A year ago we at Gro predicted shortages of many key agricultural commodities, from wheat to corn to vegetable oils, and resultant higher prices. In 2022, we got that, and more, as the Russian invasion of Ukraine added fuel to the inflationary environment fire.
Today, supplies of some commodities, notably wheat, will continue to deteriorate in coming months. But there are also tentative signs of recovery in a few sectors.
Gro’s forecasts for the Top 7 major themes for global agricultural markets in 2023 are:
2023 will be a mixed bag of relief and big headwinds. War rages on in the Black Sea region, a major breadbasket. China’s economic path forward as Beijing lifts its zero-COVID restrictions will reverberate through the world’s supply and demand balance sheet. And a repeat of last year’s extreme weather events could upend the most carefully calculated projections for 2023 food production.
Amid so many uncertainties, forecasting the direction for global agricultural markets for the year ahead is fraught with risk. Nevertheless, Gro has used the data and our forecast models in the platform to assess the principal factors that will determine the direction of agricultural markets and inventories and project what 2023 holds in store.
Gro Intelligence analyzes the vast amounts of data on our platform to see around the corner of global agricultural developments and to produce machine learning-based predictive models that generate valuable knowledge and insights. Gro is the only platform showing the dynamic impact of climate, economic factors, and agricultural systems on each other.
Here are the details behind Gro’s forecasts for the Top 7 major themes for global agricultural markets in 2023:
Food Price Inflation Will Moderate
As the world enters a third year of high food inflation, there are glimmers of hope that price increases for some core food commodities will ease, at least by the second half of the year. While prices for many staples are still well above historical levels, they are down sharply from their peaks reached last spring. Prices of fertilizers, essential for maintaining adequate levels of crop production, also have subsided, though they too remain elevated. And global inventories of a few key commodities — notably soybeans and palm oil — are looking more promising than at this time last year.
For the US, Gro’s US Food Price Index — which has proved to be predictive of inflation trends as much as six weeks ahead of official government reports — indicates that price pressures on food and beverage companies may start to moderate in the next 3-6 months. The Index represents a consumption-weighted basket of food prices that excludes energy-linked ag products such as corn and vegetable oils and can be viewed using Gro’s Custom Price Index application.
Still, inflationary pressures abound, and risks of recession could make it harder for many people around the world to afford staple food items. The war in Ukraine has sharply reduced planted area, limiting export potential in 2023 regardless of the sustainability of the grain export corridor. Drought persists in wheat growing areas of the US southern Plains and has already sharply reduced the crop in Argentina. And prices for natural gas, a key input to synthetic fertilizers, remain volatile, propping up fertilizer prices at very high levels, which is expected to lead to lower use and hurt crop yields around the world.
Tight US monetary policy to combat domestic inflation strengthens the US dollar and adds additional costs in other countries as commodity trading is denominated in the US currency. This is particularly significant for food import-reliant regions like Africa and Southeast Asia.
While Gro expects food inflationary pressures, especially in the US, will moderate later in 2023, it will take more than one crop cycle for prices to begin easing from their current, historically high levels.
Rising Chinese Imports Will Pressure Global Inventories
If China succeeds in easing restrictions stemming from its zero-COVID policy without igniting widespread illness and economic slowdown, the resulting increase in import demand for grain, oilseeds, and proteins could have a momentous impact on global agricultural commodity supplies.
Even a gradual return to normal levels of demand would require China to significantly increase its agricultural imports, especially in the second half of 2023 when people vacation more. Gro’s China Pork Demand Model currently points to a 7% year-over-year increase in pork demand in 2023. That in turn will bolster imports of oilseeds, oilseed meal, and grains.
Also pointing to increased imports are China’s domestic grain prices, which are at historically high levels. Wheat and rice are often substituted for corn in animal feed, and watching their relative prices can help predict China’s appetite for grain imports. China recently opened its market to increased corn imports from Brazil in order to diversify sourcing from the US and Ukraine, China’s traditional suppliers, as Gro wrote about here.
China is the world’s biggest consumer of vegetable oils and pork, for which it needs to import large quantities of grains and soybeans as animal feed — China’s corn imports have soared tenfold in the past five years. But as millions of people were quarantined in cities across the country to prevent the spread of COVID in 2022, service industry businesses including restaurants and hotels slowed sharply amid waning demand.
Gro estimates that China’s domestic vegetable oil demand dropped by 20%, and pork demand fell by 9%, between April and November 2022 as a result of COVID restrictions. Vegetable oil imports plunged by nearly 50% in the 12 months through September 2022, as seen in this Gro display, and imports of other commodities also declined. Spiking global commodity prices following Russia’s invasion of Ukraine compounded the downturn in imports, as profit margins became squeezed.
The slowdown in domestic demand and imports have depleted China’s domestic vegetable oil inventories and pushed the stocks-to-use ratio, a measure of available supplies, to some of the lowest levels in years. Meanwhile, a sharp rise in domestic pork prices since last spring prompted farmers to expand their herds, as hog producer margins soared above levels seen before the 2018 African swine fever outbreak. as shown in this Gro display.
Fuel vs. Food Competition Will Intensify
US renewable diesel production capacity has doubled since the start of 2022, and there’s no sign of that slowing. Already, nearly half of all US soybean oil — a major feedstock — will go into making renewable diesel and other biofuels this year, and that share will increase further as renewable diesel production continues to grow apace.
Renewable diesel has become the fastest growing biofuel in the US, helped largely by California tax incentives. The US Energy Information Administration (EIA) projects capacity could more than double again to 5 billion gallons by 2025 if all renewable diesel projects currently being planned come online.
To put that in perspective, an additional 2.5 billion gallons of renewable diesel capacity by 2025 would consume approximately an additional 20 billion pounds of soybean oil. Currently, the US produces 26 billion pounds of soybean oil per year.
Renewable diesel’s heightened demand for soybean oil will maintain support for soyoil prices and keep soybean crush margins strong. The spot soybean oil futures contract, while down from an all-time record in the spring, is still far above historical levels.
Monthly soybean crushing volumes have been around the strongest in history over the past year — and are forecast to reach an all-time annual high for 2022/23, as shown in this Gro display of crushing industry data. Propelling the high volumes are robust crush margins — essentially the difference between the cost of inputs (i.e., soybeans) and revenues from product outputs, mainly soybean oil and soybean meal, which is used largely in animal feed.
Growing demand for soybeans to produce renewable diesel escalates a competition with food uses of the oilseeds, both directly for human consumption or as feedstock for animal proteins, as Gro wrote about here. As global soybean ending stocks rise in 2022/23, but drop sharply in the US, biofuel production represents a significant and growing source of demand for the oilseeds.
Supplies of Some Staples Will Begin to Recover
Gro forecasts that global inventories of some agricultural commodities will improve in 2023, although various supply chain shocks could upend the prospect of a tentative recovery. Meanwhile, inventories of other agricultural commodities, notably wheat, will remain under pressure.
In Brazil, the world’s biggest soybean exporter, a multiyear drought has eased and the outlook for the 2022/23 crop is optimistic, as shown in this display from Gro’s Climate Risk Navigator for Agriculture, underpinning expectations for a record-breaking soybean crop and increased global soybean supplies. Early readings on Brazil’s corn output also point to a rebound from last year, which would provide relief for countries previously reliant on Ukrainian exports.
Global vegetable oil supplies are in considerably better shape than at this time last year. La Niña brought heavy rains to Indonesia and Malaysia, which bodes well for 2023 production of palm oil, the most widely used vegetable oil. A Gro analysis previously found that above-average precipitation in the two countries is often associated with higher palm oil yields 6-8 months later and possibly longer, as Gro wrote about here. Palm oil production is expected to set a new record high level in the year ahead with a 5% increase from this past year.
Some headwinds persist for other staples, however. In Argentina, worsening drought stemming from La Niña has already damaged the wheat crop and now threatens corn and soybean production. Argentina is the world’s third-largest corn exporter, and the country’s woes are helping to drag down forecasts for corn production and global ending stocks, as shown in this Gro display on corn.
In the US, corn supplies are also slated to shrink after the 2022/23 harvest produced the smallest crop of the past several years, as shown in Gro’s US Corn Monitor. If corn exports pick up after a weak start to the marketing year, supplies could tighten further. Ending stocks also will drop sharply for US soybeans on surging crush demand to produce animal feed and soybean oil for biofuels.
Little Relief in Store for Global Wheat Supplies
Worldwide wheat inventories will continue a multi-year decline in 2023.
Drought conditions in many key growing regions in 2022 are persisting into the new year, damaging winter wheat crop prospects from Argentina to southern Europe, and from the US to North Africa. Ongoing war in Ukraine means grain production will be sharply reduced and exports at best will be a fraction of normal levels.
For US hard red winter wheat (HRW), which accounts for 40% of all US wheat, drought conditions are even worse than last year, when per-acre yields for the HRW crop was 15% below the 10-year average, as seen with the Gro Drought Index, weighted for wheat growing areas in the top HRW producing states using Gro’s Climate Risk Navigator for Agriculture. When the crop emerges from dormancy in the spring, Gro users can monitor crop prospects using Gro’s machine-learning US Hard Red Wheat Yield Model.
Wheat crops heading for harvest in the Southern Hemisphere also face troubles. Argentina has been hit by drought brought on by the return of La Nña for a third year in a row, as shown with this Gro Navigator display, and the country’s wheat exports could be down by half from last year. Australia, the other major southern wheat producer, should harvest a bumper crop this year, but excessive rainfall could reduce grain quality and decrease how much milling wheat is available versus animal feed grain, as Gro wrote about here.
India could help fill world wheat silos next year, after production in 2022 was reduced by a late-season heat wave. High wheat prices have encouraged Indian farmers to plant more acres and the crop is off to a strong start. Strong wheat production also could encourage India to lift a ban on wheat exports in place since May. Gro’s India Wheat Yield Model, which will go live later in December when the plants are established, can be used to follow the crop’s outlook.
Russia’s strong wheat production will partially offset shortfalls elsewhere. This summer, the country harvested its largest ever winter wheat crop — which represents 70% of total wheat — and Russia’s wheat stocks are at record levels. Russia, the No. 1 wheat exporter, is currently the cheapest origin for exports of the grain and can help fill global needs if logistics and geopolitical conditions permit.
Fertilizer Expenses Will Take a Bigger Bite Out of Farm Operating Costs
High fertilizer costs will continue to weigh down global agricultural yields in 2023. Gro forecasts that global fertilizer prices, while down from their mid-2022 peaks, will remain historically elevated in 2023 and beyond, bloating farmer production costs and threatening further cuts to food production in many countries.
In the US, fertilizer and other input expenses are projected to account for 49% of total operating costs for corn farmers in 2023, according to Gro’s US Farmer Profitability & Crop Budgets app. That’s on a par with 2022, but sharply above the average since 2015 of about 40%.
Prices and affordability of key macronutrients in 2023 will remain challenged by costs of natural gas — a key feedstock for nitrogen fertilizer production — as well as by uncertainty surrounding Russian exports, the strength of the US dollar, and Chinese export restrictions. US sanctions continue to curtail potash exports from Belarus, a major supplier, although Canadian producers plan to ramp up production in 2023-25.
Fertilizer supply availability will vary by region. North America and Europe will have adequate supplies. In the US, nitrogen use is expected to rebound in 2023, although consumption will ultimately be determined by farmer crop planting decisions and nutrient affordability. Fertilizer affordability will remain a pain point for farmers next year because dips in crop values have outpaced the rate of price declines in major fertilizer products.
However, in other countries, including in Latin America and Africa where currency depreciation has fueled high inflation, farmers will face difficulties securing a sufficient amount of fertilizers.
Key phosphate and urea fertilizer prices in November, while down by about a third from 2022’s peak, are still nearly double spot values two years ago. Potash prices from Vancouver, a major export hub, have sustained elevated prices from earlier this year and are up nearly threefold from November 2020.
Although Europe’s ammonia production costs are well below their 2022 highs — which led to regional production being curtailed by as much as 70%, as Gro wrote about here — they nevertheless are projected to remain 19%-25% above the running average since 2021.
As a result, farmers in many countries are projected to have cut fertilizer usage in 2022, potentially reducing food production by as much as 216 trillion calories — nearly twice the annual output of staple grain commodities in Mexico — according to nitrogen fertilizer-usage scenarios in Gro’s Global Fertilizer Impact Monitor.
The Fertilizer Impact Monitor — which Gro built with support from the Bill & Melinda Gates Foundation and in partnership with the International Fertilizer Association and CRU Group — is free for anyone to use and can be found here.
Don’t Expect Any Bargains in Protein Prices
Retail beef and pork prices will remain high at least through the first half of 2023. Gro expects both beef and pork supplies to decline in the year ahead. As consumers look for comparative bargains in the poultry aisle, the increased demand will help to prop up chicken prices as well.
Underlying the high prices for all proteins: Animal feed costs, while down from their mid-2022 peaks, will remain at historically strong levels, bolstering costs of production and undermining producers’ confidence in profitability. For perspective: The last time US protein producers significantly expanded their animal counts started in 2015, when feed costs were, on average, 30% below the levels seen today.
In the case of beef, the decline in the size of the cattle herd — a consequence of drought-hit pastureland and high feed costs — is slowing from the rapid pace of the past two years, as shown in this Gro display. The upshot: a decrease in beef supplies coming to market in coming months with beef prices that are likely to remain steady or rise from current levels.
Hog herds, including breeding sows, also have been shrinking, due in part to uncertainty surrounding California’s Proposition 12, which sets minimum animal welfare standards, and is currently under consideration by the US Supreme Court.
And while chicken flocks have expanded modestly in the wake of historically high chicken prices earlier in 2022, prices could remain supported as consumers seek value alternatives to beef and pork.