January 3, 2008
Sybille De La Hamaide
Reuters
GENEVA - Grain markets are likely to be increasingly volatile in the next few years as prices face pressure from demand for biofuels, uncertainty over the economy and the weather and increasing levels of speculation. Grain prices have reached historic highs across the globe this season, buoyed by growing international demand, mainly in fast-developing countries such as China and India and a slump in stocks to levels unseen for 60 years.
Photo: Analysts believe grain prices will still be high in seven to 10 years, mainly supported by expanding demand. (Christopher Furlong, Getty Image)
The rally, also seen on other commodities and energy markets, attracted new actors such as investment funds, which added to the volatility, analysts told the GlobalGrain2007 conference in Geneva yesterday.
"Last year biofuels and rising Southeast Asian demand were the core subjects of all discussions. This year's situation is more challenging. Many factors will have an influence," U.S. analyst and AgResource president Dan Basse said.
"You'll see volatility on grain markets like you've never seen before," he added.
Among the top bullish elements for grains and oilseeds, analysts cited demand to produce biofuels, limited stocks, a growing middle class in Southeast Asia that will increase food purchases, and a rise in livestock herds.
Transportation problems, mainly in landlocked Kazakhstan, combined with export restrictions in the Black Sea region, would also play a role, they said.
"These add to the volatility in markets and I think it will continue as long as these countries try, through restrictions and quotas, to protect their food prices," said Bob Steele, global wheat co-ordinator for Netherlands-based Nidera.
On the bearish front were growth in global wheat production as high prices encourage farmers to increase their sowings, a slowing in U.S. and European economic growth and volatile freight markets, they said.
In the 2007-08 July-June season, European soft-wheat prices have gone to EU300 ($438) a tonne from ?180 in early September, before falling back to around EU220 mid-November.
In the United States, the spread on wheat prices on the Chicago Board of Trade went from US$5.50 to nearly US$9.60 per bushel.
With bigger sowings next season, analysts see the wheat crop increasing by 40 million to 45 million tonnes in 2008-09, unless a major weather problem arises.
Mr. Basse put his estimate at 648 million tonnes, against 609 million in 2007, while Mr. Steele said he expected the world's soft wheat crop at 621.7 million tonnes, up from 578 million last year.
"The real question is how much of that rise is already priced in the market," said James Dunsterville, head analyst at Geneva-based Agrinews.
"Behind the word 'volatility' is that the market has no clue on what the production level is going to be," he added.
This prospect is seen pushing prices lower, at least in the medium term, with most analysts agreeing on a price target for the coming campaign at around EU200 a tonne for European wheat and US$5 to US$5.50 per bushel for U.S. wheat.
"It's hard for me to be bullish this year, unless you want to bet on extreme weather conditions in the EU, the U.S., the Black Sea or other big producing countries," Mr. Basse said.
But in the longer term, all analysts stress they believe grain prices will still be high in seven to 10 years, mainly supported by expanding demand.
http://www.financialpost.com/story.html?id=116087