27 February, 2021

AgriBonds Will Continue to Do Well in the Near Term

Climate change will cause a profound impact on our food security.  Agricultural areas are at risk from the effects of temperature changes.  Changes in ocean currents and temperatures will affect fishing and fisheries.  Desertification is a risk for many areas.  This means the price of putting food on the table will rise, even as quality may be inconsistent.  In the meantime, agriculture commodity markets are expected to do well, because the price of the product will rise. 

In 2020, there was a bull run in agriculture commodities which defied expectations and proved immune to Covid-19’s economic and social consequences.  People still need to eat, even amidst an epidemic.  And people stuck at home tend to eat more.  It is true that coffee and cocoa suffered, but grains and oilseeds reached multi-year highs.  Even commodities associated with the energy complex, and GDP growth, palm oil and sugar, performed well. 

This is easily explained, on hindsight.  We know that speculators bought record amounts of agricultural commodity futures in 2020, feeding that price upside.  The fiscal and monetary stimulus created a flow of funds out of sovereign bonds, since yields dropped.  Investors were looking for alternatives, and agricultural commodities were attractive investment assets.  Speculation is part of the reason prices are expected to drive up. 

We also owe these prices to the resilient demand of many markets, most especially China, which was stocking up on corn and soybeans.  This demand will slowly decline in the coming year, which will lead to some surplus, dampening prices in the near term. 

That being said, this surplus will not last long because climate change, and a worsening La Niña and will continue to be a major challenge for farmers around the globe, negatively impacting the availability of agricultural commodities in general.  Countries, in order to secure their food security, will continue to drive prices up as they seek to secure adequate supply of these commodities, particularly wheat, corn. and soybeans. 

Food security is the key point here.  There will continue to be a scramble for all sorts of agricultural commodities, and this is expected to exacerbate in time.  Speculation will feed that rise, but speculation creates temporary bubbles.  In the long term, the trend is towards scarcity, meaning rising yields.

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