Orion chats with Luke Wilkinson about the drop in US pulse acreages, EU markets and how foreign exchange issues continue to cast doubt on imports around the world.
Orion Roy-Wright is a speaker on the White Bean panel at Pulses 23, the global pulse industry’s #1 event, taking place on May 28-31 in Sydney, Australia. Not registered yet? You can do so here.
It's been a very interesting year across the commodity sector as a whole. We've seen record high prices for everything, which has kind of translated into a weird year for pulses in which they are no longer as competitive to grow.
We’ve seen that the trend of increased demand for pulses seems to have taken a bit of a step back, especially across the protein sector where it’s slowed a little bit.
The biggest difference this year has been that the geopolitical situation has completely changed to the point where now money flow is an issue within the bean industry. We’ve seen a normalization of flow into Europe again, but then we've also seen some changes — Argentina has been continually creeping up on our demand as a supplier, and this year they obviously experienced quite a severe drought which caused the flow of US product to be a little bit more liquid into Europe again.
We're also experiencing very different problems than we were a year ago. There are serious inflation and financial issues, especially in some destination countries. Pakistan is teetering on the brink of not being able to afford to pay back their US loans, which is causing a lot of problems getting lines of credit (LCs) open. They’re having a lot of problems getting money out of the country. Bangladesh is experiencing a similar issue, though maybe not as acutely.
I would say in Egypt it has stabilized to a point where we can at least have our own joint venture in terms of liquidity or opening LCs with third parties. It's still an issue outside of two of the major importers.
Pakistan is in the throes of it. Next month they have a $3 billion repayment they need to make. They have $4.3 billion in forex reserves and about a $2 billion a month deficit, so it doesn't take a rocket scientist to figure out that this isn't working. Now, if the IMF can get them $3 billion, or half of that and the other half from the Emiratis or the Saudis, it should tide them over a bit, but there is actually no end in sight here. I’m not sure how this is going to resolve itself, which makes it a scary situation.
Sri Lanka has also obviously completely fallen off the map in terms of liquidity but we've still been able to see a good flow from Australia into Sri Lanka. They've been able to find outside capital to support their imports, on the pulse side at least.
The contagion has obviously spread. It’s probably too early to say, but we're getting to the point where it's becoming quite obvious that the banking sector cannot sustain increased interest rates at the level that we thought they could.
It’s likely that we are going to dip back into a mediocre to low interest rate environment, even if it means higher inflation has to be dealt with. What that looks like for these countries is very, very hard to understand because I think their inflation will continue at a rapid pace. Whether that means a collapse and then a new currency, or they go the route of Argentina, I don't know. But it makes for a very uncertain demand structure for us.
We’re now at an equilibrium, so it isn't as bad as when the euro just plunged. We were trying to price the US product in and it was very tricky.
But this is a constant thing that we have. The majority of the time we’re competing with Canada in the European bean sector, and it's just a currency play because if the Canadian dollar rallies, they'll come down into the US and bring them up to their plants and ship them out. And when it falls off, we can do the opposite. And then we're always competing in terms of what our position is — CAD versus Euro versus USD.
It's always a triangle, because we are pricing in USD to our customers, but they're selling in euros. So for them the math can be between 1.05 and 1.15 and this volatility has made it very interesting.
This is the bright light in the world! Container logistics are a completely different animal than they were a year ago. Especially going to Asia. The rates for that are a third of what they were.
We haven't seen the European corridors fall off quite at the same pace, but some of that has been just where the containers are and where they want to be. We do expect that the Mediterranean and the European corridors will start to fall off as well coming into Q3 – we're expecting some serious reductions. That said, we were expecting serious reductions in Q1 and Q2 and while they did chip away, the big reductions didn't materialize.
The other difference is the liquidity – you order a container, it comes. A year ago, you ordered a container and then maybe in 4 or 5 weeks, if they had one, they might send it to you, or they might not. Then the container would get the port and they would roll you and roll you. Three months later you finally ship the thing that you were going to ship in a week.
The main driver probably of a decrease in acres has been the fact that soybeans, corn and wheat are all paying basically record levels. They've collapsed over the last little bit, but in a time frame where most farmers are already planting. They can't change their seeding plans that quickly.
A lot of the decrease has just been that in the last few years pulses have not been as high on return per acre for farmers as they have historically. I think this is just the ebb and flow of the market more than a large overall trend but some of it also is the increased crush capacity going in on the oil sector because of biofuel mandates. You need to grow the soybeans and canola, and in the northern acres where they can either grow canola or soybeans or edible beans or peas – the pulse acres are going to get squeezed. So that's another macro portion taken away. Pulses are going to have to deal with the fact that at the current US policy level, the government wants us to grow more oilseeds to feed biofuel.
Everybody knows that a market can't go straight up, so you need to take a step back. So you may be seeing just a bit of a consolidation period prior to another round of growth.
“Pulses are going to have to deal with the fact that at the current US policy level, the government wants us to grow more oilseeds to feed biofuel.”
There's been more of a lag in terms of finding the actual demand than people had anticipated. As a result, the plants are not performing to the best of their ability. That isn't to say that they're wrong in the trend. It's just a timing thing. I think we will see the demand catch up and surpass and we'll see another large growth period, but it does feel like this year it's been a bit of a consolidation period where you probably need to see some plants rationalize and that can cause a flow on effect where people aren't fighting for those pulse acres or fighting for the bids. You’ll see the farmers respond to this, which means a few less acres.
There's also the agronomics - I would say every farmer in Montana is going to tell you that lentils sucked last year. They’re not going to grow them because it's two years in a row where they’ve lost money. When you look at the USDA numbers – peas up, lentils down – it doesn't make any sense if you look at the value.
So I think some of that flow is just people saying: “I'm not doing it again – the money looks good but I'm not producing it properly.” The agronomics aren't there right now, but I think that will rectify itself. We’ve seen an obvious change in temperature and in weather patterns – we’ve gone from La Niña to El Niño and that should create a wetter, more temperate situation in the US.
I don't think it's a long-term trend that we're going to see pulse acres deteriorate. I think they will continue to grow. I just think it's kind of a step back from all of these things meeting in a vector, and a drop in acreage has been the result.
I see a fundamental lentil story developing in India – the lack of pigeon peas could take us back into a more profitable situation. If you look at green lentils now, they've got to the point where they are profitable, but I think maybe they will take a year off. I also don't believe the USDA numbers – I think they will be higher. If you look at what green lentils will pay you to grow, farmers are going to grow more than the USDA is giving credence to.
We’re in a bit of a strange situation with peas as well. For years the driving factor was that India blocked the US, then we went to China for its protein industry. I think the US has also rapidly developed that industry, but acres will most likely stay stable to rising in the US, as they're going to have trouble increasing acreages with current fuel mandates.
On the edible bean side, I think the fall in soybean values we've seen over the last little bit will mean beans are going to be a very profitable crop for farmers next time around. I don't think they have the time to increase the acres this year but the way I see the market playing out this year, farmers are going to see a good payback. Pulses will be a competitive crop again because the outside markets have cooled down from the astronomical levels of the last couple of years.
Disclaimer: The opinions or views expressed in this publication are those of the authors or quoted persons. They do not purport to reflect the opinions or views of the Global Pulse Confederation or its members.
