WEBVTT
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You are listening to a Commonwealth Bank of Australia Global Economic and Markets Research Podcast.
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This podcast provides general market-related information and is not intended to be an investment research report.
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The information contained in this podcast is based on previously published material.
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And before listening, you're advised to read the full Global Economic and Markets Research Disclaimers, which can be found at combankresearch.com.au.
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Welcome to the ComBank Global Economic and Markets Research Podcast.
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My name is Belinda Allen and I'm a Senior Economist here at ComBank and today I'm joined by our Agricultural Strategist, Tobin Gorey.
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Tobin, good to have you on.
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Thanks, Bina.
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Good to be back here again.
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It is.
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So we're here for our quarterly chat on the agricultural sector and obviously no sector's been spared from 2020 and COVID-19 but as always in the ag space there are so many other factors that drive markets and demand and supply of particular commodities which we'll delve on here.
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But I guess the first place to start is
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The past three months has seen the path of COVID-19 and the path of the global economy take on different turns and different paces of recessions and recovery.
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You know, things to note, particularly in terms of the changes, is we are still seeing rising COVID cases in Europe and the US.
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We're still debating about how the recovery looks compared to the recessions, rising chance of double-dip recession, particularly in Europe, and maybe to a lesser extent the US as well, whereas other economies have been performing a little bit better, and really China and Australia are two economies that are definitely in recovery.
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What's your take on the situation at the moment?
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Yeah, that's right.
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That brought macro context that you and the other guys look at all the time.
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I guess the biggest change...
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In a very general sense anyway, I guess it's for everybody.
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But what applies to Ag2 is that a few months ago when we last spoke, we didn't really have an endpoint for COVID-19.
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And now we do.
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I mean, it's not really a definite endpoint, obviously.
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Things can go awry here and there.
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But if there is vaccines coming onto the market and implementing that over the next six to nine months,
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means we do get to an end point on that.
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But to put you back there, and it's a rocky road, and it's a rocky road for ag too, is that we don't know what shape we're going to be in once we arrive at that time.
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Because until those vaccines are rolled out and effective, the authorities are still fighting those, fighting the pandemic, I guess, with the imperfect tools that they have medically and epidemiologically as well.
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So...
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I think it's a big, big change, and it's a very, very good change to say there is an end point to this.
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But I think the road there is rocky and ag will fill out as well.
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And what we are seeing, particularly in different economic recoveries around the world, particularly China and Australia, the recoveries are very much dependent on what stimulus was put in place.
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So in Australia, the consumer will probably lead the recovery, whereas in China what we're seeing is industrial space lead the recovery because that's where the stimulus was.
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So that could be quite important when we talk about...
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demand for agriculture as well.
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But certainly what we've seen during the pandemic is COVID has impacted demand for a couple of commodities in different ways.
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And two, we will highlight here is cotton and sugar.
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And I still remember very clearly in our last discussion, how we talked about how sugar is social and really was very...
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dictated to, in terms of demand and supply, because of the social distancing restrictions around eating out.
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How has anything changed between cotton and sugar?
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Well, I think, just talking about sugar first, I guess that was, you know, sugar is social.
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So I think when people went first into lockdown, they were quite happy to indulge themselves a bit.
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And they realised it was going on for a while.
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I was sitting around getting a bit fatter.
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So they cut down on all the sweets and so on.
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And the occasions when they would be indulging those things was when they're socialising, so less socialising, less to a consumption it looked like.
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So now that probably reverses in time as people get together again.
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But this is an example of the rocky road on the way there we were talking about just before.
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Those times are ahead.
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They'll come back again when things return to normal, whatever that might be.
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But if you see things where large parts of the US and Europe are in lockdown, then you're going to have those same consumption effects again.
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And then the other thing was the indirect one for sugar as well, because so much of Brazil's sugar cane is generally used to produce ethanol to put in cars and power them.
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Because people stayed home, there was less fuel use.
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So there'd be a lot more sugar as well.
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So not only was demand cut.
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supply increase as well.
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And it's only really since we've had a couple of major crop losses, one in Thailand and some more recent ones in Central America, that supply has tightened up and pushed the price up again.
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So, again, there's a nice juxtaposition there of the big COVID macro effects, plus and minus, and then the ag overlay and big swings in supply.
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On the cotton one you're talking about, cotton is much more of a
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much more conventional industrial commodity.
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I mean, it grows on a plant, obviously, but it has a definite cycle with the economic cycle.
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There's people who delay or buy less clothing and so on.
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We know households and things like that.
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That's kind of left a pretty permanent mark on cotton because right now we have, what we're looking at coming out of season 2020 is that we'll have,
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pretty close to half a year's supply of cotton in inventory, which is a very, very unusually large number.
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So, you know, even if we get a really, really powerful quick global recovery, which we can get a lot of, obviously, but even if we got that, it would take a long, long time for the inventory.
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So it's kind of, cotton has a, you know, a year or two, at least, to work off the problems they've got from the pandemic.
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That's fascinating really.
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I'm just kind of thinking through the demand changes and it's not only the economic recession that you generally have a downturn in consumer spending in but also the growing trend of working from home which means people obviously wearing very different clothes and demanding items of clothing as well.
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It's fascinating.
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Now, of course, supply and demand fundamentals is crucial in the agricultural space.
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And you've already talked about how it has been impacting on sugar, particularly demand for ethanol, which comes about through people driving and travelling a lot less.
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What are some other markets that are being impacted heavily by supply and demand fundamentals at the moment?
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I think the thing this year is that the overlay in ag is, it started out very, very good in the sense that we look like a pretty big crop crop.
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At one point, the American corn crop, which is probably the biggest, single, most influential crop in the world, looked like being a record and being a record by a huge margin.
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Lost transcribed census, bit of untoward weather, revisions to the history of where things were, some trustworthy demand, including from China, poor corn there, has eroded that crop down to a small level.
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That's been repeated in a few places across the globe.
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Europe had a poor wheat crop this year,
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And right now we're looking at some problems for South American crops, very dry in parts of Brazil and Argentina where there's big corn and even bigger soybean crops growing.
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And you put all those together and you're looking at a situation coming into season 2020 where supply is, and what we know now, so we don't think about the South American weather and what we know now, we're kind of in a sort of neutral to tight zone in terms of inventory coming into the season.
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And it's very easy from there, so we get some even modest problems with South American crops, the supply to become actually tight and the bush prices higher.
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Now, in your quarterly report, you talked about a turf war.
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Can you explain what that is and what commodities we may see that in?
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Okay, so I guess that sort of kind of applies to the temperate crops, which is essentially grains, oilseats, pulses, and cotton to an extent too.
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But cotton has got a lot of supply.
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It probably won't apply to it for another year or two, even if it does happen.
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In the ordinary cause of events, when you're short one of these crops, if you have enough soybeans in the world or you have enough corn to feed grain in the world, the price of the one that's a bit short, it rises, and people plant more of that next season, and it refills the inventories and so on.
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The turf war is different because it's more difficult to get out of because what you get is simultaneously
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all those grains and oilseeds have tight supply.
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So the following season, perhaps one can catch up, but only at the expense of the other, supply of the other is becoming even tighter.
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So it generally takes several seasons to work yourself out of this.
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Now, I've got to raise the risk of this, not because we're definitely on a path to get there,
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we're not far away from them.
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So it wouldn't take huge losses on South American crops this year or equally some poor 2021 crops to get us into that situation.
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So in that context, you're talking about a much more significant shift in supply.
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And the way we think about that in price terms is that when you're in a comfortable supply to neutral supply, you get some price rise.
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But so you're going to get, say, it's going to be X,
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But if you go from neutral to tight, then the price rise is 2x or 3x.
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So it's not linear.
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It goes vertical.
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That's right.
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So it goes a lot faster.
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The price rise we've seen so far, if you roughly look at like soybean, canola, wheat and corn prices, they're roughly around the 50th percentile for the last 15 years or so.
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adjusted for inflation.
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So what they've done so far is they've risen to the extent that supply is neutral to a bit time.
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If we go to a turf war situation, then
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those prices can move up and potentially move up substantially from there as well.
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One of the other issues that probably our Australian listeners have heard a lot about in 2020 is rising China and Australia trade tensions.
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Now, this has impacted a number of different Australian exports, but they really have been probably focused on the agricultural space.
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First of all, we did hear
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about the barley tariffs that were introduced earlier in the year.
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The most recent commodity that looks like it may be impacted is wheat.
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What is, I guess, the impact on those particular commodities?
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And I'm thinking here probably from an Australian perspective.
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And what is, I guess, what can Australia do about it?
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Can we find new export markets?
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Is there a price change?
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tension there in trying to find new markets or where else should we be thinking about the consequences?
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What's happened with these things is that there haven't really been major, major issues so far and they've been a real problem for some of the businesses involved and they've often targeted particular businesses.
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And sort of adding up, it hasn't been as large as all that.
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So as you pointed to there, if China does not want Australia's barley, which said so by putting the tariffs on it, Australia will.
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Australia, the growers and the grain merchants here are left with grain that they would have sold to China, but they need to buy somewhere else to do it.
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Now in a market where there's oodles of supply everywhere, that's quite difficult, obviously because they could buy it elsewhere.
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But in a market where there's not oodles of supply, China buying it from one place means it's not available to someone else to buy.
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So that makes it easier for Australia to divert that elsewhere to find it.
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other markets.
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Now, easy doesn't mean it's not costly.
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Generally, you've got to send it further away.
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And that means the price gets discounted to pay for the freight costs between the two.
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So there's a problem.
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So for the commodity type stuff like barley like grains and wheat also, that's a relatively simple rearrangement.
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Others, you go to the other end and it's
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ago where we got wine, which is a much more high value added and branded and consumer oriented product.
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It's quite hard to switch markets quickly.
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So you need to create another channel somewhere else.
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So for those types of businesses, which is a commodity product, it's more differentiated.
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That process of switching takes more time.
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It's certainly a fascinating space at the moment in terms of agriculture, not only dealing with COVID-19, but just the general ag issues of weather, changing demand for crops and all of that.
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Tobin, fascinating to get your insights as always.
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Good to talk to you again, Bolida.
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Now, you can read Tobin Gorey's quarterly agriculture report titled How Soon Is Eventually on combankresearch.com.au and that was published on the 20th of November 2020.
1
00:00:04.443 --> 00:00:08.426
You are listening to a Commonwealth Bank of Australia Global Economic and Markets Research Podcast.
2
00:00:08.786 --> 00:00:13.349
This podcast provides general market-related information and is not intended to be an investment research report.
3
00:00:13.690 --> 00:00:16.912
The information contained in this podcast is based on previously published material.
4
00:00:17.092 --> 00:00:23.437
And before listening, you're advised to read the full Global Economic and Markets Research Disclaimers, which can be found at combankresearch.com.au.
5
00:00:30.395 --> 00:00:34.439
Welcome to the ComBank Global Economic and Markets Research Podcast.
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My name is Belinda Allen and I'm a Senior Economist here at ComBank and today I'm joined by our Agricultural Strategist, Tobin Gorey.
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Tobin, good to have you on.
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Thanks, Bina.
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Good to be back here again.
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It is.
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So we're here for our quarterly chat on the agricultural sector and obviously no sector's been spared from 2020 and COVID-19 but as always in the ag space there are so many other factors that drive markets and demand and supply of particular commodities which we'll delve on here.
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But I guess the first place to start is
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The past three months has seen the path of COVID-19 and the path of the global economy take on different turns and different paces of recessions and recovery.
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You know, things to note, particularly in terms of the changes, is we are still seeing rising COVID cases in Europe and the US.
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We're still debating about how the recovery looks compared to the recessions, rising chance of double-dip recession, particularly in Europe, and maybe to a lesser extent the US as well, whereas other economies have been performing a little bit better, and really China and Australia are two economies that are definitely in recovery.
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What's your take on the situation at the moment?
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Yeah, that's right.
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That brought macro context that you and the other guys look at all the time.
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I guess the biggest change...
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In a very general sense anyway, I guess it's for everybody.
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But what applies to Ag2 is that a few months ago when we last spoke, we didn't really have an endpoint for COVID-19.
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And now we do.
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I mean, it's not really a definite endpoint, obviously.
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Things can go awry here and there.
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But if there is vaccines coming onto the market and implementing that over the next six to nine months,
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means we do get to an end point on that.
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But to put you back there, and it's a rocky road, and it's a rocky road for ag too, is that we don't know what shape we're going to be in once we arrive at that time.
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Because until those vaccines are rolled out and effective, the authorities are still fighting those, fighting the pandemic, I guess, with the imperfect tools that they have medically and epidemiologically as well.
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So...
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I think it's a big, big change, and it's a very, very good change to say there is an end point to this.
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But I think the road there is rocky and ag will fill out as well.
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And what we are seeing, particularly in different economic recoveries around the world, particularly China and Australia, the recoveries are very much dependent on what stimulus was put in place.
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So in Australia, the consumer will probably lead the recovery, whereas in China what we're seeing is industrial space lead the recovery because that's where the stimulus was.
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So that could be quite important when we talk about...
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demand for agriculture as well.
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But certainly what we've seen during the pandemic is COVID has impacted demand for a couple of commodities in different ways.
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And two, we will highlight here is cotton and sugar.
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And I still remember very clearly in our last discussion, how we talked about how sugar is social and really was very...
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dictated to, in terms of demand and supply, because of the social distancing restrictions around eating out.
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How has anything changed between cotton and sugar?
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Well, I think, just talking about sugar first, I guess that was, you know, sugar is social.
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So I think when people went first into lockdown, they were quite happy to indulge themselves a bit.
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And they realised it was going on for a while.
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I was sitting around getting a bit fatter.
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So they cut down on all the sweets and so on.
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And the occasions when they would be indulging those things was when they're socialising, so less socialising, less to a consumption it looked like.
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So now that probably reverses in time as people get together again.
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But this is an example of the rocky road on the way there we were talking about just before.
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Those times are ahead.
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They'll come back again when things return to normal, whatever that might be.
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But if you see things where large parts of the US and Europe are in lockdown, then you're going to have those same consumption effects again.
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And then the other thing was the indirect one for sugar as well, because so much of Brazil's sugar cane is generally used to produce ethanol to put in cars and power them.
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Because people stayed home, there was less fuel use.
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So there'd be a lot more sugar as well.
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So not only was demand cut.
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supply increase as well.
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And it's only really since we've had a couple of major crop losses, one in Thailand and some more recent ones in Central America, that supply has tightened up and pushed the price up again.
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So, again, there's a nice juxtaposition there of the big COVID macro effects, plus and minus, and then the ag overlay and big swings in supply.
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On the cotton one you're talking about, cotton is much more of a
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much more conventional industrial commodity.
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I mean, it grows on a plant, obviously, but it has a definite cycle with the economic cycle.
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There's people who delay or buy less clothing and so on.
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We know households and things like that.
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That's kind of left a pretty permanent mark on cotton because right now we have, what we're looking at coming out of season 2020 is that we'll have,
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pretty close to half a year's supply of cotton in inventory, which is a very, very unusually large number.
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So, you know, even if we get a really, really powerful quick global recovery, which we can get a lot of, obviously, but even if we got that, it would take a long, long time for the inventory.
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So it's kind of, cotton has a, you know, a year or two, at least, to work off the problems they've got from the pandemic.
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That's fascinating really.
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I'm just kind of thinking through the demand changes and it's not only the economic recession that you generally have a downturn in consumer spending in but also the growing trend of working from home which means people obviously wearing very different clothes and demanding items of clothing as well.
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It's fascinating.
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Now, of course, supply and demand fundamentals is crucial in the agricultural space.
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And you've already talked about how it has been impacting on sugar, particularly demand for ethanol, which comes about through people driving and travelling a lot less.
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What are some other markets that are being impacted heavily by supply and demand fundamentals at the moment?
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I think the thing this year is that the overlay in ag is, it started out very, very good in the sense that we look like a pretty big crop crop.
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At one point, the American corn crop, which is probably the biggest, single, most influential crop in the world, looked like being a record and being a record by a huge margin.
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Lost transcribed census, bit of untoward weather, revisions to the history of where things were, some trustworthy demand, including from China, poor corn there, has eroded that crop down to a small level.
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That's been repeated in a few places across the globe.
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Europe had a poor wheat crop this year,
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And right now we're looking at some problems for South American crops, very dry in parts of Brazil and Argentina where there's big corn and even bigger soybean crops growing.
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And you put all those together and you're looking at a situation coming into season 2020 where supply is, and what we know now, so we don't think about the South American weather and what we know now, we're kind of in a sort of neutral to tight zone in terms of inventory coming into the season.
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And it's very easy from there, so we get some even modest problems with South American crops, the supply to become actually tight and the bush prices higher.
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Now, in your quarterly report, you talked about a turf war.
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Can you explain what that is and what commodities we may see that in?
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Okay, so I guess that sort of kind of applies to the temperate crops, which is essentially grains, oilseats, pulses, and cotton to an extent too.
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But cotton has got a lot of supply.
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It probably won't apply to it for another year or two, even if it does happen.
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In the ordinary cause of events, when you're short one of these crops, if you have enough soybeans in the world or you have enough corn to feed grain in the world, the price of the one that's a bit short, it rises, and people plant more of that next season, and it refills the inventories and so on.
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The turf war is different because it's more difficult to get out of because what you get is simultaneously
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all those grains and oilseeds have tight supply.
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So the following season, perhaps one can catch up, but only at the expense of the other, supply of the other is becoming even tighter.
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So it generally takes several seasons to work yourself out of this.
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Now, I've got to raise the risk of this, not because we're definitely on a path to get there,
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we're not far away from them.
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So it wouldn't take huge losses on South American crops this year or equally some poor 2021 crops to get us into that situation.
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So in that context, you're talking about a much more significant shift in supply.
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And the way we think about that in price terms is that when you're in a comfortable supply to neutral supply, you get some price rise.
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But so you're going to get, say, it's going to be X,
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But if you go from neutral to tight, then the price rise is 2x or 3x.
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So it's not linear.
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It goes vertical.
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That's right.
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So it goes a lot faster.
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The price rise we've seen so far, if you roughly look at like soybean, canola, wheat and corn prices, they're roughly around the 50th percentile for the last 15 years or so.
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adjusted for inflation.
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So what they've done so far is they've risen to the extent that supply is neutral to a bit time.
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If we go to a turf war situation, then
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those prices can move up and potentially move up substantially from there as well.
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One of the other issues that probably our Australian listeners have heard a lot about in 2020 is rising China and Australia trade tensions.
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Now, this has impacted a number of different Australian exports, but they really have been probably focused on the agricultural space.
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First of all, we did hear
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about the barley tariffs that were introduced earlier in the year.
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The most recent commodity that looks like it may be impacted is wheat.
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What is, I guess, the impact on those particular commodities?
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And I'm thinking here probably from an Australian perspective.
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And what is, I guess, what can Australia do about it?
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Can we find new export markets?
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Is there a price change?
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tension there in trying to find new markets or where else should we be thinking about the consequences?
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What's happened with these things is that there haven't really been major, major issues so far and they've been a real problem for some of the businesses involved and they've often targeted particular businesses.
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And sort of adding up, it hasn't been as large as all that.
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So as you pointed to there, if China does not want Australia's barley, which said so by putting the tariffs on it, Australia will.
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Australia, the growers and the grain merchants here are left with grain that they would have sold to China, but they need to buy somewhere else to do it.
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Now in a market where there's oodles of supply everywhere, that's quite difficult, obviously because they could buy it elsewhere.
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But in a market where there's not oodles of supply, China buying it from one place means it's not available to someone else to buy.
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So that makes it easier for Australia to divert that elsewhere to find it.
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other markets.
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Now, easy doesn't mean it's not costly.
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Generally, you've got to send it further away.
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And that means the price gets discounted to pay for the freight costs between the two.
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So there's a problem.
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So for the commodity type stuff like barley like grains and wheat also, that's a relatively simple rearrangement.
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Others, you go to the other end and it's
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ago where we got wine, which is a much more high value added and branded and consumer oriented product.
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It's quite hard to switch markets quickly.
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So you need to create another channel somewhere else.
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So for those types of businesses, which is a commodity product, it's more differentiated.
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That process of switching takes more time.
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It's certainly a fascinating space at the moment in terms of agriculture, not only dealing with COVID-19, but just the general ag issues of weather, changing demand for crops and all of that.
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Tobin, fascinating to get your insights as always.
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Good to talk to you again, Bolida.
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Now, you can read Tobin Gorey's quarterly agriculture report titled How Soon Is Eventually on combankresearch.com.au and that was published on the 20th of November 2020.
