The annual in-person Barnett-Hall conference took place recently following a two-year interruption due to the pandemic. The event provided a rundown on many global factors that impinge on agricultural markets in what is also a volatile geopolitical environment.

There were two main speakers on the day, both of whom spoke about the huge uncertainties which exist for those who attempt to conduct national and international businesses.

The war in Ukraine added a huge amount of turmoil internationally but we learned that there are also many other power plays happening.

Interest and inflation

Dan Basse presented a comprehensive review of agricultural markets and the factors that affect them. Dan is a market analyst and his presentation this year was titled “Too many wars – Russia v Ukraine, central banks v inflation and climate change v world crop yields”.

He opened his remarks by stating that low interest rates are gone. This means that access to credit and capital will get tighter and that those in business need to get back on friendly terms with their bank managers.

Inflation is happening for a range of reasons, many of which were precipitated by the invasion of Ukraine. Energy and food prices are major drivers and higher interest rates are now being used in many countries as a tool to slow inflation.

Dan commented this is just one blunt tool for this purpose which can have other consequences. He said an increased supply of goods (all goods) can have a similar impact as competition to sell helps keep prices down. It provides a softer landing, but it is more challenging where higher production costs are locked in.

He sees inflation running at around 4-5% after the next two years and suggests that interest rates need to be between 1.0 and 1.5% above inflation. So, money will not be cheap but higher interest rates mean that cash is once again an asset class.

Crop yields and heat-flation

Global per capita grain usage has continued to rise. Up to a few years ago, grain production outstripped this demand, resulting in increasing stocks. Increased output was driven by a combination of higher area and bigger yields.

Now it seems that grain yields, including maize, have stagnated across the globe. Dan put this down to the impact of excessive heat. And while there is no real food crisis yet, he said we are getting closer to that point. As global population increases so does the demand for food and this would require more acres in the event of stagnant yields, he said.

Where can those acres come from? Dan said the US is now at peak acres and that any remaining land would not be economically viable to cultivate. Elsewhere one might look towards the Black Sea region or South America. One is dogged by war and the other is labelled with the destruction of rainforests. So, there are no easy solutions unless global warming moves production capability into more northerly regions of Canada and Siberia.

The world has experienced record heat levels in recent years. The question remains as to whether these are short-term shifts or longer-term climate changes, but international yields are now being constrained by higher temperatures. Dan used the term “heat-flation” to describe this phenomenon, suggesting that we need another 25m acres over the next five years to counteract the impact of climate change on crop yields. Current trends indicate that the world will reach peak farmland by 2065.

Heat-flation and flotation

In the US and elsewhere, higher temperatures led to lower yields and other problems associated with lack of rainfall. The US is heavily dependent on its river transport system for the internal movement of grains and other goods. But less rain means less water in rivers and this is affecting load capacity through the Mississippi arterial transport system.

Reduced water levels mean one of two things:

  • Dredging the critical areas.
  • Reduced load capacity.
  • Dredging is expensive and the cost will be passed back down the line and ultimately to the farmer. Reduced load capacity is the alternative to keep barges afloat and this too increases cost. These add to the cost of getting US goods to ports for export and, along with the strong dollar, US goods less competitive.

    Soya and renewable diesel

    Dan said the production of renewable diesel in the US is set to double in the next two to three years. That would require more soya processing capacity and more oil going to renewable diesel in a fresh or pre-used state. But it will also mean that the US will produce more soya bean meal in the process, which will have to be exported.

    It is suggested that an extra 30m acres of soya beans will be needed to meet this requirement, which is now obliged by legislation in some states. This demand for soya bean oil has pushed up US soya oil prices versus competitors so oil exports will be very limited. However, high crushing margins continue to encourage investment in the sector.

    Dan expects to see a record soya bean crop in 2022/23 but the South American product will be far cheaper in international markets

    Maize markets

    Brazil seems set to have a huge 156-160Mt maize harvest this year. This will mean that it will be the biggest global maize exporter, primarily because of its Safrinha crop. Dan believes the US will export less maize in the current marketing year because of price and its internal bioethanol demand is now flat.

    Also, current tensions between the US and China could see that importer sourcing maize from other countries such as Brazil. So it is hardly surprising that, as the world’s biggest maize producer, a recent survey of US farmers found that they are currently very anxious. Basically, everybody has a hand in their pocket as all input classes have increased in price while exports of maize look increasingly challenging.

    Conference snippets

  • Dan Basse questioned the availability of fertiliser for the coming season.
  • The World Food Price Index has declined in recent months, but meat continues to increase.
  • This marketing year may be the first in a decade where demand for grain will not show a positive increase.
  • Energy is a pathway to consumer goods, regardless of the type of goods.
  • Looking behind the bigger picture

    What we see around us is very much influenced by what we want to see and our perspectives up to that point. So we see things as black and white or good and bad but knowing a bit more could make them grey and our perception of the colours can even change with time.

    Jacob Shapiro is a geopolitical analyst which might also be called a study of international relationships. It was intriguing to hear situations described from a multi-angular or multi-lens perspective and to learn of things that are going on in the background that may shape our world in the future.

    Jacob opened his comments by saying that the world has always been in transition and this is not about to change. Some of these periods led to increased globalisation in world economies but now we are moving to de-globalisation. This may give rise to more regional trade agreements in a multipolar society.

    Geopolitics is very much about understanding the other guy’s perspective. Jacob started with Russia. It has been invaded many times in its history so security is important in the Russian psyche. It would like to have physical barriers against invasion on all sides and Jacob indicated that it sees the Tien Shan mountains, the Caucasus mountains, and the Carpathian Mountains as being good natural boundaries.

    The changing world

    Most recent wars were fought over energy or other natural resources. Both speakers talked about the increasing inequality of wealth in US society. This is driving political polarity there and increasingly so elsewhere.

    This is significant because the US is no longer dependent on energy imports, so it can become more self-centred, with less need to exert international influence.

    War in Ukraine is forcing the EU to reappraise its attitude to energy and even food. Some EU countries have a heavy dependence on Russian gas while others are now having to do without it. The Russian invasion of Ukraine will severely damage its trade relations with the EU but it may still find other customers for its oil and gas.

    Some EU countries already have big LNG (liquified natural gas) import capacity and that source looks set to increase, given the capacity investment being planned for the years ahead. There is no major scarcity of gas or oil yet – the problems relate to where it is and logistics.

    Global oil consumption has been falling since the 1970s while gas is increasing slightly. Renewable energy sources are still minor in terms of overall supply but they will be more important in time.

    Energy sources led to the rise or fall of important geopolitical regions at different times in history. We have already witnessed huge changes in energy sources so further change should not surprise us. We have come from manpower, horse power, steam and coal, oil and gas, electricity, a range of renewables and we are looking towards hydrogen and again at nuclear.

    The digital revolution

    While energy has influenced economic and/or political power in the past the ongoing digital revolution could have a similar impact.

    Jacob pointed out that very many businesses depend heavily on the transmission of data or information across seas and oceans via cables laid under the seas. Are these prone to terrorism in today’s world, just like the gas pipeline to Europe?

    Against this background, Jacob stated that 5G telecommunication is being seen as a way to circumvent some of this risk.

    While it is a relatively new technology, the bulk of development seems to be taking place in the Asia-Pacific region.

    Increasing demand

    As we move to an age of robotics, automation and artificial intelligence, the necessity for rapid data transmission is only set to increase.

    Only time will tell if the 5G revolution will result in a new world order. However, it is interesting to note that one of the main technology providers, China’s Huawei, is currently banned in some major regions of the world due to allegations of unintended data transfer.

  • Low and negative interest rates are gone for the foreseeable future.
  • Tensions around geopolitics extend way beyond war.
  • Crop yields around the globe appear to be increasingly limited by higher temperatures.
  • Developments in digital technology could shape future international relationships.