Much like everything else in the world, the grains and oilseeds markets have experienced some massive shifts and changes as the Covid-19 pandemic has evolved this year. The Grains and Oilseeds analysts over at Rabobank recently published a report that takes a look at the shifts and how they might play out once we enter the post-Covid world. The Rabobank team notes that some short-term impacts (e.g. biofuel demand and commodity price declines) were followed by quick recoveries. Some medium-term impacts could be mitigated by the availability of a vaccine (e.g. travel restrictions) or are recession-induced (e.g. negative impacts on feed demand from a potential slowdown in meat consumption in the developing world). But some long-term impacts could cause structural changes that require businesses to make strategic changes. Below are the seven areas of major, long-term change that the analysts identified, which stretch across the entire grain & oilseed supply chain. The full report can be found HERE.
Increased Government Intervention: Rabobank says the impacts of Covid-19 have spurred two tracks of thinking: One, coronavirus exposed vulnerabilities of globalization and free trade, which could move governments to adopt self-sufficiency policies. In the medium term, that could mean more protectionist policies while improving domestic inventories in the short term. The second track of thinking is that governments may provide more financial supports, which could disadvantage growers in regions where the government can’t or won’t intervene, or worse, that impose taxes on ag exports. During a video conference about the report, Stephen Nicholson, a senior grains and oilseeds analyst for Rabobank added that the deglobalization trend began before Covid-19 but the impacts of the pandemic have accelerated the shifts.
Food Security and Higher Inventories: This ties in with the previous point to some degree as larger inventories of stocks are expected to be held by both private and public entities in the food supply chain. This could exaggerate demand during the stock building phase, which should be supportive of prices. Higher stocks over time will reduce price volatility but they also bring higher inventory costs, which will be closely monitored in the bulk commodity chain. That will be especially true in the private sector.
Trade Dynamics and Deglobalization of Supply Chains: Also tying in with the first two points, multilateral trade could start to fall out of favor due to geopolitics, food security, and food safety concerns. Rabobank predicts countries will turn inward to promote domestic food production/markets and self-sufficiency, and a turn outward to cultivate “favored trade partners”. A more local and regional approach will hurt the competitive advantage of major exporters and, to some degree, multinational grain traders. This dynamic could also impact how and where companies can invest in G&O supply chain assets. However, small/medium regional G&O players may thrive and be attractive investments.
Digital Supply Chains: Ag supply chains are expected to become more digitized as more farmers/producers adopt digital platforms to collect, manage, and share information along the supply chain. Ecommerce platforms will especially grow in the farm input supply chain. For instance, more farmers will purchase inputs online, bypassing local suppliers. Nicholson foresees an Amazon-type formate where seed and chemicals are delivered directly to the farm, which will change the landscape. Early adopters that prepare for the digital supply chain will be the winners.
Consumer Behavior: The pandemic has forced consumers around the globe to prepare more meals at home, leading to a resurgence in “value” shopping at the grocery store. That means more shopping in the so-called “middle of the store” where a majority of grains and oilseeds products are found. Grain-based products that soared at the outset of the pandemic have subsequently leveled out back around pre-pandemic levels. Nicholson notes that he believes the longer the pandemic goes on, the more these new habits will stick and be the new “normal.” Another interesting point in the report is in regard to a reduction in food waste, which in turn could reduce demand for G&O products. As they explain, these products are needed to produce every moldy loaf of bread thrown away and liter of milk poured down the drain. However, an immediate impact would be hard to prove but, in the long term, it could slow global growth of G&O demand for years.
Fuel and Biofuel Demand Continue Downward Trend: The good news is the worst demand reductions for oil and biofuels were felt early on in April and May. But while the recovery was quick in many regions, in most cases, demand has not returned to pre-Covid levels. The pandemic’s impact on many aspects of daily living is expected to linger, including less commuting due to increased working from home, and more virtual meetings and events resulting in less business and leisure travel. All of which means less fuel consumption, which in general negatively impacts the biofuel sector and related sectors like feedstock prices, vegetable oils, and feed grains. Biofuel margins have improved but sustained lower utilization rates will call for consolidation in some regions. This could in turn encourage acreage shifts to more profitable crops or methods. Rabobank says this trend was in place before Covid, fueled by more fuel-efficient cars, more electric cars, and an overall decrease in demand for gas and oil products. Nicholson believes the trend will stick and, if anything, might accelerate.
U.S. and Global Feed Demand: Rabobank says pandemic disruptions have led to a drop in demand that is squeezing profitability in the U.S. livestock sector, creating a long tail of potentially contracting feed demand. A short-term pullback has been witnessed in the U.S. poultry sector, while a contraction in the beef and pork sectors will take longer. For example, it will likely take 12 months for the U.S. beef industry to work through the backlog of cattle before the impact of reduced cattle on feed will be reflected in smaller feed demand. Nicholson says the pandemic coupled with the continuing culling of pig herds worldwide due to the African swine fever outbreak, which began in Asia but recently was discovered to have spread to Germany, “have disrupted the feed chain and makes it very difficult to figure out what the demand is going to be.”