes of edible oils every year. The decline in wheat prices should also support Indian import needs. We predict that cotton prices should remain at strong and above USc 80/lb which is beneficial for India as it is a significant producer. 

Low global sugar prices will continue to provide a tough environment for global sugar producers, including those in India, even so subsidies and the minimum price for sugar cane might buffer that effect somewhat for Indian farmers. 

How is weather risk according to you? Do you see El-Nino striking India?

Weather is always a key risk. 2018 brought droughts in several key producing regions and also for 2019 we need to expect some issues, especially as the El Nino risk stands at 80%. For now it seems like it will be a moderate event, but it can still bring drier than normal conditions to India with implications on the monsoon rains.

Soya and for that matter vegetable oil segment is at core of the trade war. What changes do you foresee in soya sector going ahead? 

If the soybean trade war between the US and China continues than US soybean processor-exporters will lose volumes and US farmers will heavily cut soybean acreage with knock-on effect on grains.

Brazilian farmers are expected to further expand soy acreage and that will go to China. China to consistently pay a premium for non-US soy, resulting in high feed costs. This will reduce soymeal feeding and increase the import and use of alternative protein feed. Countries outside of China to heavily buy and process 'cheaper' US soybeans, within the limitations of local crush capacity availability.

How food and agriculture sector companies are responding to these events?

The melting pot of risks from weather to politics will drive further diversification efforts of international companies in the food and agri sector as the ability to source and market agri commodities from various origins into multi fold destinations will allow companies to mitigate those risks and to benefit from the opportunities that arise from the changes in the market place. In addition, trading companies are moving further along the chain, becoming holistic supply chain managers and some go even further from trading and first processing (like oilseed crushing or flour milling) even closer to the consumer by either trying to become food companies or by delivering advanced food ingredient solutions to food companies.