Costs for agri-commodities will hover high in the short term with prices "more likely to rise than fall", despite a contraction in global demand, concludes a new report from Credit Suisse.
And in contrast to the USDA's "optimistic view of supply", the bank predicts a 3 to 4 per cent fall in crop production over the next year.
"Compared with consensus, we think the short-term outlook looks more problematic for agricultural supply than it does for demand," said the report authors.
Following the soaring input costs of 2008 which saw double-digit price rises for staples such as wheat and corn, the outlook from Credit Suisse augurs a continuing squeeze on balance sheets, and this in a more challenging credit climate.
The bank sees three key factors behind the fall in crop output: Firstly, falling planted acreage in the US, Brazil, Argentina, and CIS (former Soviet republics).
Secondly, a sharp reduction in fertiliser application; their fertiliser analysts estimate an average fall in nitrogen application in 2008/09 of about 10 per cent and 30 to 40 per cent for potash and phosphate in the US and Europe.
And finally, adverse weather in some areas – Argentina, northern China and parts of the US – has also impacted the drop.
Financing problems, suggest Credit Suisse, are partly to blame for some of these developments – particularly in Latin America and the CIS – but faced with the global demand and a more uncertain demand scenario, "farmers across Europe and the US appear to have deliberately curtailed production".
USDA more optimistic
Their view contrasts with the US department of agriculture's crop production forecasts issued on 12 May this year. Therein, the USDA suggested higher global production in most of the major grains this season compared with last.
The US government predicted that total world grain production will rise 4.9 per cent in 2008/2009 against the record production of 2007/2008, and up 3.1 per cent in the 2009/2010 season compared with 2007/2008.
Credit Suisse analysts deem that if these figures are correct, it "would be remarkable" in so far as this would be "the first global recession to coincide with increased crop production."
Post-war recessions and crop falls
According to the bank, data from the UN's Food and Agriculture Organisation (FAO) show that the beginning of all previous post-war recessions has coincided with a fall in total crop production.
The FAO figures reveal that calorie consumption per head typically contracts in a recession.
Indeed, underline the analysts, "the nature of this recession, driven, as it is, by a sharp withdrawal of credit from the system," means it is particularly "unlikely" that any of the mainstream industries can avoid some sort of contraction in production.
They calculate a contraction in global food demand of between 0.5 per cent and 1.5 per cent in 2009.
On the influence of biofuels on food prices, the report suggests that demand for biofuel is also likely to be weak but since the industry still accounts for a "relatively small proportion of global arable acreage", the overall impact is likely to be "fairly muted".
The analysts "conservatively assume" a 10 per cent fall in US and Brazilian ethanol production and a 40 per cent fall in EU biodiesel production this year. In total, they estimate it would take about 0.5 per cent off global agri-demand.