| Corn, wheat and soyabean prices have fallen heavily over the past six weeks. Corn prices are down 34.6 per cent to $5 a bushel after reaching a record $7.65 a bushel in late June this year, while soyabean prices are down 27.8 per cent to $12 a bushel after reaching an all-time high of $16.63 a bushel in early July 2008. Wheat prices have fallen 10.7 per cent to $8 a bushel since the start of July, extending their losses since reaching a high of $13.34 a bushel in February. Improvements in wheat output in other major producers such as Canada and Australia have pressured prices, but traders remain sensitive to supply disruptions in corn and soyabean markets. Good weather and increase in acreage could push the EU's cereal harvest—including beet sugar, sunflower and other crops to 16 per cent above last year's level.
While the fundamentals were intact before and remain so even after the prices of agricultural crops have fallen, these agricultural commodities are caught in the broad sell-off that has engulfed commodity markets during the summer of 2008. A process of reducing risk and de-leveraging by hedge funds has been seen lately. This has brought about a sharp decline in the price of crude oil, which has in turn weighed on sentiments towards agricultural commodities. It is being said that drop in prices reflects slowing global demand, which is sapping demand for raw materials. Ace investor Jim Rogers calls agriculture the business to be in and if one wants to become rich, he should become a farmer. He is bullish on agro products whose inventories globally are lowest.
Total EU wheat yield may be up 10.4 per cent from the 2007 figure to 5.35 tonnes per hectare and about 6 per cent higher than the average for the past five years. EU production may be 141m tonnes, an increase of over 20.9m tonnes over the past year. The overall EU barley yield is also forecast to rise 5 per cent to 4.4 tonnes per hectare. Grain maize yield may be 20.1 per cent higher at 6.9 tonnes per hectare. Production of grain maize is forecast to double in Romania to 8.7 m tonnes per hectare and the two largest producers of the crop—France and Italy are also expected to register increases. For wheat, the USDA predicts plantation of 63.5m acres, producing 2,461m bushels.
According to Jeffrey Currie, commodities strategist at Goldman Sachs, stocks of corn and soyabeans remain low and delays in planting in spring could expose immature crops to frost damage in September 2008. It is also believed that the decline in energy, commodity and food prices (a result of weak demand) is itself going to fuel demand. Much of the US Midwest has been badly affected by floods this year and fears about possible damage to corn and soyabean output together with concomitant speculation had helped drive prices to record levels. Floods after the September 12 record rainfall are giving grief to corn and soybean producers in Illinois and Iowa. The rainfall was "too much and too late" to bolster yields, and could have caused heavy crop damage.
Sugar prices may scale Rs 2,000 per 100 kg by December, from Rs 1,650 at present, as acreage has declined to 4.4 million hectares from 5.3m hectare last year. Besides, the diversion of sugarcane to produce ethanol will boost prices.
Rising demand for edible oil in India should ensure that soya prices remain robust. For soyabeans, USDA projected farmers would devote 74.5m acres to soyabeans. Assuming a yield of 41.6 bushels an acre, a harvest of about under 3 billion bushels is expected. According to Lewis Hagedron of JP Morgan, soyabean market is facing a shortage due to strong global demand, and warns stocks could remain “precariously low” in 2008. Although the USDA expects soyabean stocks to rise 12 per cent to 140m bushels by year-end, JP Morgan expects inventories to decline to 121.7m bushels. On September 12, US soyabean slated for delivery in September 2008 jumped a stunning 22.5 per cent as traders scrambled to cover their short positions for beans they could not deliver on contract expiry
The USDA's report indicated farmers would plant 87.3m acres of corn in 2008-09 and assuming a yield of 148.4 bushels an acre, forecast a harvest of 11.715 billion bushels. The precarious agricultural crops supply situation seems to indicate that supply disruptions could dramatically impact crops’ yield and their prices. Seeing how the supply-demand situation is precariously balanced at this point of time, crops seem to be priced for perfection. (The writer is the CEO of Global Capital Advisors. Financial Chronicle does not warrant the quality or accuracy of the article. It shall not be deemed a recommendation by FC for buying or selling or investment of any kind. Investments are subject to market risks. Past performance does not guarantee future success. It is advisable to seek advice from a qualified independent adivsor before investing) |