No year in modern memory has revealed as much as 2020 did about the vulnerability of our world and of global supply chains. It was a year of unprecedented, seismic-type shifts for our customers that brought about structural changes. Structural changes that the data tells us are here to stay.
The Gro platform delivered unparalleled breadth and depth of insights into the events of 2020, providing root-cause clarity that has enabled and powered improved decision-making as our customers nimbly planned for events at every turn.
COVID-19, climate-related disasters, climate risk, China’s growing appetite for food, and an increased focus on food security as part of national security – these were parallel themes that shaped the global agriculture and climate markets in 2020.
The data and models in our platform strongly indicate that these themes will not only continue to be front and center in 2021 but will determine the course of markets well beyond 2021. The impacts on agriculture and climate markets will be structural and be felt by generations to come.
The COVID-19 pandemic caused massive disruptions in global shipping and consumer demand that continue to reverberate through the economy. The economic dislocations caused by the pandemic have resulted in currency shocks which have contributed to food price inflation globally. Both supply and demand fundamentals as well as macroeconomic indicators show that this food price inflation trend will continue.
Climate-related disasters struck one after another, impacting crop production around the world. A year that saw an unparalleled number of climate disasters also brought climate risk into focus for financial regulators in the US, who joined their counterparts in Europe in setting the stage for a new era of assessing and managing climate risk. After years in a row of global climate “anomalies" and lower than expected crop production, it seems prudent to reinforce preparations, in 2021 and beyond, to manage for these new climate and production norms and the anomalies that will develop from here on.
China single-handedly shifted the landscape of global demand as it rebuilt its hog herd after the devastation of African swine fever. In response to a tightening of food supply, China’s President Xi Jinping stated that “food security is national security,” signaling a tectonic shift in China’s priorities for the near future.
The high-demand environment, combined with COVID-driven currency devaluations and climate-related supply constraints, has driven food prices upward worldwide. This macroeconomic backdrop has led several national governments to focus on food security as never before. The actions governments have taken, and will continue to take, to ensure food security for their citizens will reshape global food and agriculture markets for decades.
We dive into each of these four themes, and what they mean for 2021, in greater detail below.
The COVID-19 pandemic jolted global food supply chains, resulting in significant retail price volatility worldwide. Shipping disruptions at the beginning of the pandemic caused swings in global trade flows. Global travel ground to a halt, driving oil prices into negative territory, and shuttering ethanol and biodiesel production as a result. The sudden disappearance of on-premise dining led to massive food waste as supply lines realigned themselves.
While food price volatility has calmed down in recent months, as shown by Gro’s food price indices for China and the US, other effects further up the supply chain may have more lasting consequences.
In many agricultural sectors, such as palm oil, labor shortages due to the pandemic have led to production shortfalls, contributing to food price inflation worldwide. In others, such as beef, oversupply will continue to weigh on prices for some time to come.
Global supply chains will be tested even more as we continue to grapple with COVID-19 and as demand recovers in a post COVID-19 world alongside all the other systemic shocks discussed in the sections below.
Climate Disasters and Climate Risk
The world experienced a record-breaking number of natural disasters in 2020. The year opened with the worst Australian bushfire season on record – followed immediately by torrential rains. Record numbers of hurricanes affected the Atlantic and Caribbean, then typhoons caused heavy flooding in China’s corn belt at the end of summer. A rare derecho windstorm hit the US Midwest in August, causing significant crop damage. Giant wildfires raged in California, Oregon, and Washington states, which caused produce prices to spike.
The biggest swarms of desert locusts seen in decades formed in the Horn of Africa and spread as far as India – their swarming was at least partly due to uncommonly dry conditions. Within the hardest hit countries – Ethiopia, Somalia, and Kenya – approximately one-third of all cropland has been impacted by the swarms.
The year ended with a La Niña cycle sowing chaos in major agricultural markets. Drought and dry conditions in Brazil and Argentina threaten recently planted soy and corn crops and raise concerns about the world’s ability to meet ever growing global demand. Wheat crops have been suffering from dry conditions worldwide, with Argentina, the Black Sea region, and the United States all feeling the effects. This crunch is mitigated by much-needed precipitation in Australia, also because of La Niña, where wheat production in 2020/21 is forecast to nearly double from last year as rains return after a prolonged drought. Keep an eye out for more La Niña-driven crop effects in 2021 as La Niña cycles are multiyear events.
With all this as a backdrop, the decision by financial regulators in the US to begin incorporating climate risk into their regulatory frameworks was particularly timely. The Commodity Futures Trading Commission (CFTC) declared for the first time in a landmark report, released in September, that “climate change poses a major risk to the stability of the U.S. financial system and to its ability to sustain the American economy.” The Federal Reserve joined the Network of Central Banks and Supervisors for Greening the Financial System (NGFS) in December.
Together, these moves send a clear signal that, going forward, companies and financial institutions will be asked to measure and manage their exposure to the effects of climate change. The Bank of England and the EU are leading the way with regulations requiring corporations to disclose their exposure to climate risk, which come into effect on March 31, 2021. The US is now heading in the same direction.
Companies and financial institutions globally will feel the effects of these regulatory decisions, and will need to rapidly develop plans for measuring and managing climate risk going forward. Gro has created applications that companies can use to analyze the level of exposure their physical assets have to extreme weather events or long-term changes in their local environment.
Historical environmental and weather data, as well as climate model projections and analysis, which are available in the Gro Platform indicate that climate change exposure will have very disparate impacts both geographically and over time. Gro’s various Climate Indices allow companies across industries and financial institutions to better assess climate trends and variation. These trends and variations can be specific to any region of interest in the world and can be viewed on a historical and going-forward basis.
For example, Gro’s Drought Index (GDI) aids in issues ranging from an assessment of crop health to monitoring wildfire risk. The GDI provides actionable insights and enables the creation of risk products which can span from the general to the particular.
For longer-term planning, the Gro Variability Index for Precipitation provides measures and indicators of regions where rainfall has become less stable over time. The Gro Climate Change Index for Precipitation estimates where that variability is headed. These indices are applicable to any industry.
China’s Growing Appetite
China began to ratchet up demand for global grain as its hog population rapidly recovered from the devastation of African swine fever in 2018-19. As hog and pork supplies have recovered, and hog prices have fallen from record highs, consumer demand has grown. This has created an upward spiral in feedstock demand. Imports of soybeans from Brazil and the US hit record levels, but the effect on China’s corn balance sheet was even more pronounced. With domestic corn stocks running low, China turned to the US for huge amounts of corn, and also started to import more wheat, sorghum, and other grains from around the world.
These trends, along with the disruption caused by COVID-19 and this year’s typhoon season, have prompted the highest levels of China’s government to pay greater attention to food security, as demonstrated by Xi Jinping declaring war on food waste this August. In July 2020, Gro produced a Real-Time Assessment of China’s push for food security that analyzes short-, medium-, and long-term policies proposed and enacted, as well as provides world-leading predictive models on China’s prices, production, and trade flows. As the largest consumer and producer of agricultural products, the policies China adopts will have immediate and profound effects on agricultural industries around the world in 2021 and for decades to come. China is making a historic shift from being self-sufficient to being a net importer of grain to meet its food demand.
Food Security in Focus
Food security is national security. China was not the only country to take action on food security this year. The most obvious sign was the use of trade measures by different countries to control inflows and outflows of agricultural products. Some countries threw up trade barriers – Indonesia and Malaysia raised their export taxes on palm oil, and Russia moved to restrict exports of wheat, other grains, and vegetable oils. Others, finding themselves in need of imports, lowered them, as Brazil did for imports of corn and soybeans. As we write, Argentina has just announced a ban on corn exports until March 1, as part of an effort to stabilize rising food prices in the country.
As the market tightens heading into 2021, many other countries will look to protect their food security, either through trade measures as we have seen in 2020, or through the diversification of their import partners. Food security is national security.
Governments, corporations, and our global society are still far from being able to fully understand, or even measure, the ultimate impact of these issues, individually or collectively, on the global agricultural ecosystem and food supply chain. Most notably, the ability to analyze the potential ramifications of climate risk across and within industries and nations is in its infancy.
Gro remains steadfast in our commitment to provide our customers with relevant and timely knowledge, insights, and applications on the Gro Platform that will enable decision-makers to better navigate these complex and unsettled times.
Most of these issues will continue to affect the agriculture and climate markets in 2021 and beyond, and Gro’s platform will continue to empower decision-makers with the knowledge, insights, and tools to enable teams to better measure and manage supply chain volatility.