- Strong demand from emerging countries (notably China and India)
- Growth of the organic market in advanced economies
- Highly exposed to climate hazards and biological risks
- At the heart of protectionist tensions
- Volatility of agricultural commodity prices
The global agri-food sector is one of the industries at the heart of protectionist tensions, while it is also vulnerable to climatic hazards and biological risks. Coface expects that the main risk factors that the sector experienced in 2019 will continue this year.
The trade war between the United States and China gives a very important place to agricultural products, especially soybeans, through China’s retaliation measures against the United States. This has contributed to high volatility in agricultural commodity prices, while exerting downward pressure on soybean prices.
At the same time, free trade agreements also give this sector a leading role, since in most cases their provisions include trade in agricultural products. This was the case in 2019 for a number of agreements such as the EU-Mercosur Agreement, the EU-Japan Trade Agreement and the CETA signed between Canada and the European Union.
Coface also expects that the biological risks inherent in the sector, recently exacerbated by the African Swine Fever (ASF) epidemic and the consequences of the fall armyworm’s spread, will exert downward pressure on global agricultural production this year.
African Swine Fever (ASF), which continues to affect Asia – particularly China – and, to a lesser extent, Europe, is having an impact on the global pork market as China is the world’s largest consumer and producer.
The organic market, mainly concentrated in the European Union, the United States and, to a lesser extent, China, is expanding rapidly. Demand for organic products in these regions is mainly driven by consumers on health-related and environmental grounds, as organic farming limits or does not use pesticides. The European Parliament, for example, defines the absence of pesticides as a basic criterion for organic farming. As a result, organic farming is set to continue to grow in the coming years, despite the global economic slowdown expected this year. Long considered a niche market, the organic market has become increasingly popular, reaching €90 billion in 2017.
Sector Economic Insights
The production of agricultural commodities remains highly exposed to climate hazards
World wheat production is expected to increase to 766 million tons for the 2019/2020 season, up by 35 million tons compared to the previous season. This significant increase is strongly linked to a base effect, as the 2018/2019 season’s harvest was particularly poor (-4.2% compared to 2017/2018), mainly due to lower production by some of the largest producers, namely Russia, the European Union and Australia, due to adverse weather conditions. This increase in overall wheat production is expected to have a downward impact on prices.
Soybean production is expected to decline for the 2019/2020 season: the US Department of Agriculture (USDA) forecasts a 5.8% decrease mainly due to lower US production (-20%) following bad weather conditions. This drop in production will put inflationary pressure on soybean prices, but this pressure will be offset by the impact of ASF on the one hand and by the trade tensions between the United States and China on the other.
World maize production is also expected to decline in the 2019/2020 season, mainly due to lower production in the United States (-5.3%), again due to adverse weather conditions.
The agri-food sector is both at the heart of protectionist tensions and a key sector in free trade agreements
The soybean market is particularly affected by the trade tensions between the United States and China. In practice, Chinese firms have stopped importing soybeans from the United States, discouraged by the Chinese authorities’ decision to impose import duties on the United States in 2018. Chinese imports of American soybeans fell by 99% and 97% respectively in the 4th quarter (Q4) of 2018 and January 2019 before resuming in February 2019. President Donald Trump announced in October 2019 that China would import between USD 40 billion and USD 50 billion worth of agricultural goods after progress in talks between the two governments. This scenario seems unlikely, however, given that these amounts are much higher than past Chinese imports: in 2017, before the trade war, China bought USD 24 billion worth of US agricultural goods.
Brazil and Argentina, the largest and third largest global soybean producers respectively, have benefited from lower US exports to China that turned towards them to offset the reduced purchases of US soybeans. The future of the American, Brazilian and Argentinean soybean markets will therefore partly depend on future trade relations between China and the United States. Trade tensions also impact the financial positions of agricultural commodity trading companies. Louis Dreyfus Group, Cargil and ADM (Archer Daniel Midlands), the three largest agricultural commodities trading companies, all posted deteriorations in their results on the three first quarters of 2019, and their economic performances in 2020 will depend heavily on future trade relations between China and the United States.
In October 2019, the United States imposed tariffs on USD 7.5 billion of imports from the EU. The duties, which mainly affect France, the United Kingdom, Germany and Spain, are a response to subsidies deemed illegal by the World Trade Organisation (WTO) and feature 25% tariffs on agricultural goods including French and Spanish wine and Scotch whisky. These customs duties could have serious consequences for the agricultural producers of the countries concerned, since the United States is one of their main foreign buyers: in 2017, the United States purchased 22% of the United Kingdom’s whisky exports and 18% of French wine exports.
The various treaties and agreements concluded last year between the EU and Mercosur, between the EU and Japan, between the EU and Canada (Comprehensive Economic and Trade Agreement, CETA), and between the United States and Japan, all place great importance on agricultural goods. It should be noted, however, that these agreements have attracted some public criticism and do not necessarily have the support of local producers; the potential negative environmental consequences of these agreements have also been criticised. These four agreements involve the elimination of customs duties on goods traded between the regions concerned, with the aim of encouraging trade between these regions. Agricultural products are a key element of these trade agreements, due to the importance of these regions in the global agricultural market.
ASF and the fall armyworm are the biological risks that will continue to have the greatest impact on global agricultural production in 2020
African Swine Fever (ASF) broke out in Europe and Asia in the summer of 2018. At this stage, the impact in Europe is limited. Germany, France and Spain, the three largest pork producers in Europe, have been spared. Asia is much more affected by the disease, which has spread in the region, causing havoc among pork producers, particularly in China that accounts for 50% of global pork production and consumption. ASF in China has several consequences. The most direct is the increase in Chinese pork imports from the European Union, Brazil and, despite customs duties, the United States. Increased Chinese demand caused pork prices to surge by 51% in September 2019 year-on-year, after seasonal adjustment. Rising pork prices have prompted some Chinese consumers to switch to other meats. This has led to an increase in external demand for beef and chicken, which has benefited Brazil, Argentina and the European Union (Brazil is the largest exporter of beef and chicken, the European Union is the third largest exporter of beef and the second largest exporter of chicken, while Argentina is the fourth largest exporter of beef). The decrease in Chinese pig herds is leading to reduced demand for soybeans, which are mainly used to feed pigs. According to the USDA, China’s pork market is not expected to recover in 2020: production is expected to fall by 25% compared to 2019, while beef, chicken and pork imports are expected to increase by 21%, 20% and 35% respectively.
In addition to ASF, the spread of the fall armyworm (FAW) is one of the major biological risks to the global agri-food sector. FAW is a caterpillar that feeds mainly on maize, but also on rice, sorghum, cotton and other crops. It was first detected in West Africa in early 2016. By the end of 2018, it had spread to most countries in sub-Saharan Africa and Asia. FAW has now reached several Asian countries, including Vietnam, Myanmar, Bangladesh, Indonesia, Taiwan, China, and is potentially spreading to others. China is the world’s second largest maize producer, so FAW’s presence could lead to inflationary pressures on world maize prices.
Last update : February 2020