Agricultural Volatility Then and Now: Comparing 2022 to the Emerging Market Commodity Boom

Like in the present-day, volatility in 2008 was caused by a supply-demand imbalance. But in addition to some supply-side commonalities to the present, 2007-2009 was characterized by a demand-side burst  (on top of a global recession that complicated access to credit). The figure below, for example, shows global production vs. usage of soybeans. The crop years 2007/2008 and 2008/2009 exhibit usage exceeding production to the greatest degree since the beginning of record.

Though the period of 2007-2009 is generally associated with the Great Recession and the U.S. subprime mortgage crisis, the ascent and accelerating growth of emerging markets, in particular the BRIC nations of Brazil, Russia, India and China, shared economic precedence.  

The BRIC nations were characterized by large and young populations, vast natural resources, rapid industrialization and urbanization, and what economists determined to be an intermediate stage of economic development. Expectations for the BRIC nations were so high that in 2006, Goldman Sachs released a report entitled BRICs and Beyond, in which it projected that in 2050, the top 10 largest economies would include China, the United States, India, Brazil, Mexico, and Russia. Under this prediction, China, India, Brazil and Russia would see real growth of up to 4,000%  during the period 2006-2050. While China, India, and Brazil have largely proved worthy of the economic confidence imparted on them, in growth to date, Russia has been a notable underachiever.

Indicative of the country’s urbanization and increasing wealth, China’s soybean imports skyrocketed in the 2000’s, from annual imports totaling only hundreds of thousands of metric tons in the 1990’s to 50 million metric tons in the 2009/2010 crop year, to over 90 million metric tons in the most recent crop year.

Such an increase in consumption put pressure on soybean exporting nations, including the United States. The growth in demand, predictably, was a tailwind for soybean pricing.

As BRIC nations increasingly demanded imports to feed their growing populations during the 2007-09 period; weather, trade and economic dynamics convoluted global trade. A drought in the Southeastern United States complicated the growing season for some U.S.-grown field crops. Meanwhile, the period saw a massive acceleration in the production of corn-based ethanol, fanning the flames of the “food vs. fuel” debate by diverting a significant share of corn from both exports and domestic food and feed use. Echoing present-day issues, fertilizer prices skyrocketed in 2008, driven by increased demand and the slowness of the domestic fertilizer industry to adjust to new fundamentals. 

An important difference between then and now is the availability of more sophisticated risk management tools. Times have changed since the commodity boom of the early 20^th century, and so have the hedging tools available. Short-Dated New Crop Options, for example, were listed in 2012 and allow participants exposure to longer dated contracts such as December 2023 Corn or November 2023 Soybeans with shorter time horizons.

This allows participants to gain exposure with lower premiums than conventional long-dated options.

The drivers of the commodity boom of the early 20^th century are considerably more ingrained with, for example, a notable deceleration of China’s consumption not beginning until 2015, when investors and supply chain players grappled with slowing Chinese demand.

Early 2022 volatility is largely attributable to supply disruptions stemming from the Russian invasion of Ukraine. The Russian invasion of Ukraine interrupted the factors underlying what many predicted was another commodity supercycle, increasing the sensitivity of agricultural markets to more classically endogenous forces such as weather.