Perrin: Demand matters too
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- Published on Thursday, May 16, 2013
By: Steven Perrin
myWestman.ca
For the last six weeks, most of the space in this column has been devoted to discussing and analyzing developments on the supply side of the farming industry.
And rightly so; the recent release of some very important stocks and production reports and the fact of it being planting season in North America means we've been passing through a crucial window of activity as far as supply is concerned.
For this reason, it can be easy to lose sight of demand-side developments this time of year. We shouldn't; they can also have important impacts on the markets as we move ahead.
As far as demand goes, one question many analysts are asking is whether we can expect a return to the demand levels we were accustomed to before the challenging production year of 2012. High prices and tight stocks in the last year have caused significant demand rationing across the industry. If harvests return to approximately normal levels as many are expecting, can we rely on demand to respond in kind?
To a large extent it depends on the nature of the demand and the relative ease with which a commodity whose price is increasing can be substituted for a cheaper one. One trend we witnessed in the last year was a substitution away from higher-priced soybean oil towards cheaper and more-readily available, but also lower-quality, palm oil.
This was particularly the case in more price-sensitive markets. With South America reporting a much larger soybean harvest this year, soy oil may reclaim some of that consumption back, although only at prices that are below than what we saw last year.
In contrast, demand for canola oil is less price sensitive. It’s reputation as a healthier oil means its demand is more inelastic, particularly as living standards around the world improve and more people seek out healthier diets.
Canola prices are still influenced by other vegetable oils so won’t be completely immune to any weakness from soybeans, but its unique demand characteristics can help cushion prices in the event of a wider market downturn.
Another question: if grain and oilseed prices drop significantly, will countries like China, whose governments try to smooth out price swings by maintaining large stockpiles of these commodities, engage in a buying spree that could make up for lower demand elsewhere? It's hard to predict China's behaviour so this factor is a bit of a wild card.
Then there's the livestock industry, which suffered greatly from spikes in feed costs. Herd sizes were reduced; how long will it take the industry to bounce back?
Overall, we must remember that supply is only half of the equation. We may very well see a return to normal production levels this year but how the demand side responds will ultimately impact where prices go.
Perrin is a marketing advisor in Rivers with FarmLink Marketing Solutions.
