DATA: What happens to oilseed and grain prices in a recession?

12 Mar 2020 | Andy Allan, Rei Geyssens

With governments around the world quarantining cities and the US banning all flights from many EU countries, analysts are now predicting with growing confidence that a recession is likely on the cards this year.

China – long the global engine of economic growth – is facing what some analysts say is the biggest slowdown in growth in decades.

So, what impact does a downturn have on oilseed and grain prices?

We at Agricensus crunched the data from the last three economic downturns and compared it with consumption.

Financial crisis

In the last economic downturn from January 2008 through June 2009 – which was also one of the most severe – soybeans fell from a peak of almost $16.50/bu ($606/mt) to a low of $7.76/bu in the space of just four months – a whopping fall of 53%, according to CME data.

Over that same period, corn fell 55% from peak to trough from $7.37/bu ($290/mt) to $3.29/bu, while wheat fell 63% over the same period $13.70/bu to a low of $5.02/bu.

And while from a graph that looks easy to slap the blame on the downturn, global consumption of wheat, corn and soybeans actually grew from 1.65 billion mt in 2008 to 1.72 billion mt in 2009 and to 1.77 billion mt in 2010, a rise of just under 4% per year.

This was at a time when global GDP fell from $63.7 trillion in 2008 to $60 trillion in 2009 before rebounding to $66 billion in 2010, according to IMF figures.

So what was the driver of the price decline if it wasn’t a slowdown in demand?

Two factors were likely at play here.

The big driver was oil. Crude prices fell from $147/bbl to $33/bbl over a very similar time period – a 77% drop.

And the oil collapse had two impacts – firstly it hammered down the price of producing crops through lower fuel prices and secondly it brings down the price of gasoline and diesel, which in turns pressures ethanol and soyoil prices through biodiesel.

A second factor, and a much more marginal one, was the increase in global production between 2009 and 2010, with production rapidly rising 5% from 1.7 billion mt in 2008 to 1.78 billion mt in 2009.

Early 2000s and Black Monday (number one)

In the financial downturn of 2001, which saw global GDP fall from $33.8 trillion in 2000 to $33.6 trillion in 2001, global consumption of those three products rose from 1.36 to 1.39 billion mt – a rise of 2%.

The figures again show that soybean, wheat and corn consumption are relatively immune to a downturn in economic growth.

So, what happened to prices over this period?

All three commodities traded in a relatively narrow range of 20% with corn trading from $1.87/bu to $2.35/bu, wheat trading in a $2.54/bu to $2.96/bu range and soybeans trading from $5.30/bu to $4.20/bu.

Indeed, crude oil prices averaged 20% lower in 2001 compared with a year earlier, showing crops had a strong correlation with black gold.

And in the 1990/91 downturn, consumption again rose by 2% while global GDP was broadly static.

Oil prices dumped around 15% over that period while corn, soybeans and wheat fell 20-25%.

Covid-19 puzzle

So, from the data we can conclude two things: consumption rises 2-3% per year irrespective of GDP; and crude oil prices should have a big impact on agriculture futures.

While it’s too early to say that the current crisis won’t impact consumption, we can say that Chinese consumption of soybeans is expected to flatline – a more bearish sign than previous recessions – and the USDA is expecting just a 1% increase in demand in the 2019/20 year versus historical growth of 2%.

At the same time, production is expected to increase in the 2019/20 marketing year compared with a year earlier.

These are both bearish factors.

Yet, at least so far, the 30% collapse in stock markets and 55% slump in crude prices since the start of the year has not filtered through to the agricultural markets.

Instead, corn is down 7%, soybeans are down 10% and wheat down 12%.

Even soybean oil futures – which should be most correlated to crude through biodiesel prices – have fallen just 25%.

So, what’s different now?

One reason may be that while current stocks-to-use ratio is at average historical levels, sellers are happier to stockpile grains and seeds now more than they ever have been.

Testimony to this is, while stocks were expected to be far higher a year ago than they currently are now, even then prices of those commodities were only 5-10% lower than current levels.

In addition, credit is cheap and cash is plenty (two US government bailouts help) and they may well think this is a temporary blip. 

Yet no-one knows the impact of Covid-19 and it remains to be seen as to whether agricultural futures will return to type and track oil lower or react in a way that we have not seen in any of the last three economic downturns.