The recent earthquake in Japan had short-term implications on the agricultural, energy and metal commodities markets. Aversion to risk prompted many traders to focus on treasury securities and gold, driving down prices of agricultural commodities. Beyond any short-term implications for input costs, there are widespread concerns in the food industry with regard to the medium-term consequences on food demand.
Commodity prices tumble in earthquake’s aftermath
Immediately after news of the 11 March Japanese earthquake and ensuing tsunami reached trading floors, aversion to risk prompted a flight in capital to safer treasury securities. This resulted in a short-term slump in prices for most agricultural commodities.
Wheat price futures rapidly reversed the gains achieved in early March, declining by 14% over the 7-13 March period. Similarly, corn futures declined by 10% over the 3-13 March period and cocoa futures declined by 14% over the 8-18 March period.
Market losses linked to frantic panic-induced selling were, however, short-lived. Underlying market fundamentals, particularly tightening stock supplies, prompted a steady recovery in wheat and corn prices during the second half of March. The recovery of cocoa prices was weaker, but this was linked to high expectations for a final resolution to the Côte d’Ivoire political crisis and a subsequent positive impact on the supply chain.
Beyond the short-term impact on commodity trading, there are concerns among analysts as to the mid-term implications of the Japanese disaster on the global food industry as a whole. There is consensus among industry sources that this impact will be largely determined by economic growth in the country in 2011 and 2012. This will in turn shape consumer behaviour over the next two years, which is set to have knock-on effects on Japanese food imports and therefore on global food demand.
Different growth scenarios
As yet there is still no agreement among analysts on the impact of the disaster on future Japanese economic growth. According to a report released by the World Bank on 21 March, the cost of reconstruction might range from 2.5-4% of Japanese GDP. Based on the experience of the 1995 Kobe earthquake, the report suggests that the disruption to imports will be short-lived and exports could return to previous levels by early 2012.
Overall, most analysts are discussing two possible scenarios. The first – worst case – scenario is contingent on the spread of nuclear radiation to urban areas, temporary evacuation of the population in key cities like Tokyo and severe disruption of food supply chains. Another – somewhat better – scenario would entail the short-term disruption of the supply chain, which is typical after natural disasters. There would be, however, no widespread radiation and no evacuation of the local population in major cities.
Regardless of models assessing the severity of the earthquake and its aftermath on the supply chain, most analysts agree that its most likely effect will be a slowdown in growth in Q2 2011. Beyond that, there is consensus that reconstruction work will underpin economic growth over the rest of 2011 and in 2012.
From a packaged food perspective, the economic disaster will likely have a positive effect on demand. Paradoxically, stronger economic activity is likely to result in higher disposable income and a revival in demand from the private sector. At the lower end of the market, those displaced and in direct need of help will underpin demand for mass-market food lines. This could in turn underpin retail volume growth of more economically priced branded and private label packaged food lines.
Conversely, stronger economic growth is also likely to benefit consumer demand for more premium- minded packaged food among those less affected by the disaster, or simply benefiting directly from a higher income. Overall, price polarisation in the Japanese market, a trend prevalent since 2005, is likely to advance further over 2011 and 2012.
The effects of the Japanese earthquake will likely transcend Japanese borders. Japan is a net importer of food, and the disaster is likely to have damaged its productive output not only in cities but also in rural areas. Paradoxically, demand for agricultural commodities used in the farming industry, particularly corn, is predicted to be weakened by the disaster. Japan is the largest importer of corn, and traders see the damage done to livestock operations in the northern part of the country as a reason to suspect lower import needs over the near term. Some traders indicated a drop of nearly 8% in monthly imports as a rough estimate.
Conversely, a reduced livestock headcount could result in an increase in demand for fresh meat, which would in turn contribute to a rise in international prices. Demand for fresh meat at global level is being driven by China, which is expected to increase its total volume consumption of fresh meat by 20 million tonnes between 2010 and 2015, according to Euromonitor International’s projections. A surge in fresh meat imports from Japan might result in a moderate slowdown in demand for fresh meat in less affluent countries unable to compete in price terms with more developed economies. Such a trend might have implications on demand growth for fresh meat not only in China, but also in emerging South American economies like Brazil.
Beyond the medium-term effects on fresh meat and agricultural commodities, there is agreement on the risk that financial implications might pose to the real side of demand. Funding reconstruction might lead to both corporate and government liquidation of assets abroad in late 2011 and early 2012. That in turn would result in a strong appreciation of the yen, an effect already taking place in the aftermath of the earthquake. If that is the case, the import costs of food and raw materials into Japan would be comparatively lower than in previous years. This would have an effect on both internal and external demand for processed food.