October 6, 2006

 

World grain, oilseed prices expected to rally on soaring demand 

 

 

A multi-year bull market is just getting started in agricultural products with grains to lead the way in 2007 and oilseeds following in 2008, Dan Basse, president of analytical firm AgResource said Thursday (Oct 5).

 

A strong increase in grain usage by the ethanol industry and rising food demand from South-east Asia is creating a "perfect storm," Basse said speaking at the Global Grain conference in Geneva.

 

Klaus Schumacher, head of economics for international grain trading company Toepfer International, told conference attendees that growing demand for food, livestock feed and biofuels will affect grain and oilseed markets "significantly".

 

"Gone are the days of low (grain, oilseed) prices," said Schumacher. "These fundamental changes in the market will hold fast for many years."

 

Schumacher said if current ethanol proposed projects are actually built, that global ethanol production can rise 85 percent over a 10-year period ending 2015.

 

In the world's largest ethanol producers, the US and Brazil, ethanol is predominately made from corn and sugar cane, respectively. In the EU, where the ethanol industry is comparatively small but growing fast, the alternative gas is mostly derived from wheat.

 

Demonstrating the sharp investment growth in the industry, Basse said, "A new ethanol plant is opening in the US every 11 days.

 

Basse forecasts that in Iowa, the largest US corn producing state, will be running at a grain deficit due to the number of ethanol plants being constructed there.

 

Historically there has never been such a demand increase for agricultural products as the one currently being seen through biofuels, said Basse.

 

He added that because politicians are so in love with biofuels around the world and offering large incentives to boost investment that it will be up to the market to stymie demand.

 

To influence farmers enough globally to meet this demand, Basse said it will be hard to do without a significant price shock.

 

Schumacher also said that the world has not been increasing grain plantings. Countries that can afford support for biofuels will export less grain and oilseeds, increasing a need for emerging exports to offset that shortfall.

 

Basse added that world wheat price rally have already started, even while that grain has very limited use in biofuels, as consumption is outpacing demand. This has been further accented by some crop problems this season.

 

Emmanuel Jayet, senior analyst at BNP Paribas said even with just relatively small amounts of wheat being used in the EU's ethanol production, it has altered the balance sheet sufficiently to have dramatic effects on prices and trade. US corn usage for ethanol is also expected to cut stocks dramatically.

 

Biodiesel, made from vegetable oils such as soy and palm, is "a sleeping giant," said Basse, adding that industry projections show that US biodiesel output could triple in the next year to nearly 5.9 million tonnes.

 

He said because soyoil is the key ingredient to make biodiesel in the US, this growth in production would sharply lower US soybean stocks.