Global food demand has a doppelganger… and its name is Challenge
Part 1 of this series fairly gushed about the potential of the global middle class (GMC) to drive gains in consumption, raising significant opportunities for exporting countries like Canada. Yet, as great as demand is, it never appears without its doppelganger: the challenges in supplying that demand.
Challenge #1: Ag prices to head lower
The recent Canada West Foundation’s conference described a demand for food that’s expected to grow along with the global middle class (GMC). This increased demand suggests that ag prices should also climb.
The World Bank, for one, doesn’t think that’s going to happen.
The Bank’s John Baffes forecasted a weakness in prices for 2015 across all main commodity groups including agriculture. In the longer-term, oil will live within a range between $55-$70/barrel.
Is this the new normal in ag prices?
If the Bank’s correct, the recent high prices for ag commodities aren’t likely to be seen anytime soon. On the plus side, the energy-intensive agriculture will benefit from softer price pressure on inputs such as oil and fertilizer.
Demand will still grow but so will supply
A number of things spurred the weakness in prices and the sluggish/moderate recovery that marked 2014: the economic slowdown in China, the appreciation of the U.S. dollar, high stocks, and the fact that other countries eventually implemented the same monetary policy stimuli found in the U.S.
However, according to Baffes, supplies were the big culprit.
This is primarily due to the recent period of high prices allowing for investment that helped to reduce costs and expand exploration, innovation and the capacity to reach new markets. There’s a pretty good example of this outside of agriculture: U.S. shale gas, which helped to over-supply world stocks, continues to get cheaper to produce.
Such lessons in efficiency and cost-cutting don’t disappear simply because the market’s facing a period of lower prices. The future will continue to offer improved yields and production, pressuring producer profitability
Challenge #2: More local competition in export markets
As if that weren’t enough, in addition to growing consumerism, the global middle class is helping to grow local supply.
The greatest shifts in productivity and improvements in ag yields will no longer occur in the developed world. Markets shifting from grain/crop diets to protein diets will change where production and infrastructure needs to also grow.
And the rise of companies responding to their local, growing middle class demand will bring real competition to those who export into these markets. In the world today, there are 8000 companies defined as conglomerates or large companies but in 2025, there will be 15,000 such companies, 70% of which will come from emerging markets.
And the winner is...
The drop in oil prices is great news for those who use energy-related commodities (fertilizer, fuel, etc.)
Generally, for Canada, lower prices and softer demand for agricultural commodities will mean a greater need to develop value-added. Whether its feed for livestock raised in markets trying to feed themselves or enhanced markets for animal protein or processed foods, value-added markets should loom large on Canada’s export horizons.
Martha Roberts, Economic Research Specialist