The return of the AG
We’ve talked recently about African Swine Flu sending the Hog market for a ride, and that’s just the sort of thing we imagined in our 2019 Outlook whitepaper when we talked about the “return of Ag.” There’s been four straight years of volatility contraction for the Ag markets, and there’s a real threat that the increasingly connected global food supply and increase in the volatility of the weather causes some outlier moves in Ag markets.
Enter Bloomberg, with their Pessimist’s Guide to 2019: Fire, Floods, and Famine, a sort of worst case scenario they imagined where record forest fires, bigger and costlier hurricanes, and hotter and longer droughts unfolded into a sort of global nightmare situation with resulting food riots, bread lines, and all the rest.
Here’s the pretend headline from the future they imagined:
“The heat El Niño released into the atmosphere helped push up world temperatures, making 2019 the warmest year on record. The disruption it brought to weather patterns unleashed floods and droughts, sparking forest fires, displacing people, creating food shortages, and upending energy and commodity markets.”
It’s as out there as you can get – and they even admit that maybe it “…sounds far-fetched” before pointing out that “all of the weather scenarios and most of the policy scenarios described here have happened in the past, just not at once.” Bloomberg references case studies throughout the article where situations like this have all happened before – like the 2011 Brazilian Crop Devastation, and the 1993 Japanese Rice Crisis.
Don’t remember those crisis periods as well as the ’07/’08 financial crisis here in the U.S.? Neither did we. So we looked up a couple of these examples to show how the futures prices were moving during these real-life crises.
1993 Japanese Rice Crisis
Here’s how Bloomberg described the crisis, and the resulting price chart showing prices nearly doubling:
The coldest-ever summer in many parts of Japan had damaged rice crops. Production was down 26 percent from a year earlier. Japanese consumers needed 2.7 million more tons than was on the market and rice stockpiled in government warehouses was less than 10 percent of that.
To make matters worse, in August there were media reports that harvests were still deteriorating across the nation. Some wholesalers began withholding their stockpiles. Rice prices in supermarkets started climbing. Eventually they would double. Because of hoarding, rice virtually disappeared from store shelves.
2010 Russian Wheat Export Ban
Bloomberg explains the dynamic inside Russia which caused the resulting price action:
…the government banned export sales of wheat…
A drought in 2010 had slashed the country’s wheat crop to a level barely above consumption. The ban was to ensure the country’s consumers didn’t have to compete with international buyers for the scarce supply. [But] As wheat futures soared on the Chicago Board of Trade, domestic prices in Russia, a top shipper of the grain, slumped.
All of this is to say – commodity markets don’t care how many subscribers were added last quarter, how many cars produced, or what the Fed is up to. Commodity prices move to their own beat – based on things as variable as the weather, a drought, or a poor policy decision. Check out our infographic on what moves commodity prices.