How do our global and very interconnected markets effect resource volatility?
The evidence points to increasing resource volatility as globalization grows, including in agricultural products. “The globalized world increases the pressure on resources, making even basic food volatile, and especially increasing the pressure on energy and metals,” says Kai Goerlich, SAP’s Idea Director, who led the research.
This research is based on World Bank data and converted into 2010 U.S. dollars for consistency. This is part one of a two-part series.
Top 10 resources and trends
The top cotton-producing countries are India, China, and the U.S.
The cotton world had a bit of a shock last year when news came out that China was about to unload its massive cotton reserves, which sent prices down. But China didn’t actually flood the cotton market, and cotton production has also decreased somewhat, both of which reversed the price decrease.
The USDA also reports that production levels have recently decreased, particularly in West Africa. Demand from Pakistan increased because its own crop was damaged by pests – good news for India, which increased exports to Pakistan to make up the shortfall.
Maize, aka corn, makes up about a third of global cereal production, according to the World Bank. Maize production has increased over the past 20-odd years, mostly due to its increase as a crop in Asia. The Asian, Canadian, and Australian markets have had an effect on the U.S. Notwithstanding that areas of America’s Midwest are still known as the “breadbasket,” U.S. maize production is actually on a downward trend. It will be interesting to see if the Trans-Pacific Partnership, once (or if) signed will change that development.
Platinum might be known to consumers mostly for jewelry, but the primary market for this metal is automotive. The majority of platinum comes from South Africa; Russia is the second largest producer. The World Platinum Investment Council is predicting that the metal’s market deficit will decrease this year because of the increased availability of recycled metals and less demand. However, others think the deficit is permanent and predict that platinum will return to its historical price above gold. Much of this depends on demand from global industry, particularly in China.
Here’s an example of the global nature of resources: South African mine workers’ union contracts expire in June. Labor disruptions would, obviously, affect the availability and price of platinum worldwide.
4. Crude oil
It was only recently that the price for crude oil fell yet again due to high inventories, global output, and less demand. What a difference a raging fire can make. The fire in Fort McMurray, Alberta, which began on May 1, has forced the evacuation of the town and the major oil producers have halted or shut down production. This sent crude oil prices back up to almost $50 a barrel, from $26 earlier in the year. Canada is the U.S.’s major supplier of oil.
As with other wood products, there has been an increase in sawnwood production and demand recently, the biggest since the economic downturn post-2008, according to the UN’s Food and Agriculture Organization. There has been an increase in production in some European countries, in part because of recent wind storms that knocked down trees. Also, Europe is slowly reforesting, most dramatically in Ireland with a 52% increase in forested lands.
Lead is a valuable ore that is relatively simple to mine and has a high value, with a global market of approximately $15 billion. While production has slowed somewhat, it’s interesting to note that what’s referred to as the “secondary production,” which includes recyclables, is now almost at par with mined lead. In the U.S., most lead production comes from secondary production, and most of it is used for lead-acid batteries. And even though global stocks and production are decreasing, the price per ton is, too. One reason for that is the search and adoption of alternatives that are more environmentally friendly.
Sorghum is grain used mostly for livestock feed and ethanol products. The U.S. is the biggest sorghum producer, followed by Mexico and Nigeria. Its benefits are that it’s relatively drought- and disease-resistant. But that hasn’t stopped the global sorghum market from experiencing a downturn in demand, driven mostly by China for animal feed. China was responsible for almost 80% of U.S. sorghum exports in 2014-2015. But now it looks like China’s government wants to import less and is using up some of its own stockpiles instead.
A sweet tooth is about to get more expensive. There’s more sugar demand than supply for the first time in five years. This is good news for sugar producers; the price of sugar recently fell to below production cost. Weather conditions, particularly El Niño, have been a problem in decreasing sugar supply. The EU recently surveyed member states’ opinions on raising sugar supplies because the stockpile is heading to dangerous lows, with potential shortages as soon as this summer.
9. Meat and chicken
The world’s appetite for meat continues to grow. Again, China is driving consumption of chicken, sheep, and pigs, and Brazil takes the top slot for beef. Here’s some interesting data from the OECD about global meat consumption: yet again, China’s economic outlook and tastes are shaping global markets. A Chinese company recently purchased Brazil’s largest soybean producer – soybean is used as animal feed. The Australian government recently blocked the sale of a cattle station conglomerate to Dahang Australia, which is mostly controlled by the Shanghai Pengxin Group. The sale was for 2.5% of Australia’s agriculture land and 185,000 cattle.
It’s been a tough year for some tea producers. Assam, the state in India famed for its teas, has been affected by heavy rains and cool temperatures, which will have an negative effect on the “second flush” (second growth) teas. India is the world’s second largest tea producer (China is the largest; Kenya is third), and most of it is grown on Assam’s tea plantations. Heavy rainfalls, dry periods, and pests are all making tea growing a challenge. Tea is actually the second most popular drink worldwide – the first is water. As noted in this U.N. Food and Agriculture Organization report, tea is pretty picky about growing conditions, and there are only a few areas in the world where it grows well. Overall, tea production, exports, and consumption all grew, and the FAO predicts this trend will continue. However, climate change is a top concern of tea producers and could be the biggest challenge to established producing regions.
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