Sometimes it’s great to be a bulk commodities producer.
One of those times is now. It’s a lot easier to see the future for bulk grain and meat markets than it is to see the future for food and processed products.
So many of the big food market themes of the last decade are stories for which the end is nowhere near being written. For somebody investing in that industry, that must be a harrowing situation.
With bulk commodities, there are always markets. Supplies from one source are, by nature, substitutable by those from other sources. They’re easy to store, to ship, to swap and trade. They might need to be discounted in order to find a home, but they always find a home.
Finished food products are a whole different and messier ball of wax.
Imagine you’re one of the major food companies that has invested huge sums in producing plant-based meat-like products such as the “bogus burgers” that became such a media sensation during the pandemic. That group of big and bright industrial investors includes Canada’s Maple Leaf Foods as well as American giants like Tyson Foods and Smithfield.
After fake meat sales slumped this year, Maple Leaf and Smithfield have shrunk their plant protein divisions. Tyson has said little about what it’s doing but sounds remarkably unenthusiastic about a line of products many recently saw as the saviour of real meat. Many thought real meat had a bleak future as flexitarianism took stronger hold.
Plant protein probably still has an excellent long-term outlook, especially as an ingredient in processed foods, but the fake meat revolution appears to have frittered out for now.
For bulk pea producers, that’s unfortunate news, but bulk peas have many places they can be sold, so a slower-than-expected expansion of plant protein processing is a disappointment rather than an investment nightmare.
The nasty geopolitics with China don’t seem to be getting better, although Canada’s specific toxic meltdown with the giant market appears to have stabilized. China is still buying lots of Canadian commodities and that’s unlikely to change any time soon. There’s no reason for any bulk commodity producer in Canada to scale back production or investment plans due to nastiness with China.
That isn’t true for producers of processed goods. If those goods are reliant upon Chinese components, or don’t have alternative markets, or are processed in China itself, every statement about Taiwan is likely to raise a lot of hairs. Imagine being a company like Apple, whose biggest factories are in China. What happens if the United States-China situation goes ballistic over Taiwan? It’s the same with electronics producers relying upon rare earths mined in China.
Canada’s impressive and hawkish foreign minister, Chrystia Freeland, has been vocal in laying out the need for Canada to make common cause with other rules-based global players and democracies. She notes that Canada and other countries are vulnerable to the geopolitical belligerence and manipulations of China and Russia. Freeland’s right, but that’s part of what must be, for investors in countries like China, a very disturbing turning away from global integration.
“We need to be cautious about our relations with the world’s dictators and their elites. We need to make clear it will no longer be possible to rule like Stalin but live like (oligarch and former Chelsea Football Club owner Roman) Abramovich,” Freeland told the Washington-based Brookings Institute Oct. 11.
“We should continue to trade, but we should avoid strategic vulnerability in our supply chains and our economies.”
If you’ve invested a lot in China and in the assumption of just-in-time supply chains with hostile, non-democratic countries, your investments suddenly look very shaky. Outside the rules-based sphere, you’ve left some expensive cards on the table that a cheat could easily palm and play against Canada.
For bulk commodity producers, the vulnerability isn’t nearly as extreme. Fungible commodities might be blocked from specific markets due to intercountry and geopolitical situations, as Russian oil is dealing with today due to the Ukraine invasion, but other markets will almost always absorb that dislodged supply, as Russia is demonstrating today with that oil as it reroutes supplies from Europe and North America to China and India. The same goes for grains and other bulk agricultural products.
There are still many threats to bulk commodity producers and exporters like western Canadian farmers. Protectionism hurts farmers’ bottom lines, with discounts and slow movement pushing right back to the farmgate whenever any preferred market is blocked.
The container shipping crisis has moderated, but uncertainty still hangs over the special crops industry because similar problems could arise again.
The commodity bull market could end any time and we could go into years of low grain and meat values, which would reverse the farming boom of most of the past two decades.
Processed and value-added goods are a better value proposition if markets are open and free. Bulk commodity values will always trend down towards the cost of production.
But in an era of geopolitical tensions and disruptions, there are times in which being a bulk commodity producer offers a relatively comfortable situation, and one of those times is now.
Source: Glacier