Global recession is another potential situation 2022 could also make everyone deal with. The chances of a global recession have risen significantly in recent months. For so long this year, grain prices have been heavily supported by the Ukraine conflict. This has driven grain values to record highs, yet could the flows-on’s from this conflict actually be the thing that unwinds these fundamentals?
Of course, it isn’t just the immediate impacts of Ukraine itself, but the sanctions placed upon Russia, and even COVID (particularly with China) still having major impacts worldwide. Despite stock markets rebounding strongly post Covid, these markets are beginning to correct and head into a ‘bear market’. With the removal of COVID stimulus packages around the world (which injected billions or trillions of dollars) and skyrocketing costs of living, inflation is rising quickly. The job of central banks is to balance economic growth and inflation. Right now, creating an environment that doesn’t stimulate spending but doesn’t stop growth is what the aim is, yet in the face of huge inflationary increases, this will be hard to achieve. Hence the ‘bubble’ gets bigger. This may be about to come to a head, but what does that mean for making pricing decisions? Isn’t grain a ‘soft gold’ that can ride out global downturns? The answer is, not necessarily.
Macro factors beyond direct grain fundamentals may overwhelm these markets. The world economy is facing its biggest shock in decades, well beyond that of 911, the GFC and COVID. U.S. inflation has hit a forty-year high with inflation also becoming a major issue worldwide. Governments and central banks have an unprecedented problem on their hands with runaway inflation, interest rates not anywhere near where they now should be, unaffordable or unattainable energy and GDP in decline, as global supply chains grind to a halt. The only way out is a huge decline in asset prices, and this could include grains, despite the supply/demand situation. The U.S. Federal Reserve made a huge movement in interest rates recently with other countries equally expected to follow suit to contain inflation levels. The RBA has also been hiking interest rates, indicating that Australia is more at risk of a global downturn than at any point in the last 30 years.
With global stocks remaining tight and the possibility it could get tighter still, there is suggestion of a tussle between fundamentals and financial markets occurring. With rising costs of logistics, bottlenecks and increasing cost structures for importers, the future direction is very cloudy at the moment. If we look back at previous recessions, oil generally sheds a lot of value quickly (from highs). This generally has implications for grains and tends to drag them lower, particularly corn and soy. Currently, oil prices have also seen some correction while, at the same time, macros markets turn bearish as ideas of recession may indicate a slowing global economy (and less demand for energy). This has a direct impact on the grains complex, which generally tracks movements in oil. In previous recessions however, global demand for grains actually rose. This is clearly in line with population growth and this is what gives them an edge in being able to weather some of the wider economic downturn.
We haven’t yet spoken of currency and its impact on local values. A lower dollar makes exports more competitive, with the flip side being that it makes imports more expensive. This assists local grain pricing to buck some of the downward pressure on global values. Our dollar is likely going to come under pressure in the event of continued economic slowdown. At the start of the pandemic, the AUD slipped quickly into the mid 0.50 US cent range before recovering. This has also been a key factor of previous recessions/financial shocks prior. The dollar will likely soften, and potentially help ride out some of the wider market impacts.
If we look at how grains may be that ‘soft gold’, we can then come back on to fundamentals. In previous recessions, the likes of oil can shed more than 50% of its value, yet grains may not even do half of this. At the start of COVID, the oil price slumped by 55% yet soybean oil futures (which should be directly correlated) only shed 25% of their value. Right now, with global stocks very tight and demand strong, we can expect grains to hold reasonably well if not soften slightly. With the ongoing war in Ukraine, the emphasis on grains production, from a supply and demand viewpoint, is front and centre.
How the wider markets react remains unknown but the current situation indicates that grains should be able to ride out and remain strong in the current environment. Global recession could create supply chain issues, however, with credit availability and shipping logistics. A balanced approach to risk management is key to ensure we capture pricing opportunities where able, whilst reducing impacts of potential market disruptors, of which recession could certainly be one.