January 4, 2008

Oil surge lifts grain prices to multi-year highs

Agricultural commodities rose to all-time highs Thursday (January 3) on the Chicago Board of Trade (CBOT) following crude oil's surge to US$100 a barrel as traders anticipated higher demand from the expanding global biofuels industry.

Soy jumped 19 cents in CBOT to US$12.51½ a 34-year high. Corn traded up 3½ cents at US$4.66 a bushel, within touching distance of its recent 11-year high, while wheat prices jumped 30 cents to US$9.45 a bushel, just below its recent all-time high.

As grains and oilseeds are key feedstuffs for biofuels, the oil price rise has exerted a huge push on agricultural commodities, which enjoyed their best returns for almost 30 years in 2007. The S&P GSCI agricultural commodities index returned 31 percent last year, its best performance since 1981. Support is also coming from population growth and animal feed demand.

Jeffrey Currie, head of commodities research at Goldman Sachs, said the combination of food, feed and fuel demand for crops has created an upward trend demand growth for agriculture products.

He said global biofuel demand could increase from 10 billion gallons a year in 2005 to 25 billion gallons annually by 2010, posting a yearly growth rate of 20 percent.

Extreme weather events and drought have hit harvests and exporting countries, such as Russia and Ukraine, have imposed export tariffs to ensure their domestic supply base remains secure. Key consuming countries, such as India and Egypt, have been scrambling to secure supplies, ensuring that overseas demand for US wheat and corn is running at near-record levels.

As a result of supply disappointments and rising demand, stocks have fallen to historic lows in many agricultural markets, leaving prices very susceptible to upward price shocks.

Many analysts believe the rally for agricultural commodities is only just the beginning. According to Michael Lewis, prices for agricultural commodities today are still significantly below their real highs in terms of inflation adjustment, so their valuations remain very attractive.