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Economy
Wednesday, December 9, 2015 - 03:16
Bad news for farmers

The FAO Food price index registered the largest monthly fall in seven years in August. The index fell by 5.2%, the largest decline since December 2008. Admittedly raw materials have declined over the last 10 months, but the FAO index has not reached such a low level since March 2007. The fall in soft commodity prices is less significant than that of oil (-51.5% in mid-September 2015 on a yearly basis) and the decrease in raw materials prices which reached 22%. All key commodities are affected: cereals (-15%), vegetable oils food (-19%) and dairy and sugar (-33%) over the same period.
“The reasons being that the supply of most agricultural commodities are abundant, energy prices have fallen and global demand is lower due to China’s slowing economy,” explains Guillaume Rippe-Lascout at Coface.
• Cereals: wheat, maize and rice prices are falling. Favourable weather conditions have led to better-than-anticipated crops over the past year. After a record crop in 2014, world production continues to be higher than world utilisation (see chart). This excess in supply, combined with a growth in inventories, is weighing on prices.
• Vegetable Oils: Prices are being impacted by the decline of oil palm prices (at a 7-year low). This is due to lower demand from China and India and improved prospects for soybean crops.
• Dairy and sugar: The end of dairy quotas in the European Union has contributed to intensifying the milk supply increase. Over the same period, estimates of powdered milk imports in China in 2015, conducted by USDA, were 33% lower in June (400 000 tonnes in June vs 600 000 tonnes in January 2015). This decrease is related to a higher-than-expected level of inventories in China as well as lower overall consumption.
The sugar price fell as a consequence of continued depreciation of the Brazilian real (40% year-on-year against the US dollar). Brazil is the world’s top sugar producer. India (second) has increased its supply and should become a net exporter in the current 2015/16 season.
Looking ahead, risks are on the downside. According to Coface, global growth will be below 3% for the 5th consecutive year in 2016. Growth will continue to slow in China (6.2% against 6.7% in 2015). Cereal inventory levels increased by 6.2% between 2013 and 2015. China is the world’s largest importer of soybeans and also the main international market for food and agricultural products from the United States.

China accounts for 20% of all US agricultural exports, with a record $29.9-billion 2014 (including soybeans, coarse grain, cotton and beef). Prices are unlikely to rise, as confirmed by IMF forecasts. Wheat prices are expected to decrease by -6% in 2016.
This situation could lead to increased insolvencies of breeders and farmers (whose financial situation is already tight). In 2015, farmers, breeders and food trading companys’ (agricultural cooperatives) revenues have been impacted by these low raw material prices.
For breeders, although the fall in prices of agricultural raw materials has led to a lower cost of inputs, it has not offset the negative effects of lower selling prices. In France, the purchase price of agricultural commodities index for cow’s milk production declined by 1% in July 2015 year-on-year while milk prices fell by 13% over the same period. Investments from food trading companies (agricultural cooperatives), may also be at risk.
“The only silver lining for the industry but not for the consumer is related to weather conditions,” he says. The warm equatorial current el Nino Pacific could affect food supply next year. It could be one of the four most intense episodes observed since 1950, according to the World Meteorological Organisation.
 

Copyright © Insurance Times and Investments® Vol:28.12 1st December, 2015
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