Grain market forecasts 2024: new market maker, US debt and volatility

How does the interplay of geopolitical and economic factors affect the global grain market? Dan Basse, President and Founder of AgResource, USA, spoke about this in detail at the BLACK SEA GRAIN.EUROPE – 2024.  He joined the conference online, however, it did not prevent him from providing a thorough analysis of the grain market for the nearest period. Dan outlined in detail and meticulously the factors that will influence prices and market trends. He checked the historical perspective, took into account armed conflicts, trade blockades, and the upcoming US presidential election.

Talking about market volatility again?

Dan Basse.

It may sound trite, but I want to emphasize the potential for volatility in the grain market as we approach the growing season in the northern hemisphere. The current global situation is tense, and I want to illustrate the intertwining of political, macroeconomic and opportunity factors that arise from it.

Despite the ongoing conflicts around the world, grain producers are facing economic challenges: margins are declining and prices for crops such as wheat, corn and, to a lesser extent, soybeans, have reached three-year lows. Interestingly, while oilseed prices are declining, seed, machinery and cultivation costs remain high in regions such as the US, Latin America, Europe and the Black Sea region.

The mix of macroeconomics, geopolitics and weather conditions is likely to lead to increased volatility in the grain market in 2024. Let us consider each of the factors in more detail.

The Food and Agriculture Organization of the United Nations (FAO) predicts a 25% drop in food prices, despite the fact that prices for cocoa, sugar, and vegetable oil have slightly increased. However, grain prices are lagging behind.

When looking at inflation rates in different countries – the Eurozone, Japan, China, Mexico, Canada, Korea, Australia, South Africa, or the United States – China is a notable exception. Due to the significant elimination of the pig population, China has seen a drop in pork prices, which has led to an overall decline in food prices. However, in the rest of the world, food inflation is on the rise, ranging from 2.5% to 9% annually. This inflationary trend is a crucial factor that every major importing country and consumer should closely monitor in the coming months.

The emergence of India as a significant global grain importer on the horizon marks the beginning of a decade that could be transformative for the country.

The macroeconomic landscape, especially in Southeast Asia, is undergoing significant changes, which is affecting global grain markets and trade dynamics.

USA: rising debt and weakening dollar

One of the most important issues that requires attention and is becoming increasingly important for the global economy is the growth of the US debt. The current US debt is a staggering $33 trillion, which is 100% higher than the country’s GDP. This growing debt is becoming a cause for concern evident in all administrations, from the elder Bush, George W. Bush, Obama, Trump, and Biden. The rapid accumulation of debt in a world dominated by commodity-based economies typically puts downward pressure on prices.

Although the US dollar remains the world’s reserve currency, I foresee some weakening in the second quarter, especially if the US economy slows down. This change is important because it could affect commodity markets. Historically, there has been an inverse relationship between the dollar index and the CRB index, a basket of 28 commodities. When the dollar strengthens, commodity prices tend to decline, and vice versa. Therefore, I expect a weaker dollar to return bullish sentiment to commodity markets.

Current situation of farmers around the world

Take, for example, a farmer in Latin America who is struggling with corn prices that have fallen below $2 per bushel. Similarly, farmers in Ukraine, the EU, the US, and Canada are facing similar challenges – the price of grain barely covers their operating and overhead costs, leaving them with relatively small profit margins.

Currently, corn prices are hovering below the break-even point for most U.S. farmers. AgResource estimates that the average breakeven price for corn for U.S. farmers is about $4.74 per bushel. With the December futures closing at $4.50, farmers are likely to suffer losses if they continue planting under current conditions, which could have implications for markets in the long run.

As farmers prepare for the spring planting season in the northern hemisphere, they are facing relatively low fertilizer prices. However, this decline in prices has not been significant enough to restore farmers’ profitability, primarily due to the ongoing downward pressure on grain prices.

Analyzing the USDA data on grain markets and macroeconomic indicators, it is clear that the forecast for global corn and soybean stocks will increase. However, wheat, which is particularly important for the Black Sea region and Ukraine, stands out with a lower stock profile. Nevertheless, wheat may not lead a bullish market reversal, given the emphasis on supply dynamics.

South America is the new market maker

So, how did we get to this stage of decline in global grain prices, which are approaching the lowest levels in the last three years?

Brazil is emerging as a prominent economic powerhouse, with farmers expanding their acreage and achieving record corn and soybean production last year. While production may be slightly lower this year due to drought, the combined supply growth from countries such as Brazil, Argentina and Paraguay, grouped together as South America, has had a significant impact on global grain prices. As some time ago the US Department of Agriculture forecasted corn and soybean production in South America at 45 million tons, this oversupply has led to a predominance of bearish sentiment in the market.

Geopolitically, Brazil has become the world’s largest exporter of grain, especially corn and soybeans. The growth in Brazilian grain exports has been impressive, reaching unprecedented levels, while countries such as the United States, which traditionally dominated grain exports, have seen exports stagnate or decline. This shift underscores the growing importance of South America as a determinant of global grain prices.

Going forward, persistent weather conditions, especially in South America, are likely to play a more important role in shaping global grain markets than traditional regions such as the central Midwest or Europe. The bearish sentiment on the market is primarily due to excess production in South America.

Dan Basse, President and Founder of AgResource, an analytical company

Tags: wheat, USA, crop forecast, BLACK SEA GRAIN.EUROPE-2024, corn, grain, Brazil, EU, prices, oilseeds, Black Sea region