December 20, 2012


World grain prices to remain high in 2013



World grain prices may well stay elevated as global stocks of agricultural commodities are low and the drought that hit harvests in the fall of 2012 has continued, threatening the new wheat crop, and with low rainfall also hitting river-borne US trade routes.


Prices of corn and soy have retreated somewhat from the record highs they reached when the severity of last summer's dry spell became clear. But the lull may be deceptive. Several factors point to high prices next year.


Dry weather has persisted, with some 63% of the continental US facing at least "moderate drought conditions" in early December, according to the US Drought Monitor.


Snarled logistics could exacerbate cost pressures. Water levels on the Mississippi River, a critical grain transit corridor, are near record lows, causing headaches for barge operators. Supply risks also extend beyond the US. Unsettled weather has delayed recent plantings in Argentina, another big grain exporter.


Stockpiles offer scant comfort. The USDA recently estimated US corn reserves at 647 million bushels for 2012-13, the lowest level in 17 years and a thin-looking 5.8% of total demand. Soy inventories are headed for a nine-year low. One exception is wheat, where the USDA recently bumped up its stockpile forecast. But the UN Food and Agriculture Organisation expects tighter stocks for a variety of important foodstuffs next year.


That should support prices even before taking ultra-low interest rates and central bank money printing - which can boost demand for inflation hedges like agricultural commodities - into account. Demand for corn in US ethanol production is another potent factor.


Since the financial crisis, unusually low stockpiles have left agricultural markets on a razor's edge. Prices may only fall significantly in 2013 if near-ideal weather delivers the bumper harvests needed to supply the world's growing hunger for grains.