The Bloomberg Commodities Agriculture sub-index is up 22% this year to its highest level since 2016. Cash receipts by U.S. farms are forecast to hit $391 billion in 2021, their best result in seven years. Prices for hogs, soybeans, corn and wheat have been surging.
A push higher in food prices is to be expected as developed countries start returning to normal after a year of pandemic. Still, it would be a bold investor or farmer who predicted these levels are here to stay.
A broader look at food supply, from seed to stomach, offers one explanation. It’s conventional to consider only the early parts of that chain, in the form of crop plantings, production and stocks. From that perspective, there’s good reason for prices to be booming.
Wheat stocks in the U.S. were down 7% from a year earlier in March, and worse may be coming, with the area planted coming in at its fourth lowest level since 1919, according to the U.S. Department of Agriculture. Soybean inventories plummeted 31%, and while the area planted was up from 2020’s outbreak-hit result, they were well below expectations. It was a similar picture with corn, where stocks were down 3% and plantings barely up.
Combined with the tail-end of last year’s La Nina climate cycle — which tends to reduce rainfall over crop-growing areas of South America and lower output from farms in Brazil, Argentina and Paraguay — that suggests a tight market for agricultural products.
Move a step further along the supply chain, however, and you get a different picture. The world’s food processors, manufacturers and retailers, wary of running out of product amid the twists and turns of the Covid outbreak, have been changing their own stock levels.
Inventory days are up by about a week over five-year average levels at chicken producer Tyson Foods Inc. and yogurt-maker Danone SA; by around 10 days at Nestle SA, pork giant WH Group Ltd. and processor Archer-Daniels-Midland Co.; and by around two weeks at traders Bunge Ltd. and Louis Dreyfus Co. Those numbers are far more opaque than the crop inventories taken at farms and commercial grain bins, but they’ll still make a difference for those looking to sell the next season’s harvest into the market.
Food demand worldwide hasn’t fundamentally grown any faster than it would in other years — but commodity prices are riding the whiplash as a subdued pandemic-hit market returns to normal.
That’s reason to be cautious. Take pork. Lean hog prices are the best performer on U.S. commodity markets this year, but the simple explanation — that cuts are flowing to China after African swine fever decimated the local pig herd in 2019 — doesn’t quite add up.
For one thing, China’s herd has more than recovered and is now the largest it’s been since 2017. Wholesale pork prices are down by nearly a third this year, and margins for Chinese farmers are the worst they’ve been in nearly two years. If U.S. hogs are trading at elevated levels, it’s at least as much to do with demand from Mexico, as well as from Americans eating cooked breakfasts while working from home — the belly meat used for bacon has seen particularly strong pricing in recent months, relative to other cuts.
Spikes like the current one are a regular feature of agricultural commodities markets. Since food makes up such a large slice of spending for the world’s poorest, they shouldn’t be neglected: The 2007 global surge in food prices sparked riots in multiple countries, while the high cost of onions under former Indian Prime Minister Manmohan Singh helped pave the way for his successor Narendra Modi’s 2014 election victory.
Despite this, the cost of produce has barely changed in 60 years after adjusting for inflation, according to an index produced by the U.N. Food and Agriculture Organization. Farmers for millennia have struggled with the challenges of planting crops when prices are high, only to find they’ve lost value well ahead of harvest time. There’s no reason to think the current situation will prove any different.