[This post was first published in the Fairfax New Zealand Sunday Star Times on 10 August 2014]
Last week I wrote how the OECD and FAO secretariats expect many agricultural prices to drop in real terms over the next ten years as supply ramps up across the world. This is particularly the case for staple crops such as wheat, corn and soybeans. However, in the last ten days it has become increasingly apparent that major price decreases are playing out right now in front of us. With the early Northern Hemisphere harvest reports for wheat now coming through, with increasingly positive pre-harvest reports for both corn and soybean, and with existing high global stocks, the prices have all been tumbling.
The first place to look when considering international grain prices is the USA. The USA is by far the most technologically advanced cereal growing country in the world, and has huge global influence.
In the last ten days the futures prices for December 2014 corn have dropped to about $US3.60 per bushel based on increased yield estimates. In units that make more sense to us, that is about $US145 per tonne or $NZ 170 per tonne. In contrast, prices over the last four years have typically been between $US6 and $US8 per bushel.
For wheat, the latest prices are about $US5.40 per bushel, which is about $US200 per tonne, or in NZ dollars, $235 per tonne. In recent years, wheat has been between about $US7 and $US8 per bushel. For those who are interested in the intricacies of these calculations, a bushel is actually a measure of volume. With wheat there are about 36.7 bushels to the tonne, whereas for corn there are about 39 bushels per tonne.
There is a similar story playing out with soybeans. The soybean price is now at about $US10.50 per bushel compared to about $14 in recent years.
There are two key reasons why this is happening. One is that the high prices of the last four years have led to increased agricultural investment. This has been reinforced by two consecutive good growing seasons, particularly across America’s Midwest. These are the 12 states west of the Appalachians and east of the Rockies that make up the American grain bowl. The critical month of July was somewhat dry but temperatures were ideally cool. And now in August the rain is falling widely to help fill out the crops.
American farmers are already grumbling about the new economic environment but most of them will handle it well. Average debt of American crop farmers is now down to about 10% of total assets. Farmers have had ample opportunity over the last four years to upgrade their machinery, and so for capital items they can put away their cheque books.
Unlike New Zealand, about 40% of the farm land in the Midwest is leased rather than owned outright. When land passes from one generation to the next, the new city-dwelling generation often retain ownership and lease the land to other farmers. Inevitably there will be some re-pricing of land rentals. But grain prices will still be sufficiently high to maintain the current level of direct inputs.
The impacts of lower grain prices will now ripple out across the world. New Zealand’s grain crops, which are used mainly for animal feed, will be priced at the world price plus transport cost. Most of the wheat that we eat in New Zealand actually comes from Australia, and that too will drop in price.
The Chinese will be particularly pleased to see soybean prices dropping. They import huge quantities out of both South America and the USA for their pig industry in particular. They also import considerable quantities of corn for both the pig and dairy industries.
There will be an impact on New Zealand dairy farmers but it will take some time to show through. It will mainly occur through lower grain prices encouraging the American mega dairy farmers to further expand. This expansion is already under way, driven mainly by last year’s dairy prices. Those product prices are now starting to slip, but the lower grain prices will compensate. The 800 biggest American dairy farms already produce nearly double the amount of milk produced by the total New Zealand industry. Fortunately, there are some compensating global demand factors.
Of course one season does not make a trend. However, global stockpiles of all grains are now sufficient to make it less likely that we will see a food crisis as occurred in 2008.
All of this does not mean that there is no longer any hunger in the world. The sad reality is that there are close to a billion people who live outside the global cash economy, and whose access to food is driven by local conditions of deprivation. This problem relates more to war and social conditions, and is beyond the power of agriculture alone to solve.