Insight Conversation: Darren Stetzel, StoneX

The latest UN Food and Agriculture Organization's price index for August averaged 121.4 points, the lowest since April 2021. The index, weighed down by declines in dairy products, vegetable oils, meats and cereals, is 24% below its peak in March 2022. StoneX Vice President for Soft and Agricultural Commodities - Asia Darren Stetzel spoke with S&P Global Commodity Insights Managing Editor of Grains and Oilseeds Elizabeth Thang about the recent FAO price index release and his views on the potential long-term trade flows for grains.

The FAO food price index has been trending lower since the price shocks in 2022 though still elevated compared to 2020 and 2021. How do you see prices trending for the remainder of 2023 and what are the key driving forces?

Inflation and the Fed's outlook are key factors that will drive prices this year. Economic data shows inflation risks have subsided significantly. The large consensus is there will be no more rate hikes for the remainder of the year. Prices are likely to continue their trend lower unless other unforeseen fundamentals come into play, such as El Nino weather concerns. Any bullish momentum will also be driven by gains in vegetable oils, sugar and cereals -- but the expected fall in dairy and meat will maintain a cap on the upside.

Can you elaborate on what is supporting your bullish views on vegetable oil, sugar and cereals as well as your reasons for dairy and meat to soften?

Vegetable oil supply is tightening with the Argentinian crop being lower than expected. Even though Brazil's output is increasing it will take some time to balance the market, so we anticipate supply pressure through to the end of the year. This is happening as demand from China continues to rise as the country moves on from COVID-19.

Sugar supply is lower in Thailand and India this year and there is no expectation of any improvement next year. Global sugar consumption should also return to pre-pandemic levels and ethanol demand should increase.

USDA feed grain production is expected to be lower, with US and foreign coarse grains output lower, driven mainly by corn and barley. The ongoing [Russia-Ukraine] war and uptick in demand should add further price support.

On a more global scale, short-term meat consumption should most likely stay a tad suppressed due to cost of living issues faced by most consuming countries. In the medium-term there could be more stability after 2023, with China forecast to lead a recovery in demand.

Lower export prices should see the farmgate milk price fall from record highs, with global dairy prices falling as global supply rises and demand from China weakening.

China is a major importer of grains and oilseeds but some imports have slowed down this year. What are you views on the Chinese demand picture?

The failed stimulus to improve consumption is a worrying factor in China. Unless there is fresh or improved stimulus to revive demand, the situation will continue. China does still need to feed its population, so we anticipate a natural rise in grain demand despite economic recovery not being positive. High levels of youth unemployment are a mitigating factor going forward. Younger generations are looking more to the financially secure elder generation to support basic needs such as access to food.

Crop supply is only one piece of the puzzle and food has to be transported from countries of surplus to countries of deficit. Asia is a major importer and freight transport cost impact bottom lines. Where do you see challenges that could impact food prices?

The Panama Canal drought is a cause of concern given it coincides with a risk of the El Nino weather phenomenon intensifying this year, leading to even drier conditions. Climate risks will affect supply chains adversely and could lead to consumer prices becoming elevated in the short- to medium-term.

If El Nino fails to intensify then of course the canal will recover and global freight will resume with few interruptions.

These situations only highlight the need for further innovation in the global shipping market to reduce a heavy reliance on the Panama Canal as a key route.

Related podcast: El Niño spells dire straits for shippers at the Panama Canal

Brazil is in pole position for soybean exports and now corn. Is this the new normal? Do other origins have a fighting chance to stay in the game? What are the factors that could tip the scales?

One obvious factor is Ukraine and recent positive news regarding the revival of the Black Sea Grain deal. Even if the deal gets partially reinstated, it could result in the country becoming a major player once again in the grain exports game.

For the short- to medium-term Brazil will stay in pole position. Agricultural practices are more advanced compared to smaller countries in the trade, which is a competitive advantage in its efficiency as a leader in global exports.

Brazil production of grains and oilseeds have risen exponentially in the last decade, breaking records in corn and soybeans. The US is also reaping a record corn crop this year. Do you see the supply surplus translating to lower costs for buyers and ultimately for consumers?

Ultimately the increased supply will lead to lower costs for buyers, but there is a concern whether this will get passed on to end-consumers. Companies may take profits when considering the decreasing raw material cost to avoid any future supply and demand shocks.