Agflation Returns. A mix of weird weather and weirder government policies seems to have put grain prices on a roller coaster.
Welcome to a worldwide weather market.
It’s been a while since we’ve seen one of these in all its confusing glory, but a mix of weird weather and weirder government policies seems to have put grain prices on a roller coaster.
It looks to be a thrilling and sometimes scary ride.
In recent years, there has been a taste of it, but this time low year-over-year carryovers and tight stocks-to-use ratios seem to have set the stage for some pretty volatile pricing.
The fragility of the world market can be told by latest wheat production forecast for Western Canada.
A month long July heat wave did more damage than expected to crops in Saskatchewan, Manitoba and Alberta and Statistics Canada forecast wheat production at just over 20 millions tones. This is down almost 20 per cent from last year.
Only three times in the last 20 years has there been a smaller crop and each time the culprit was severe drought. That single report, which was much lower than earlier forecasts, gave wheat futures in Chicago and Europe wings.
The futures rose, from already lofty levels, more than one per cent in Chicago to $7.39 US a bushel and jumped 2.2 per cent to $8.76 US a bushel in Paris.
In response to the Canadian report the International Wheat Council cut its world wheat production forecast to 607 million tones from 614 million tones. Demand meanwhile is expected to be 614 million tonnes.
Bad weather in Europe set the stage early in the year. This was followed by continuing drought problems in Argentina and critically hot weather in the U.S. Midwest.
Smaller than expected and poor crops, combined with increased industrial demand for grains and oilseeds from a highly subsidized ethanol sector has tightened supplies and raised prices everywhere.
The International Wheat Council says that world wheat supplies haven’t been this tight since 1979. With wheat in tight supply, corn and soybeans were next.
It was thought that near record corn planting in the U.S. would bolster supplies. But those projections were based on the expectations of average per acre production. Supply and demand has become so sensitive that analysts started forecasting trouble if yields were just two to three per cent below USDA expectations.
For example, the USDA estimates corn yield at 152.8 bushels per acre. This would provide the U.S. with enough supply for the coming year. But lower yields – say 148 bushels per acre or less – could bring 2008 carryover stocks down to near critical levels. The US needs about one billion bushels carryover just to keep its supply pipeline full. Anything below that level results in higher prices as the market starts rationing supplies through higher prices.
The International Grains Council expects worldwide demand to outstrip supply this year setting the stage for a potentially wilder ride next year.
The highly respected business publication The Economist has weighed in on the topic. “Aside from wheat, the prices of corn, rice and barley have all risen by over a third since 2005. Food prices around the world are rising so quickly that a new term has been coined to describe the ballooning price of breakfast staples and dinner-time favorites: agflation.”
The Economist lays part of the blame for agflation at the feet of the ethanol industry.
It notes that U.S. ethanol producers are taking three times as much corn this year as they did in 2000.
“As the cost of keeping poultry and livestock goes up so do the prices of eggs, chickens and other meat. Because generous subsidies ensure that biofuel production is handily profitable, that industry is likely to grab new grain supplies to prime its distilling towers,” The Economist says.
What The Economist only implies is that ethanol is largely the creation of vote-seeking politicians who approve the
subsidies and lobbyists for the corn producers who were looking for a way to stimulate demand to raise prices and reduce burdensome supplies.
As usual the politicians overreached. The subsidies are so generous that only a fool would ignore them.
While there is some thought that farmers will respond to the increased demand by raising production, this is looking more problematic than the optimists believed.
It required co-operation from the farmer’s partner Mother Nature and we all know how fickle she can be.
This year she wasn’t feeling all that co-operative. If she decides to become downright nasty next year then the grain price roller coaster will be wilder than ever and the politicians will be scrambling to deal with agflation. n
Print this page
