February 22, 2008

Global grain demand draining US supply
 

Despite the high costs for grains, global demand has reached record levels and US grain stocks have reached a critically low level, which would bring worrying concerns, according to Chris Hurt, an agricultural economist from Purdue University.
 

US wheat crop for 2007 was almost sold out, while domestic soy stocks could soon fall below a 20-day supply. Corn stocks are higher but with demand from export markets, livestock industry and ethanol plants, supplies could also run low. Yield could also be lowered if there are bad weathers.

Grain prices have skyrocketed in the past two years but despite so, wheat exports are up 32 percent, and 33 percent of US soy will be exported. Corn exports also look set to break the nearly three decades old record of 2.4 billion bushels.

The weakening US dollar has a part to play, as its decreasing value means that other countries can buy more US grains for less money than before.

"As an example, US$12 soybeans in the Midwest are equivalent to something in the range of US$9 to the world at this point. This suggests that the world will not cut back on grain usage as quickly, because as buyers purchase using their own currencies they are not experiencing as high a price as we perceive these prices to be in the US," said Hurt.

It might take another month of grain price increases to get users to cut back, Hurt said. He estimated soy prices would hit US$15 per bushel very soon.

US ended 2007 with a monthly food inflation rate of nearly 5 percent higher, Hurt said, and the rate might rise to 6 percent in 2008.

The same situation had happened in the early 1970s when the former Soviet Union bought out US wheat supplies, and soy also ran out of supply. The US government then reacted by placing an embargo on grain exports until stocks were replenished.

Hurt will not be expecting the export prohibition to take place again, but grain prices will have to keep rising to cool the demand.

Hurt expects farmland values and cash rental rates to keep going up as producers look to increase their crop acreage to meet the grain demand, and agribusinesses - especially those that offer seed, chemicals, fertiliser, machinery - could also benefit.

Given the current global demand for basic crops, Hurt said, the hope for 2008 is to have favourable yields throughout the world for consumers and crop producers to adjust to this new high-demand era.