15 April 2022, Malabo: With the release of the State of Agriculture report a few weeks ago, FBN® took a deep dive into what’s happening in the world of agriculture, how it’s affecting farmers and what to expect for the rest of 2022.
This was the first time FBN tackled a broad topic like the state of agriculture in a report. And behind the scenes, the report that was originally conceived ended up being affected by geopolitical events that shook the world and changed the course of how we were thinking about the state of agriculture.
Why was it important to produce this report
The State of Ag report was part of our Planning Ahead series of content, meant to provide relevant content to help our members make knowledgeable decisions ahead of the new growing season.
In the report, we talked about how inflating costs were tied to both supply chain logistics and energy prices. But those things are even more impactful now as the war in Ukraine exacerbates the challenges farmers were already facing before the war.
Kevin McNew is the Chief Economist at FBN and one of the authors of the report. He says that one of the big fears he heard from farmers was that commodity prices are going to collapse. He says farmers are afraid they’ll be stuck paying substantially higher prices for glyphosate and other fertilizers and then see commodity prices tank.
But while some farmers are filled with anxiety and trepidation about this happening, one of the things McNew felt was important was to provide truthful insights about what’s actually happening and what farmers may expect in the coming months.
“I think the value we were able to bring with this report was to be able to say, ‘Look, here’s why we don’t think that’s going to happen.’”
How the state of ag changed overnight
McNew and his team originally started talking about putting together this report in January, almost 6 weeks before the outbreak of the war in Ukraine.
One of the factors McNew was thinking about as he started working on the report was to remind farmers that we’ve been in a bull market for 18 months.
As he explained, 18 months of rising grain prices is a long time. There aren’t many instances where grain prices have continued to rise for that length of time. It’s rare to see that kind of prolonged price inflation and grain prices.
McNew equates it to a small localized forest fire. As prices continued to rise there was a sudden outbreak of war in Europe, that small fire became a raging rain of fire on the markets.
“We expect the markets will fluctuate day-to-day based on whatever the headline event is around negotiations or talks between Russia and Ukraine. But for all practical purposes, we don’t currently see anything changing that deflates the markets. That’s why we were confident saying that grain prices would likely smash record highs,” says McNew.
While he admits this is a bold statement, he says the powder keg of bullish factors that already existed for the last 18 months and the outbreak of war in Eastern Europe meant that there will be long term effects on agriculture for years to come.
“You can maybe picture a world where there’s a ceasefire but normalization seems so far removed. We’re talking about Ukraine being literally destroyed as a country. Even if there is a ceasefire, what happens with Russia? Can Russia be brought back into the world markets? Or are they perpetually banished for sometime in the near future?”
While both countries are pivotal and important to global agricultural trade, it’s difficult to imagine a world where these countries are able to return to normal in just months or even years.
How the war affected fertilizer prices
Fertilizer prices started rising in the fall of 2021 when Hurricane Ida struck New Orleans. Key manufacturing facilities for fertilizer were damaged throughout Louisiana which slowed and halted production in some instances.
At the same time, natural gas prices were going down because of shortfalls in Europe. So between the hurricane and natural gas prices dipping, we continued to see really high fertilizer prices. It wasn’t until December of 2021 that fertilizer prices started to drop.
By this point, production facilities started to come back online and it seemed as if things would begin to even out. But as the threat of war loomed, natural gas prices started to rise and fertilizer prices once again began to increase significantly.
Ripple effects of current events
After the report was released, McNew started to see other factors at play that could have global implications.
He and his team started to see a deeper context around the fact that 30% of global wheat trade is Russian. One of the strategic areas McNew is keeping a close eye on is North Africa as bushels of wheat make their way into lesser developed areas of the continent that are highly sensitive to escalating food prices. North Africa’s reliance on both Ukrainian and Russian wheat could make the region a volatile powder keg as food becomes a political lever.
As both wheat and food prices continue to rise, McNew sees the potential for geopolitical instability to spread into both North Africa and the Middle East.
He says current events in North Africa are similar to what happened in 2011 with the Arab Spring. Russian drought in 2010 caused wheat prices to rise and were a catalyst for the uprisings that spread across several Arab nations.
Looking to the future
“The key message we wanted to express was to be aggressive about locking in input costs. You need them for the growing season. You need them to maximize your crops. From a price standpoint, get locked in. And from an availability standpoint, you want to make sure you have inputs for the season,” say McNew.
McNew says that when he presented his findings at this year’s Commodity Classic in New Orleans, he saw relief on farmer’s faces. McNew admits it won’t be easy for farmers to look at the markets now and be faced with high inputs. He says when farmers sit down and put pencil to paper to figure out their profitability, they may only see the short-term. But look to the long-term and realize that prices fluctuate and could potentially rise.
“I literally could see farmers’ shoulders relax when I told them that grain prices are not done. They are going to keep moving higher in the months ahead. And with that you could see that anxiety leave their body.”