Posted on March, 22, 2023 at 08:05 am
Russia agreed over the weekend to extend the Black Sea grain deal that would allow the safe export of Ukrainian grain for another 60 days. Wheat and corn prices eased as the extension alleviated some concerns over global supply.
However, the renewed agreement only covers 60 days, half of the intended period, as Russia warned any further extension beyond mid-May would depend on the removal of some Western sanctions. On Monday, the country’s foreign ministry said in a statement that it would like to see the restoration of access to the SWIFT financial messaging system for its state-owned agriculture-focused bank, a resumption of farm machinery supplies, and the unblocking of foreign assets and accounts held by Russian agricultural companies.
Geopolitics is a key ongoing risk to global grain supply chains alongside other challenges, such as the impact on productivity from climate change and nature loss. According to the Intergovernmental Panel on Climate Change (IPCC), current agri-food systems are responsible for up to a third of emissions and the primary driver of biodiversity loss. Progress here is needed to meet our emissions targets by 2030 to keep us within the 1.5-degree Celsius limit.
Food security, in our view, will remain one of the key challenges in the years ahead.
The war has a longer-lasting impact on crops beyond the current season. Earlier this month, Ukraine’s national academy of agricultural science said that its grain harvest could fall by over 35% this year due to a smaller planted area and lower yields. These declines come after a 37% drop in grain harvest last year from 2021 levels. Production losses will likely be more pronounced as the war drags on and disrupts farmers' ability to prepare and plant fields, while access to seeds, crop protection, and fertilizer is diminished.
Weather risks remain. While Russia’s wheat export volumes have been well above seasonal norms, the production outlook in the US and Europe remains unclear. Winter crop conditions in key US states remain challenging and are being reflected in regional price spreads, and warm weather across parts of Europe during the winter periods have left crops highly susceptible to dry spells or sharp drops in temperatures. Separately, local Argentinean forecasters see further cuts to the estimate for 2022–23 soybean crop as it continues to struggle with the ongoing impact of recent drought and high temperatures.
China’s recovery is set to support demand growth. The latest data showed that China’s soybean imports from the US rose over 15% in the first two months of the year. While the jump was largely due to delays in harvesting in Brazil, total imports in the period reached a record 16.2 million tonnes as buyers stocked up in anticipation of healthy demand this year. We expect China’s soybean imports to reach almost 100 million tonnes in the coming 2023–24 marketing year. Last week, China’s economic activity data demonstrated a that the recovery is on track as industrial production, retail sales, and fixed asset investment all showed improvements. As we see consumption growth in China rebounding to above 7% this year, we expect higher imports of key agricultural products.
Overall, we believe companies linked to improving agricultural yields should outperform their benchmarks as governments and international organizations rethink all aspects of food security. With 200,000 more people needing to be fed sustainably every day, a continued rise in the consumption of land-intensive foods means that agricultural production will need to be 50–60% higher by 2050. We expect the global farm economy to grow by 2.5x to USD 6.5tr by 2050 with precision agriculture, crop science, controlled-environment farming, and residue-based biofuels showing the strongest growth rates.
Source: UBS