October 10, 2008
Many European farmers who have held on to grain in recent months in the hope of a price rebound are ready to sell at a loss as they fear crumbling prices may plunge even lower, said analysts on Thursday, 8 October 2008.
Cereals including wheat and corn rallied to all-time highs last season, fuelled by rising demand from developing countries, expanding biofuel production and poor supplies.
But markets saw a sea change in the spring when an outlook for hefty crops worldwide started weighing on prices.
Some farmers and cooperatives believed the fall was a limited correction from unjustifiably high prices and that strong demand and good exports or even a weather problem, such as drought in Australia last year, would likely keep them firm.
But the worst financial crisis in nearly 80 years, a slump in energy and other commodity markets, confirmation of large harvests and harsh competition took charge of prices. Bearish grain growers, just like shareholders, now prefer to sell with a small loss rather than wait and be hit by a big one.
Michel Portier, analyst at France's Agritel said the situation is similar to what is happening in the stock markets, when prices take a big hit, investors prefer to cut their losses and sell. Moreover, in a recession, it would be hard to predict the scale of any drop in grain consumption.
Analysts said however, wheat prices in Europe are lower than production costs, which would limit further falls, even if the short-term trend remains bearish.
As more grain pours into the market, it puts pressure on prices, encouraging already well-covered buyers to hold off, eventually creating a snowball effect that makes farmers more willing to sell.
A German trader said mills often seem to have good supply cover and are not aggressively buying. Some farmers will have to keep storage space free and may have to bite the bullet and sell some of their old crop.
A large incoming corn crop also encouraged farmers to make room in their granaries.
However, analysts stressed that even if some farmers were hit by falling prices, there did not seem to be a massive sell-off at below-cost prices.
Paolo Abballe, cereals analyst at Italy's biggest farmers' association Coldiretti, said there are concerns about prices that are not recovering, but there is no need to be alarmed.
The credit crunch linked to banking turmoil also speeds up sales that could have been on hold in a different financial context.
Jose Vazquez, a crop technician with leading Spanish farmers' union ASAJA, said the credit pressure had made farmers' traditional cash flow problems worse as they had a narrower range of potential buyers.
Farmers now sell to whoever can pay cash upfront, rather than accept a promissory note which they might not be able to collect from.