Agriculture markets eye normality as countries ease export restrictions

The global food supply chain, as well as demand for agricultural products, faces an unprecedented threat from the coronavirus pandemic.

Livelihoods have been destroyed and economies dragged down, while prices of basic foodstuffs soared and countries imposed measures to limit exports and shore up domestic supply, albeit mostly for a short duration.

“This is a very peculiar situation for the Food and Agriculture Organization,” Abdolreza Abbassian, senior economist with the UN agency, told S&P Global Platts.

“On one hand the message from us is look here, the world market is pretty well supplied, but on the other hand we see price rises, people who have severe problems in terms of access to food because they lost employment and income,” he said.

Go deeper: Interview - Abdolreza Abbassian, senior economist, UN Food and Agriculture Organization

Price warnings

An analysis of FAO data covering more than 90 countries showed cereal complex prices soared in March and April, especially in those regions that are price sensitive and where food insecurity is a perennial problem.

Price warnings have been issued recently for staple foods like wheat, wheat flour, rice, corn, and other food items across many countries including North Africa, Argentina, Brazil, Kyrgyzstan, Thailand and Peru among others.

Domestic prices of rice in regions like Asia, the largest producer and consumer of the grain, rose up to 99% over the period of February 2-May 19.

African countries, which import huge volumes of rice, have also seen domestic prices rising up to 50.7% over February through May, according to FAO data.

Africa is expected to consume 38.6 million mt of rice in 2020-21, while the continent’s  production is estimated for 23.5 million mt during the same season, according to the US Department of Agriculture.

Trade and price constraints

Many countries have put in place measures such as export limits, price ceilings, selling of grains from government stocks, and reduction of import duty to control food inflation.

In Asia, which is a major grower of rice and importer of cereals, countries have been more cautious in their interventions, even while trying to ensure adequate domestic supplies of rice in particular

After placing restrictions on rice exports in April, Cambodia and Vietnam  subsequently withdrawn the curbs. Stronger measures on limiting agricultural exports have come mainly from Russia and CIS countries.

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Some of the key wheat producers such as Russia, Ukraine, and Kazakhstan also imposed some restrictions which led to rising prices in April. However, both Ukraine and Kazakhstan have eased the restrictions recently.

Many North African countries, which are big importers of cereals, stepped up imports and relaxed restrictions to secure supplies amid looming uncertainty. Morocco has extended the exemption of 35% duty on soft wheat until December 30, while Egypt, the world’s largest wheat importer, accelerated its purchase of the grain, fearing supply constraints.

Notwithstanding the current curbs on grain exports, the intention of major exporting countries has been more towards normalcy than extension.

“Putting export restriction in the 2020-21 season [by major producers] is quite unlikely. I don’t see a problem there. What I do see a major issue is in some countries, [especially which are price-sensitive and economically weak], may want to come into the market and buy more grain than they usually do, because they are worried about the second wave of the pandemic," Abbassian said.

Loss of future demand

The larger problem for the grains and oilseeds complex would be the loss of demand going forward, particularly for the commodities linked to biofuels and animal feed.

Corn prices have plummeted in the US, the top exporter, as consumption by the ethanol sector has fallen drastically. Similarly, the vegetable oil, dairy, sugar, and meat price indices all declined in April from the previous month due to closure of food services and income loss, according to the latest report released by the FAO.

The supply outlook for grains also makes it clear that the bumps in the prices of cereals are largely due to logistical worries and not about the production or stocks.

The US, Brazil, and the EU are among the hardest hit by coronavirus, and are also among the top exporters of major grains. These countries, with few exceptions, have not imposed any curbs on grains trade.

Brazil and Argentina, which are major producers and exporters of soybeans, corn, and wheat, have been dealing with internal logistics issues like slow truck-loading operations and extra safety checks that have been put in place for ships that dock the ports, leading to slight delays in operations.

In the two South American nations, after initial confusion over the lockdown that slowed down export operations, overall functioning at ports has improved. However, the rapid increase in the number of people affected by coronavirus in Brazil is worrying, as many agricultural exports are concentrated in three ports.

The spread of coronavirus among the workers in the food supply chain has been posing a major risk. In Brazil, spike in positive cases among poultry and pork processing plant workers in Parana, Santa Catarina and Rio Grande do Sul have raised concerns in the industry. Similarly, the severe disruption in US meat production is a case in point, after hundreds of workers in units tested positive for coronavirus. This has led to plant slowdowns and shutdowns, creating a bottleneck in the US meat and livestock supply chain.

“We expect pork processing to pick up in the coming weeks, but US hog producers may still have to euthanize as many as 7 million pigs in the second quarter alone,” CoBank Lead Economist Will Sawyer said in a report.

“This would further diminish meat supplies this fall and add to the billions of dollars of losses from lower livestock prices,” according to Sawyer’s report.

Less livestock will translate to lower demand for corn used for feed in the long term, market experts said, piling up additional stress on corn after unprecedented ethanol demand destruction in the last few months and higher acreage prospects for the upcoming crop season caused the market to crater.

Ethanol prices in the US crashed dramatically in April from a high of $1.33/gallon in February to sub-$1 in March, leading to lower margins and forcing about 140 facilities going offline or reducing output, after lockdowns impacted fuel demand.

While the fuel ethanol demand outlook has improved in recent weeks, following the easing of restrictions and increase in US gasoline prices, S&P Global Platts Analytics estimates ethanol prices for the rest of the year may not touch the highs seen in February.

Many ethanol producers continue struggling financially and lawmakers are looking to push for emergency relief, Platts Analytics said.

The uncertain future is something that everyone has to, unfortunately, live with, and finding ways to mitigate the fallout of the pandemic would be the biggest challenge for policymakers, Abbassian said.

However, unlike many other sectors, the agriculture segment so far has proved relatively resilient, with supply of major cereals and oilseeds at comfortable levels. Despite some supply bottlenecks, exports have been continuing without major delays.

If the present is any indication, and barring a second pandemic wave, agriculture supply chains should be able to weather the crisis.

Infographic research by Rohan Somwanshi, Mugunthan Kesavan, Asim Anand and Shikha Singh