January 24, 2011

 

Weather woes to keep Asian grain prices high

 

 

Asian grains prices will remain high in the near future due to a series of weather-related problems and shrinking stock levels.

 

Weather-related shocks have surfaced in quick succession during the last eight months, starting with summer floods in Germany and Canada, followed by the worst-recorded drought in Russia around July and widespread flooding in Pakistan in August. More recently, Australia was hit by a double whammy of severe flooding in the eastern states and a major drought in Western Australia.

 

The Food Price Index of the UN's Food and Agriculture Organization rose 4% in December from a month earlier to hit an all-time high of 215 points. The FAO's Cereal Price Index rose 6% to 238 points, although it is still 13% below its peak of June 2008.

 

Unless something very dramatic happens, basic food prices will remain high and further increases are expected this year, said Abdolreza Abbassian, secretary of the FAO's Intergovernmental Group on Foodgrains.

 

Inventories of corn, soy and wheat are low and there are concerns about the size of crops in 2011, said Jay O' Neil, senior agricultural economist at Kansas State University.

 

The US has revised down its production estimate for the current crop several times in recent months due to falling yields, with the latest projection showing 2010-11 closing stocks at a 15-year low of 19 million tonnes.

 

Near-month corn futures on the CBOT are currently close to a 30-month high of US$6.60 per bushel, with traders expecting prices to breach the US$7/bushel level in the next few weeks.

 

Because of increased usage in production of ethanol, corn is getting additional support from the crude oil market and this could result in intense competition with other crops for limited acreage, potentially pushing up prices of soy and wheat. Farmers in the US will make their spring plantings decisions next month.

 

Demand from the US ethanol sector is limiting the supply of corn for food and feed use, said Koname Gokon, deputy general manager at Japanese commodity brokerage Okato Shoji Co.

 

In the case of wheat, at least half of the crop harvested in eastern Australia, has been downgraded to feed grade following heavy rains when the crop was ready for harvesting.

 

Russia, which exported 18 million tonnes of wheat in 2009-10, is no longer in the market after the government banned wheat exports until July 2011.

 

Large wheat stocks in the US cushioned the impact of the Russian ban when it was announced, but analysts said that another round of supply shortages could have an outsized impact as global inventories have shrunk considerably.

 

USDA has forecast a 10% drop in global stocks of wheat by May 2011, as countries have been using up stocks to make up for lower production.

 

India has surplus wheat after two bumper crops, but that is not available in the global market as the government has not yet lifted a ban on exports, imposed during the last spike in prices during 2007-08.