Agricultural market volatility to continue into 2023, may intensify: CoBank economist

Farmers and consumers across the globe may have to contend with a volatile market well into 2023 as the upside risks to the prices of agricultural commodities and inputs loom, Kenneth Scott Zuckerberg, lead analyst and senior economist with CoBank's Knowledge Exchange division, said in an interview with S&P Global Commodities Insights.

Prices of major crops like corn, soybean and wheat have been trading higher than usual levels as a cocktail of adverse events like the Russia-Ukraine war, weather issues and logistical bottlenecks tighten the crop supply.

The Russia-Ukraine war is going to affect the supply of grain and oilseeds for three or more years, Zuckerberg said.

"2023 is a year where we have a lot of asterisks, you know, markings that things can change, things could be worse, and we are very, very cautious about the outlook," Zuckerberg said.

Geopolitical disruptions

Ukraine is one of the world's top suppliers of corn, wheat and sunflower oil, and the war in the country has cut the supply of these key commodities significantly.

While there has been some progress toward allowing agricultural exports from Ukraine, there have been no clear signals of the conflict ending in the near term.

"Turkey, the UN, Russia and Ukraine signed a grain deal," Zuckerberg said. "The nature of trusting Putin is beyond me, the deal was signed, and the missiles got fired. If you need any other indication of 'proceed with caution or a banner to proceed with caution' about what one's assumptions are, I think that's a very good situation."

High energy costs have also made the manufacturing of fertilizers expensive. Recently, fertilizer prices have eased a bit. Still, the possibility of natural gas supply disruption in the EU from Russia can lead to a spike in gas prices and costs of fertilizers again.

"If they [Russia] pull supply, natural gas prices go up ... it means fertilizer prices go up, and we have a restart to the inflation regardless of what the central banks are doing on interest rates," he said.

Zuckerberg also cautioned that the markets cannot overlook China-Taiwan tensions.

"I think we can't ignore the China-Taiwan situation because once somebody tells you their intention, it is really important to remember that."

China is one of the largest producers, consumers and importers of food and feed grains in the world.

Farm income

Farmers sailed through the high energy and fertilizer costs this year, thanks to the increase in crop prices as well.

However, crop prices have climbed down over the last few weeks.

There are concerns about farmers' income taking a hit amid high inflation, the rise in interest rates and the possibility of slowing demand.

Zuckerberg said that despite various concerns, farmers may still be able to make some profits given the above-average price levels of crops.

"It's not clear yet that it's going to be awful, or terrific," he said. "I think the best guess is that it's somewhere in the middle of an average here, somewhat profitable, but not as profitable as let's say 2020-21."

When asked about the impact of rising credit costs and the impact it will have on farming he said, "so far in the US the agricultural credit cycle, we are managing through it and we don't see flashing signs of disasters at the moment."

Logistical bottlenecks

The logistics costs have also been generally higher this year due to the increase in crude oil prices.

The lingering supply chain issues due to the pandemic and fresh outbreaks in China continue to present a challenging environment for grain traders.

There have been fuel shortages in Argentina; truck freight rates have surged in Brazil, and there is a shortage of personnel involved in the transportation of commodities in the US amid higher gasoline prices.

It would be naive to say that everything is back to normal, Zuckerberg said.

"I think the more realistic interpretation is we [have] some positives and negatives, but we still have a longer run rate of volatility in supply chains," he said.

The issues in the supply chain are likely to continue in the balance of 2022 and probably for a good bit of 2023, Zuckerberg said.

Weather outlook

The status of La Nina and hurricane season in the next three months will be critical, Zuckerberg said.

The possibility of a continued La Nina, a weather phenomenon, may add more uncertainty to the agricultural market.

Current forecasts see a 70% chance for the continuation of La Nina during the June-August 2022 season, and a 50%-60% chance for continuation beyond mid-2022.

Argentina's 2022-23 wheat sowing is hampered by dry weather; the US corn crops are developing under less-than-ideal conditions due to heat stress and the US is also in the midst of hurricane season.

Though the impact of La Nina depends on the intensity and time of the year, typically La Nina leads to rainfall deficiency in Southern Brazil and parts of Argentina.

La Nina is associated with wet conditions in eastern Australia and heavy rainfall in rice-producing South and Southeast Asia.

The weather element can throw a wrench into the supply calculus of crops, and along with the other constraints the supply side of crops faces more risk than demand destruction, Zuckerberg said.

Related Infographic: La Nina adds uncertainty to already troubled agriculture market