Guy Allen told attendees at Sorghum U/Wheat U Aug. 11 in Wichita, Kansas, farmers are consistent in their concerns—whether they’re located in Kansas, his native Illinois, Australia, or in northern China.
“They want to talk about the weather, and they want to talk about price,” he said.
Allen is a senior agricultural economist and grain marketing and risk management curriculum manager at Kansas State University. He was tasked to speak about Ukraine during the event and its impact on the marketplace.
He took the liberty to expand on the topic just a bit after speaking with colleague Dan O’Brien recently and decided neither has witnessed a time when the market was this volatile. Allen said when he got out of college in the early ‘80s, there was high inflation and double-digit interest rates along with a Russian grain embargo.
“A lot of similarities there,” he said. “Sort of reminds me of the saying Mark Twain is known for, history doesn’t often repeat itself but it frequently rhymes.”
For the younger attendees in the room, he wanted them to do two tasks. First, go talk to those farmers who are over 65 and ask them how they did business 40 years ago.
Second, when thinking about Ukraine, Russia or China, think in a global perspective.
“Not everybody in the world thinks like Americans or that western school of thought,” Allen said. “We’re less than 12% of the global population. Most of the world actually sees the world quite a bit different than we do.”
He challenged those in the room to look at things a bit differently and not to make a call whether it’s right or wrong, but instead understand how customers and competitors around the world are viewing events in these “significant times of change.”
During the last 20 years Ukraine has developed into being a major grain supplier right alongside Russia. During the early 1990s, Russia was the biggest importer of grain in the world.
“Today, Russia is the largest wheat exporter in the world,” he said. “Things do change significantly and want you to keep that in mind.”
Allen believes right now we’re in the middle of a significant paradigm shift in global markets. Shifting away from globalism to more regionalized trade and market relationships. To put it into perspective, Ukraine is a significant grower of oilseeds—No. 1 in sunflowers and top 10 in rapeseed and canola.
“They’re not soybeans, but they are an important part of that oil seed complex,” he said. “And it’s having an impact on your soybean price, and the use of oil and meal around the world but particularly on vegetable oils.”
When it comes to coarse grains, Ukraine remains in the top 10. Allen said any disruption in production and exports is a hindrance.
“So that disruption in production and exports is having a major impact on markets,” he said. “Corn, sorghum, barley prices move closely in tandem than say if they are a feed grain.”
Allen believes controlling the supply chain and grain is a key factor to Russia’s interest in the Ukraine, especially the Black Sea ports. He also believes Russia’s interest in the energy supply chain—crude oil or natural gas—is a high priority as well.
“Ukraine is very, very rich in resources and it strategically sits at the top of the Black Sea with access to global markets,” he said. “And one of Russia’s biggest concerns is year round access to warm water ports, whether is in the form of commodity trade or in military security.”
During the last 20 years, Ukraine has tended to be the cheapest supplier of grain and generally export their commodities early in the production season.
“And also their quality has increased significantly, particularly when it comes to wheat,” Allen said. “If you look at their local customers, it’s all Mediterranean, North Africa, Middle East type customers, Egypt, Indonesia, Turkey, Pakistan, Bangladesh, and when that supply gets shut off, these guys are now scrambling to find alternative markets.”
Those countries tend to rely on an imported food supply because of very little domestic production of their own. Their governments are “a bit more questionable” and their currency is significantly unstable as well, according to Allen.
Allen expects in the coming year, the full impact of the decreased exports will be realized.
Allen said there’s a crisis in the commodity and energy complex. Inflation is driving new highs across the board. He expects to see historical highs in probably the next 12 to 18 months. He didn’t overlook supply and demand issues. “Just in time” inventory models just don’t work anymore.
“Everybody’s having to rethink that and you’re seeing that on your farms as well,” he said. “Everything from supplies and fertilizers, seed, chemicals, farm equipment.”
The commodity buyers and those selling seeds and other inputs are having to carry a larger inventory. When Allen visits with trade teams, he still finds it surprising that a typical ethanol plant or flour mill is only maintaining “maybe less than a week supply on hand.” Most companies struggle financially to have more on hand.
“It has a significant impact on balance sheet, financing lines, etc., and with rising interest rates having to change that business model is having a significant impact,” he said. “Not to mention increasing costs of inputs particularly related to fossil fuels, petroleum products—which ranges from fertilizer inputs to chemical, seed and across the board.”
Businesses are going to have to start managing margin rather than just their input costs and output revenues. As the supply and demand situations tighten up, Allen is concerned about a number of weather issues around the world—especially in areas where production is high—Europe, South Asia, East Asia, and Argentina.
“Particularly in major producing areas—where dry weather and reduced crop production is expected,” he said.
After reviewing World S&P grain numbers, Allen said for wheat—take a look at who are the major exporters around the world.
“We may have supplies, particularly in China, about 150 million metric tons,” he said. “The market keeps asking is that volume really there? And we’re getting supplies for major exporters down to historical lows.”
When looking at the supply and demand numbers, carry out stocks have come down quite significantly. Allen would still like to see China take those major stocks off the table, but that would push the ending stocks to a 15 year low.
“Things are very, very tight,” he said. “The key thing is we’re running the tank pretty close to empty and it will get increasingly concerning.”
The supply chain will suffer if this happens, especially if there’s questions around whether or not the grain can get to where it needs to be on a timely manner and do people that have the cash to buy it.
“The U.S. situation not much different. It’s tightened up quite as well,” Allen said. “The key thing for wheat we now cannot afford to be a feed grain.”
During the last four or five years, hard red winter wheat has been cheap because people were feeding so much wheat.
“We have a supply and demand situation now tighten up enough we can not afford that much wheat at all, not only in the U.S., but globally as well,” Allen said. “So it’s going to be corn that actually is going to drive the price for wheat. It’s a bit tighter.”
Allen expects wheat to get back to the price levels seen in 2008.
“There we approached $14 a bushel,” he said. “I would not be surprised to see prices come back up to those levels. Everybody’s pretty comfortable now immediately post-harvest. But I think we’re looking at some things that make us increasingly concerned and corn is going to be the underlying driver of that.”
Corn has seen very tight world stocks. There’s been record production and consumption. A big driver for the consumption is not only the increased demand for meat and animal products, but also energy. Numbers suggest China may have more than 240 million metric tons of corn in storage, but again, there’s skepticism as to what’s really there.
Allen touched briefly on the international cost of ocean freight. Very high commodity prices coupled with the cost of freight the last 18 months hasn’t been very kind to those in the market.
“We saw that jump in May, March April May of this year,” he said. “It’s come back down because of slowing demand for not only grain, but also for coal and iron ore as well.”
He believes part of the drop in the ocean freight bulk prices is because experts are starting to see additional signs of demand destruction.
“People just aren’t buying commodities internationally and that reflects this,” he said. “This puts the longer-term chart for ocean freight.”
Container freight has stayed quite expensive relative to bulk dry freight, but Allen believes the problems are starting to work themselves out.
“We’re seeing a supply chain shift,” he said. “We saw a lot of people caught out of position to their container frame. Right now they’re building more capacity.”
The container market over the next 12 to 18 months is expected to slowly work lower.
“I think the container market is going to be significantly over supplied with freight capacity and it’s going to make container freight quite competitive with dry bulk,” Allen said.
To wrap up, Allen commented on the value of the U.S. dollar and when it is strong it hampers exports of U.S. ag commodities versus other currencies around the world.
“Not only are they experiencing the inflation, they’re experiencing a significantly devalued currency against the U.S. dollar. And as the U.S. raises its interest rate it just makes our U.S. dollar more valuable compared to other currencies,” he said. “Most countries most developed countries can’t afford to raise their interest rates anymore.”
Longer term, that makes Allen a little bit more optimistic or less dark when it comes to recessionary forecasts.
“But that interest rate variation and the value of the U.S. dollar is a big, big driver of your commodity prices,” he said. “And it’s something we don’t think of every day.”