November 4, 2010

 

US food prices inching towards 2008 highs

US food prices are gradually moving towards record highs of 2008 due to tight supply, weather concerns in major exporting countries, China's strong demand and a continuing wheat export ban in India.

 

A new monetary stimulus in the US, as is likely Wednesday (Nov 3), and a weaker greenback can push fresh investment into agricultural commodities, boosting prices further.

 

The UN's Food and Agriculture Organization Tuesday (Nov 2) revised up its monthly food price index to a 27-month high due to increases in global cereal, sugar and soy prices.

 

The index now stands at 197.13, up 4.4% from September and at its highest since July 2008. The record high of 213.5 was reached in June 2008.

 

Near-month wheat, corn and soy futures on the CBOT have already broken crucial psychological resistance levels at US$7.00, US$5.80 and US$12.30 a bushel, respectively.

 

The chances of the food price index declining in November aren't very good due to concerns over the dry weather in the US and planting patterns in Russia, said Abdolreza Abbassian, secretary of the FAO's Intergovernmental Group for Grains.

 

However, he added, cereals are a major component of the index, and their prices are high but still considerably off the record of 274.6 set in April 2008.

 

The Cereals Price Index rose to a 25-month high of 219 in October, up 5.1% on month.

 

"The farmer-unfriendly weather started with the drought in Russia in June but weather concerns are now truly global," said an executive at a commodities brokerage.

 

Adverse weather, either too dry or too wet, has affected major producers and exporters around the world, from Russia and Ukraine to Canada and the US, Germany, Australia, Pakistan and Southeast Asia.

 

The US is currently planting its winter wheat and prolonged dry weather can badly affect yields.

 

CBOT December wheat futures have a potential to rise to US$7.30 a bushel, then US$7.40 this month, said Koname Gokon, deputy general manager at commodity brokerage Okato Shoji Co.'s research division.

 

The upcoming battle for acreage among major crops in the US is also supportive for prices. As soy and corn vie for the same acreage, CBOT corn futures may rise to US$6-$7 a bushel, Morgan Stanley said.

 

"Prices may rise as demand needs to be rationed and farmers need incentive to plant corn, instead of soybeans, cotton and wheat," Morgan Stanley's head of commodities research, Hussein Allidina, said in a recent research note.

 

Private forecasters are indicating that the US corn production estimate for 2010-11 may be revised lower again as actual yields could be below current projections, FAO's Abbassian said.

 

He said another worry was that farmers in Russia may switch to planting oilseeds due to government restrictions on grain exports.