December 12, 2007

Rising food and fuel demand the perfect storm for soaring grain prices

 

 

The rapid growth in food and fuel demand has led to a bull run on grain prices, an analyst with the LaSalle Group of Chicago said.

 

The two factors, acting in unison with strong world economy, weak US dollar and the fact that global consumption of grain outpaced total planted acreage for the first time ever this year, has led to a perfect storm that pushed up grain prices, according to Mark Ditsch, analyst with the LaSalle Group of Chicago

 

Ditsch was speaking at the National Grain and Feed Association's 36th annual Country Elevator Conference Monday (December 10, 2007)

 

"We've got a rare opportunity where food and fuel demand are both growing very rapidly," said Ditsch, analyst.

 

Although rising energy prices and new government energy mandates have suddenly begun to pull grain from the food into the fuel sector, Ditsch said a rapid rise in world meat consumption has quietly become a primary price-driver, as well.

 

Soy meal demand is increasing at double-digit rates in many developing countries, something never really seen before, he said.

 

An extremely weak US dollar has also helped to maintain export demand for US grain during a period in which world supply is "having a difficult time" keeping up with world demand, he said.

 

"Tight world stocks and the high utilization of arable land means commodities must fight for available acreage and eventually, we'll have to see new acres" come into production, he said.

 

US grain markets have also attracted more speculative interest and a better information flow, "meaning prices can react quicker than they ever have before," he said.

 

Ditsch said ending stocks-to-use ratios, which were the primary determinant of world grain prices for some 30 years, have suddenly ceased to be a valid price-forecasting tool.

 

This is evident from the soy market last year when there were record ending stocks but the market focused on what was to come later, he said.

 

"It turns out that the market was right ... stocks did get tight," he said, adding that prices recently pushed as high as US$11 per bushel.

 

"The best way to forecast (grain) prices is to find the price levels needed to balance production with consumption, and we have evidence to suggest that current prices did not increase (soy) production in South America, like the market had hoped," he said.