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Grain market blow-up 'just a matter of time', says UN expert
By Mike Verdin - Published 11/04/2017

Sitting comfortably?

Maybe we shouldn't be, as agricultural commodity consumers, despite the large surpluses of major grains evident in official crop balance sheet estimates, and in weak market prices.

Abdolreza Abbassian, senior economist at the United Nations food agency, the Food and Agriculture Organization, warns against complacency over crop supplies, arguing that a market rally is but a couple of weather upsets away.

"Last year, we had a problem in France," where June rains doused hopes of a strong cereals harvest, landing the country, the European Union's largest producer, with a drop of more than 30% in wheat output.

"Imagine if in the same year, Russia and the Black Sea had a similar issue," Mr Abbassian told Agrimoney.com.

"Wheat prices would probably be double where they are."

'Just a matter of time'

And having some kind of blow-up in grain markets is not just "extremely probable".

"It is just a matter of time," says Mr Abbassian, who is speaking at Agrimoney Live next month.

He is not reassured by the prolonged reign of benign weather in many major growing areas which has allowed the build-up in world inventories in corn, soybeans and wheat to simultaneous record highs.

"In fact, that only makes me more worried.

"Go back in history, and when was the last time we had so many strong harvests in a row.

"I don't know whether the chances of bad weather are increased by the number of years of good weather. But common sense says 'watch it'."

'Perfect storm'

Nor is it a comfort that the world has become increasingly globalised, with the march of free trade, up to now at least, having lowered import and export barriers.

One factor this has encouraged is "concentration of production centres", he says, terming this a "big difference between where we are now and 10, 20 years ago".

He cites the example of soybeans, in which production in meaningful terms is limited to Argentina, Brazil and the US, yet of which China has such huge demand.

"This puts big pressure on the producers to come up with the production to fulfil that demand."

This has created the conditions for a "perfect storm" in agriculture markets, should indeed a weather upset interrupt that output.

'Do not be fooled'

"It has expanded so much, the reliance on trade," a factor which has its disadvantages.

While, in theory, the extent of supplies offers reassurance for when production does indeed disappoint, the safety net may not be as secure as some investors imagine.

"There is a lot of talk about surpluses, but do not be fooled by this," Mr Abbassian says.

"When we have something that does go wrong with the weather, then people will not be talking about having high inventories around.

"They will be talking about protection for their own farmers and consumers."

He mentions the infamous surge in rice prices nearly a decade ago, when global prices tripled between November 2007 and late April 2008, without any shortage of the grain but thanks to trade curbs imposed thanks to soaring values of other crops, and of oil.

Correlation, and co-operation

Indeed, Mr Abbassian highlights too enhanced correlation between commodity prices as a factor for investors to keep an eye on (and, unlike some other commentators, does not see funds as the key driver of this dynamic).

He attributes an increased tendency of raw material values to move together as down to factors such as the growth of the biofuels market which links food to energy and the growing ability through trade to swap, say, food quality wheat for rice.

But where food markets can take comfort is that steps have been taken too to improve alignment of countries on trade, and encourage them to co-operate in times of food instability, rather than pull up the drawbridge.

Preventative action

One of Mr Abbassian's other roles is as secretary to the agricultural market information system, Amis, which was set up six years ago by the G20 countries to promote co-operation between them on food, and improving information flows, to stem market volatility and try to flag up problems before they occur.

Some of the political moves which fuelled the 2007-08 rice price surge

October 2007: Vietnam bans commercials sales

November 2007: India places minimum export price on non-basmati rice

December 2007: China puts 10% tax on rice exports, axes VAT rebate on exports

March 2008: Egypt and Cambodia ban rice exports

April 2008: Pakistan unveils minimum export prices on many rice grades

Sources: Agrimoney.com, USDA

"It offers a platform to try to prevent problems happening," Mr Abbassian says.

"It also should help to promote co-operation, and prevent countries from taking unilateral action," of the type, for instance, which in 2007-08 whipped up a storm in the rice market, when supply and demand fundamentals suggested calm trading.

"We want to prevent the first person from taking that step which could promote market instability.

"The hope is that no-one sitting around the table at Amis will want to be the one having the finger pointed at them."

Changing political climate

And already Amis, whose creation has promoted agriculture to a discussion point at every G20 meeting, has claimed success.

Amis participants comprise:

- All G20 countries

- Non-G20 countries in the EU, (represented by the EU, rather than individually)

- Egypt, Nigeria, Kazakhstan, Philippines, Thailand, Ukraine and Vietnam

For instance, in 2012 it encouraged Ukraine to opt for softer terms on grain export restrictions than some of the proposals which had been suggested, and which, in curtailing supplies available to importers, risked exacerbating a revival in wheat prices on a downturn in global output.

Still, that could prove small beer compared with some of the dislocations in world food trade being suggested in a world marked by the growth of populism, and in particular the election as US president of Donald Trump, who has pulled the country out of the Trans-Pacific Partnership trade deal.

Mr Trump has too threatened measures likely to kick-off trade wars with China and Mexico - two key agricultural commodity markets, in particular for the US - although talks with Chinese president Xi Jinpeng have raised hopes that battles can be avoided.

'Hot air?'

Indeed, Mr Abbassian takes comfort that there is hope yet that belligerent talk could "turn out to be all hot air".

If not, at least Amis offers a "way of bringing some degree of confidence to the market".

Time ahead could provide a "measure of the effectiveness of Amis as a political platform".

Mr Abbassian will be speaking at Agrimoney LIVE in London from May 23-25. For more information on the event click here.

© Agrimoney 2017