July 24, 2012

 

US grain prices likely to fall 19%, moderating food inflation

 

 

By year-end, skyrocketed US grains prices could drop as much as 19% from their drought-fuelled peaks, a decline that could calm expected inflation for a variety of food ranging from meats to cereals to cooking oil, a Reuters poll showed.

 

The poll of nine analysts showed that prices for grains will keep climbing over the next two months to fresh highs, then taper off after the US harvest, and as traders turn their attention to crops in the southern hemisphere and preparations to plant crops anew in the US for harvest next year.

 

Prices at the end of the year, however, will remain historically high, with Chicago Board of Trade (CBOT) spot corn futures seen at US$6.91 per bushel, the highest ever for that time of the year. But it will be off 17% from its current all-time high of US$8.28-3/4 set on July 20. The poll showed that corn futures are seen peaking at US$8.87 in early August.

 

Investment bank Goldman Sachs on Monday (July 23) raised its forecast for corn prices to soar to a record high US$9 per bushel in three months, and for soy to hit US$20 after cutting the yield estimates for both crops. It pegged the wheat price at US$9.80.

 

"The importance of the current US drought for the global crop outlooks is magnified by detrimental weather conditions in other key world production and exporting nations in 2012."

 

On Monday (July 23), CBOT corn, soy and wheat prices tumbled due to forecasts for rain in some of the parched areas of the northern US Midwest and as concerns over Europe's debt crisis sparked a sell-off in equities and other commodities.

 

The Reuters poll showed that CBOT soy futures were seen ending the year at US$15.40 per bushel, the highest ever at that time of year but off 13% from its all-time high of US$17.77-3/4. It showed the price peaking at US$18.04 per bushel.

 

Chicago wheat is forecast to end the year at US$7.72 per bushel, down 19% from its peak of US$9.52-3/4, the highest in nearly four years. The analysts were expected the price to peak at US$10.01 per bushel in late August.

 

Corn and soy futures set all-time highs last week as the worst drought in 56 years withered crops in the world's largest grains exporter, sparking worry about a food crisis like the one in 2008, when food shortages sparked riots in 30 countries.

 

Ricky Volpe, research economist at the Economic Research Service of the USDA said higher food prices this time around will not be comparable to 2008.

 

"None of the dynamics and indicators is approaching that for 2008," he said, adding that the food price increases in 2008 were the highest in 20 years. He said major differences include much lower crude oil prices this time around, and lower wheat prices too.

 

There was also a severe shortage of rice in Asia, which was a major factor behind the civil unrest that year. While wheat prices remain well below all-time highs above US$13 per bushel set in 2008, they have soared 55% in just over a month in tandem with corn and soy.

 

Economist Bill Lapp of Advance Economic Solutions in Omaha, Nebraska, said the price rally has so far added about US$30 billion to food costs that may be passed on to consumers.

 

"There is a cumulative US$30 billion cost bubble due to the rise in prices for corn, soy, soymeal and others," said Lapp, whose clients include food companies and restaurants.

 

Analysts said that while some of the higher food prices will come later this year, the bulk of the gains could come in 2013 as it usually takes several months for food companies to run down their inventories before restocking with fresh supplies. The analysts said some companies might have been caught flat-footed by the surge in grains prices since just a month ago the US was seen heading for bumper crops after one of the mildest winters provided perfect planting conditions.

 

As the US is the world's largest exporter of corn, soy and wheat, food inflation could also be exported to importing countries, especially in Asia. The drought in the US has been more critical for soy, which are used to feed livestock, produce biodiesel, make cooking oil and in some countries like Indonesia eaten as a protein-rich snack, because global production was slashed by a drought in leading growers Brazil and Argentina. The two South American countries -- the second and third largest soy exporters -- will plant their next crop this fall and begin exporting early next year.

 

Some analysts, however, are expecting any food crisis this time around to be worse than in 2008 when riots broke out in 30 countries and helped spark the "Arab Spring" that toppled the leaders of Tunisia, Libya and Egypt last year.

 

"It could be more severe than in 2008," said Dennis Gartman, a commodities trader and editor/publisher of The Gartman Letter. He said cereal makers were likely to raise prices even though "the cardboard box containing the cereals is far more expensive than the grain."

 

Abdolreza Abbassian, senior economist and grain expert at the UN's Food and Agriculture Organisation, told Reuters in Milan that while rising grain prices were a cause for concern it was too early to be referred as a food crisis.