Agfarm World Market Update May 2016

There are numerous factors that contribute to the continual increase in demand for coarse grains. The first being global population growth and the second being sociological and economical changes, such as increased wealth and the impact this has on diet change.

Population growth

The growing population is not a new phenomenon, nor should it be surprising that the growth in population has added to the demand for grain. The current global population is 7.4 billion with projections it will climb to 9.4 billion people in 2050, a rise of 27%, with the biggest growth rates occurring in second and third world nations. Asia, currently accounts for 30% of global land mass while holding 60% of the global population, again creating hurdles to sustain its population with limited resources.

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Fortunately, most parts of Asia are financially and economically stable to handle such growth through imports. Australia is in good stead to capitalise on the population growth projection in terms of food, fiber and other resources due to our proximity to Asian markets and access to local recourses. This is also highlighted by corresponding governments building closer relationships and introducing free trade agreements in an effort to increase the flow of grains from Australia into Asia, and hopefully feed the rapid growth in population.

Sociological and Economical Factors

Global economic output and personal wealth has increased every decade between 1930 and 2016, with Global GDP Per Capita (measurement of income per person) showing an increase of over 300% in this time. This incredible increase in wealth throughout the world has changed the populations living and eating patterns, in turn effecting the increased demand for grain. The world is now consuming less carbohydrates while consuming more protein, dairy and edible oils – all reflected over the past seasons protein wheat spreads. This increase in proteins has also seen an increased demand for water.

Ultimately food production is dependent on the availability of water and with the trend of changing diets, the world needs more litres of water to produce enough food to match demand. Take beef as an example, 14,500 litres of water produces one kilogram of beef verse 1,500 litres of water producing one kilogram of bread. Therefore, one kilogram of animal protein uses roughly 10 times more water than one kilogram of grain.

The correlation between wealth and eating patterns in China is well explained in an article released in October 2015 by Price Waterhouse Coopers. As you can see in the below charts, the overall direct consumption of grains in China up until 2012 decreased and the overall direct consumption of meats increased. Close inspection of the graph shows rural consumption of grains is higher than urban, and urban consumption of meats is higher than rural.

This means that although direct grain consumption is on the decline, indirect grain consumption, in the form of animal feed to produce beef, pork and poultry, will cause an overall increase in total grain consumption.

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Higher demand for protein does not equate to higher demand for milling wheat varieties. Wheat price spreads for H2 and H1 varieties over APW and ASW, along with wheat/barley spread narrowing which supports this. The below chart depicts Chicago wheat vs corn over the past 10-year period. Interestingly, the 10-year average difference between wheat and corn is 145 cents per bushel, and it has recently been trading at 100 cents – wheat being the premium. While there are other influences creating the tightening of wheat vs corn spread, the underlying driver has been the sharp and dramatic rise in intense livestock production, in turn adding to the increase in demand for feed grains.

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If the past decade has taught us anything in the rural industry, it is that global demand for wheat and feed grains is on a continual incline. For corn, the 2006 global consumption was 725MMT and for 2016 it is project at 970MMT – an increase of 33% over a decade. Wheat has the same growth trend. In 2006 global demand was 598MMT and for 2016 its projected consumption will be 725MMT– an increase of more than 20% over the last decade.

So what does it mean?

With increasing global population, changes in diets due to rising personal wealth and more water intensive agricultural requirements, the world agricultural sector will need continuous innovation and resources to meet the continuous increased demand for natural sources of food, water and fiber. Previous decades have shown a consistent rise in demand making future demand projections somewhat predictable. The greatest fear is the one we cannot see. Will supply continue to match demand? Despite global supply being at record levels over the past four years, this is not sustainable. Weather, water and governments being the biggest unknown variables. These unknowns are what brings volatility and price fluctuations into grain markets. We currently hear the phrase ‘the world is awash with grain’ as a result of current record crops. However, if a production shock does occur it will not take the world long to consume the current stock-pile. In the meantime, demand will continue to grow, prices will ebb and flow and the market’s function will be to incentivise growers to grow.

 

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