La Nina to take hold of agri markets in 2021

G Chandrashekhar | Updated on January 04, 2021

Prices expected to remain firm in H1

After the pandemic-hit 2020 that saw demand destruction all round, a great weather market is upon us following the onset of La Nina — a weather phenomenon under which colder Pacific Ocean waters tend to change precipitation and wind patterns.

La Nina is already exerting its varying impact in different parts of the world – drier than normal S-W and S-E USA; wetter than normal weather in Northern America and Canada; generally drier conditions in South America; greater risk of excessive rains and flooding in Australia; greater likelihood of typhoons hitting China; and importantly, higher precipitation in South Asia and South-East Asia. EU, Russia and Ukraine, too, face adverse weather impact.

Principally, under La Nina influence and abetted by other non-weather factors, agricultural commodities have already become much more expensive in recent months, reflecting tighter supplies.

Ultra-loose monetary policy, fiscal stimuli, rising crude oil rates, revival of economic activities and a weaker US dollar have combined with La Nina to propel the markets higher. A new dimension recently added is the positive news of vaccine availability.

Tighter supplies

The price impact applies particularly to grains and oilseeds complex. Strong demand and downward revision of crops (mainly in the US) is the season’s flavour.

Demand strength comes not only from China whose economic activities are close to pre-Covid levels, but also from other countries keen to expand inventories due to the experience of corona crisis that led to disruption of global value chains.

The question is: when would global demand return to pre-Covid levels. Coming on top of crop losses in the US and elsewhere, La Nina is seen impacting South American crops, especially wheat in Argentina and corn (maize) in Brazil. This has tightened global availability of these two crops.

In wheat, the perceived surplus is on paper as both China and India are not an integral part of the global value chain. To meet its animal feed needs,

China is a big demand factor for corn. The Asian major is now the world’s second largest importer and is expected to retain the position in 2021.

In the oilseeds complex, lower global production of soyabean and sunflower seed as well as palm oil has catapulted the market far higher than earlier anticipated. The price rally has taken various vegetable oils to impressive highs not seen in recent years (crude palm oil above $1,000 a tonne; degummed soya oil above $1,100 and sunoil above $1,200). Rising crude oil rates (Brent at $50 a barrel) and mandated biodiesel programmes, too, have supported the vegoil complex.

During 2021, oilseed and vegetable oil prices will soften as the current supply constraints ease. Higher prices are sure to encourage planting of oilseed crops in a larger area in the northern hemisphere even while supporting higher production of palm oil because of the favourable weather effect.

US policies

The market will closely watch the new US President for his policy stance on eco-friendly agriculture, support to bio-fuels and multi-lateralism. On current reckoning, low or near-zero interest rates and massive liquidity are sure to boost investor interest in sensitive agri-goods.

Trade friction between the US and China as well as China and Australia will be keenly tracked for advance signals.

In the first half of 2021, prices of agri-commodities overall are likely to remain at elevated levels given tight supplies, robust demand, massive liquidity and high crude oil rates.

Bearing in mind the emerging situation, the Centre must design its response to inflation expectations. The response must include appropriate tariff changes for import and support for export of agricultural commodities, especially essential food items.

Fortunately, the Rabi crop prospects for wheat, pulses and oilseeds appear bright.

The writer is a policy commentator and global agri-business specialist. Views are personal

Published on January 04, 2021

Follow us on Telegram, Facebook, Twitter, Instagram, YouTube and Linkedin. You can also download our Android App or IOS App.

This article is closed for comments.
Please Email the Editor