March 1, 2011

World grain prices decrease amid market volatility

Global grain prices have decreased by almost 15% over the past week, as geopolitical issues and speculative selling contributed to market volatility.

The trigger for the decision by hedge and pension fund operators to get out of grain and other agricultural commodities was the growing instability in North Africa, coupled with the sharp rise in oil prices.

A Northern Ireland Grain Trade Association (NIGTA) representative confirmed that on February 18, international grain and oilseed markets showed signs of weakening as the Middle East crisis began to worry speculators.

The spokesperson said, "Funds basically took money out of agricultural commodities which are viewed as higher risk and invested in safer bets such as oil, gold and the Swiss Franc which hit an all time high versus the US Dollar.

"This mass action over the last few days has in fact generated even more volatility with wheat trading down EUR16 (US$22), then up EUR6 (US$8) to settle basically unchanged. The speculators have created a self-perpetuating prophecy. There has been no significant change in the fundamentals, demand has slackened only slightly and so the sharply lower market has been a mass over-reaction. Even in the past few days the markets are recovering with corn and wheat increasing more than EUR20 (US$28)," the representative said.

UFU Seeds and Cereals Vice Chairman John Best said, "The Union is not surprised by the fluctuations in grain price and understand that this is being driven by external factors, such as the political unrest in the Middle East and rising oil prices. After reviewing the Agri Commodity Markets Research report, we believe that the effects of these external factors may be short term. Looking longer term, as global energy prices continue to rise, it is possible that the demand for biofuel production will increase the demand for grain and oilseeds."

Meanwhile the international trading bank, Rabobank, is confirming that global grains and oilseeds markets are in the midst of a dramatic sell off.

"During the past week, corn, soy, and wheat futures have fallen anywhere between 1% and 13%," said analyst Keith Flury.

"Geopolitical issues and speculative selling have been the primary drivers behind the sharp correction in prices and an increase in volatility. While there remains risk of further downside in the short term, we maintain our bullish view on the market in the medium term," he said. "Grains and oilseed prices are likely to find support from consumers who have shown an increase in buying activity amidst this pullback in prices. We expect volatility will continue to increase in coming months as prices consolidate near current levels before continuing their rise into the Northern hemisphere's spring planting season."