What role does politics play?

Over the past 25 years, not all market forecasts have been accurate – neither those made by analysts nor those in the DLG reports. Admittedly, the hit rate was high, but misjudgements did and do occur. The most important variable that drove the markets was the weather: too cold, too wet, too dry. In addition, there were also political events that were unpredictable. But apart from that, it was a stable world with comprehensible market drivers. An important, if not the most important anchor was China's immeasurable demand for virtually all agricultural commodities. 

Five political factors have a significant impact on market developments

This comfortable and, in principle, fairly straightforward situation has changed fundamentally over the past two years. Of course, oversupply or shortages continue to play a decisive role in pricing. However, these are no longer determined solely by cultivation areas and weather conditions, but also by completely different drivers such as politics. To a certain extent, this can also mask shortages or surpluses. Five factors play a prominent role in this:

• The end of globalisation. Instead of increasing free trade, more and more countries (including the EU) are focusing on self-sufficiency, protective tariffs or bilateral agreements (EU, USA). 
• The USA has lost its central role as the world's ‘supplier’ of many key products such as soybeans, corn and wheat.
• China has passed its economic zenith and is entering a period of turmoil – with massive implications for its agricultural imports.
• Climate protection aspects are playing an increasingly important role. This is most noticeable in biofuel.
• Fossil fuels are becoming cheaper. This is shifting the competitive balance between countries that continue to rely on coal, gas, oil and nuclear power and those that are pushing ahead with (more expensive) renewable energies.

Tariffs instead of free trade

The trend towards renationalisation of trade and economic policy did not begin with Donald Trump's presidency. TTIP was hotly debated in the EU. To put it somewhat bluntly, a global free trade agreement failed because of Europeans' aversion to chlorinated chicken. Brexit was another wake-up call.

Mercosur has still not been fully ratified. Sanctions and punitive tariffs (fertiliser) against Russia may be politically and morally justified or necessary, but ultimately they are also a nail in the coffin for global trade. The same applies to European tariffs on cheap Chinese imports and politically motivated Chinese special tariffs on Canadian rapeseed. Trump's special tariffs under his “America First” policy are just the latest in a long line of such measures. What these measures have in common is that they change trade flows and, above all, are unpredictable. When the US and China agree on Chinese soy imports, prices jump. When political promises are not kept, they fall again.

Politics creates new market conditions

The impact of these political factors and also of the wars that are increasingly affecting Western Europe is significant and likely to bring about lasting changes in the market situation. If Ukraine becomes a member of the EU as a result of the war in Ukraine (banks are betting that this could happen within the next five years), this will permanently change individual markets such as the EU sugar and poultry markets.

This will have little effect on prices on the global markets – what one loses in sales, another gains; markets are communicating vessels. But for individual countries, there will certainly be significant price movements. Political factors also have a massive impact on exchange rates and thus on competitive relationships. At the current exchange rate of US$1.17 per euro, grain and car exports can only be realised under price pressure in production or domestically. At US$1.05 per euro, higher prices in domestic currency were possible at the same world market price.

The USA is no longer the breadbasket of the world

One reason for the “America First” policy is the declining importance of the USA in many international markets. Whether satellites, military or digital technology – the United States continues to lead the way in these areas. But in traditional industries ranging from automotive to shipbuilding to agriculture, it is losing ground. The figures in the overview make this clear. While almost a quarter of all wheat came from the US 25 years ago, this share has now halved to just 11%.

While US ports shipped half of all soybeans and poultry meat worldwide in 2000 (figures rounded), today they only ship a quarter of each. The growth in global food demand is increasingly being met by countries such as Brazil, Russia and India (rice, beef, sugar). It is almost impossible to regain these market shares; at best, they can be maintained. But even this is currently only possible with massive political pressure. Without the threat of tariffs, neither the Chinese would buy US soybeans nor the British US ethanol or the EU poultry meat.

As a consequence, the US is becoming a domestic market for many agricultural products. A prime example is biofuel policy. Twenty years ago, ethanol production was boosted by legislation and blending quotas in order to take corn off the market. The environment played no role in this. Today, with soybeans hardly saleable in large quantities without Chinese demand, a US president – who, with his words ‘drill, baby, drill’, stands for fossil fuels like no other – is doubling the biodiesel blending quota, naturally with domestic vegetable oil.

In future, growth will come from Africa.

Who will replace China?

For 25 years, China was something of a vacuum cleaner for all bulk agricultural commodities. This provided a basic security for pork, milk powder, grain and oilseeds worldwide. That is changing in several ways.

The population of what was once the world's most populous country is declining. It is also ageing, and the economy is in serious crisis. This was triggered by the gigantic real estate bubble, but also by huge overcapacity in all key economic sectors. Whether it's electric cars, solar panels, microchips or even mechanical engineering, China has too much of everything and has already slipped into deflation. When starch factories are operating at less than half their capacity, when the government is urging pig farmers to reduce their herds and slaughter weights, the world is losing a veritable sales market for many key agricultural products. The figures from the State Commission for Development and Reform are dramatic.

According to these figures, China's pig farmers are losing US$33 per fattened pig and poultry farmers US$4 per broiler chicken sold. This does not bode well for the demand for feed grain. And where China remains the central buyer, as in the case of soybeans, annual growth rates are now only marginal. This alone is enough to unsettle the market, especially with production in South America on the rise. Furthermore, genetic engineering seems to have arrived in China. Maize yields are rising after the government gave the green light for genetically modified varieties two years ago. Compared to 2022, grain imports fell by 18 million tonnes this year.

Who will buy South America's or Europe's (including Russia's) surpluses in the future?

In the long term, it could be Africa, where the population is growing fastest and the UN expects an increase of 900 million people by 2050. In the short term, however, this is not the case, as the consumption of meat and dairy products is developing only slowly there and production reserves are huge. The situation is similar in India. Although the population there is growing rapidly, meat consumption is largely non-existent (for religious reasons). And for the foreseeable future, India will continue to be self-sufficient in almost all important products (except vegetable oil) and an important exporter of rice, wheat, sugar and beef.

Potential new markets must combine a large population with sufficiently high purchasing power. This means countries such as Indonesia, the Philippines and Vietnam, and certainly Mexico. Brazil itself produces surpluses, and neither Nigeria, Pakistan nor Bangladesh have sufficient purchasing power to absorb the quantities that will become available from China. Even though global consumption of grain, oilseeds, milk and meat is growing, production is growing faster, with the exception of milk. Climate and climate protection are becoming market factors Climate change also has consequences for long-term commodity flows. Production losses due to desertification or heat are offset by gains. In Russia, for example, where new areas are becoming usable for the first time due to warming, or where border areas are achieving higher yields due to warming (the latter also applies to Canada, incidentally). If Russian grain production continues to move northwards and harvests increase, this will also have a massive impact on trade flows. Already today, 45% of global wheat exports come from the Black Sea countries. This share is likely to increase.

Climate protection shifts competitive relationships

Climate protection aspects are losing their dominant role and are being slowed down by economic considerations (the Green Deal is being wound up, the EU Deforestation Regulation postponed), but that does not mean the issues are off the table. If the Deforestation Regulation does come into force in 2027, deliveries from Brazil and Argentina will come to a standstill and the EU will be completely dependent on the United States for soy. Last but not least, sustainability remains an important issue at the consumer level, especially in the EU and North America.

Emissions regulations are neutral for the internal market, but they increase competitive pressure in exports. The carbon border adjustment mechanism (CBAM), which will come into effect at the EU's external borders in January, will make fertiliser much more expensive, thereby worsening the competitive position of EU grain exports.

Wheat produced in the EU will thus be even more expensive than that from Russia, Australia or Argentina. While we have been able to score points with high-quality wheat in the past, the immense cost of fertiliser means that it is hardly worth producing anymore. This also applies to all other mass-produced products without any distinguishing features.

Biofuels are a positive market factor in climate protection

However, there are also economic benefits to climate protection. This is particularly true of biofuel policy, which has long since become a real market factor outside the EU (biodiesel) and the US (ethanol). If Indonesia aims to achieve a 50% blend of palm oil diesel next year, this will have an impact on the availability of palm oil and thus on the price of all vegetable oils. If the USA actually implements its planned addition of 7.3 million tonnes of additional biodiesel, this will have a lasting effect on the price ratio between oilseeds and cereals. Perhaps areas of soybeans in the northern USA will then be converted to rapeseed, as it is much more efficient than soybeans in terms of oil yield.

There are many other examples. India, for example, already achieved a 20% ethanol blend in petrol in the summer, and the EU and other countries have made a start with aviation fuel. This sector absorbs a lot of used cooking oil, which frees up more space for rapeseed oil in biodiesel. In any case, EU biodiesel policy is shifting back towards more plant-based biofuels. 

Energy is becoming cheap

The climate conference in Brazil has just shown where the real lines of conflict lie. There are many oil and gas sources available that are easily accessible and easy to tap. The price of fossil fuels is therefore likely to fall in the coming years. Those who rely on oil (and other fossil fuels) have real competitive advantages. The EU is not one of them, which means that our agriculture sector is falling behind.

However, the competitive situation of industry is much more decisive in this context. High energy prices isolate us from the rest of the world and ultimately limit us to the domestic market. This reduces purchasing power, which has a direct impact on demand for high-priced foodstuffs.