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Agricultural commodities: a new boom?

Regarding the agricultural commodities market, it should be clear to begin with, that, within an one-year horizon, there are no real sectoral factors that indicate a sharp price rise cycle (a boom). The very strong cycle observed in the 2000’s is attributed to a real factor: high global demand due to the unprecedented growth of the Chinese economy – from 8% to 12% a year –, leading dollar prices of agricultural commodities to double in eight years. After the effects of the 2008 financial crisis settled, prices had returned to high levels at least until 2014. Since then, values have sustained at levels that are from 20% to 30% lower compared to the peak reached and are likely to continue in this trend – certainly with oscillations – thanks to high levels of income and consumption in China, which has been increasing at the “moderate” rate around 7%.


Due to the pandemic, this trend in China in 2020 was interrupted (growth rate at around 2%) – nothing compared to the gigantic downfall experienced by many other countries; however, China is likely to have an 8.2% increase in 2021 and a return to pre-crisis levels is expected. Therefore, commodities prices may keep, on average, the favorable levels registered over the last five years, disregarding the still uncertain pandemic path. Food, specially, and agricultural raw material are first (or high) priority goods, and they may continue to sustain or resist even with deep economic crisis, such as the current one, in a global scale. Moreover, they do not face significant impacts of a possible economic recovery that may take place in a very optimistic scenario. However, the rest of the world has not observed a U or a V-shaped recovery, but a K-shaped evolution: some sectors have been growing, while others are shrinking according to the effects of the crisis on both supply and demand.


In addition to the real sectoral aspects, it is worth mentioning that commodities – because they are storable and have relatively inelastic supply in the short-term – can experience important financial effects basically related to world liquidity and to the interest behavior, mainly in the US. The most likely financial scenario in 2021 is high global liquidity and low interest rates, which favors devalued dollar quotes, attracting investments in commodities (Commodity and Multimarket Funds). All these factors may also favor price underpinning and a possible speculative high, pari passu to the equities in general, according to the risk appetite, which increases due to the extremely low remuneration of safer assets. An issue that is still being evaluated is the extension of fiscal stimulus that might be applied by the new administration of the US and could affect the global economy with yet non-measurable financial impacts.


In other words, uncontrolled agricultural commodities prices might come from exaggerated errors in the conduct of the macroeconomic policy in several countries – specially the United States – or from the incompetence of the governments to escape the traps that they themselves created. In any case, exchange and interest rates – and through them, commodities prices – will reflect the reasonableness of the measures taken in the major economies. Brazil can internalize these effects depending on the actions it takes on the economic and institutional sides.


In the Brazilian agribusiness, farming activities have been increasing 3.5% per year (against 2.2% for the country), with exports (value) growing more than 6% per year, on average. It is an increase based especially on productivity, and, therefore, on the use of modern inputs (machinery, agrochemicals, seeds etc.). This scenario has been taking place despite the real 1.7% decrease per year in farm prices, mainly because of the real exchange rate overvaluation that prevailed since 2002, which is still far from being reversed. In other words, a commodity boom, like history has shown, often favors the Brazilian economy, but not necessarily the farmers.


Therefore, the trend is to maintain the continuous growth of agriculture and the use of technology-bearing inputs up until, maybe in the mid-term, efficient competitors appear in the market or Brazil, due to a regrettable error, fails to continuously support agriculture through investments on science and technology and policies that favor liquidity and the control of environmental, pests and diseases, and market risks. A threat is the chronic fiscal crisis that, if not treated properly, can sacrifice resources that should be applied in the sector or jeopardize the agribusiness by establishing taxation to exports. A blunder would be made, since it is exports that make the scale of production based on technology viable and, therefore, external competitiveness as well as affordable food for the Brazilian population. Moreover, the real revenue obtained by agribusiness exports in the Brazilian currency does not keep pace with that obtained in dollars, due to the persistent exchange rate valuation.


Excluding such course deviations, the agribusiness positive trend should go on. However, it has to be clear that agricultural and livestock production oscillates according to many risk factors – weather, pests and diseases, financial and commercial oscillations –, favoring inflation increases or decreases. However, the reality is that over the last 20 years, on average, the agriculture impact on inflation has been neutral, so that unexpected price rises have been compensated by decreases throughout time.

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