Steady march upward for grains

Commodity focus has been on crude oil which approached $100per barrel before falling to the mid 80’s for the current contract, yet the grain markets have seen a steady increase on strong demand and declining inventory and expected production. Soybean prices have hit the highest levels since the big grain shortage of 1973 while corn is again over $4 per bushel. This was not supposed to happen given the significant changes in production dynamics over the last decade. This is also surprising given the strong gains in the US harvest this year.

The grain markets have changed significantly from the 1970’s with South America becoming a dominant player in production and exports. This impact of South America is to lessen the weather supply shock problems that have plagued soybeans and corn in the past. When these grain markets were Northern hemisphere crops, they were always subject to swings associated with the weather cycle in North America. With strong production in South America, the crops were diversified against the weather shocks in the Northern hemisphere. This increase and diversification in supply has been a contributing factor to the real decline in rain prices over the last three decades. But this year we are facing two significant problems which are driving price higher. One is on the demand and the other on the supply side.

On the demand side, world consumption of grains has continued to move upward even at the current higher prices. The increase in world income has shifted diets to meat which is less efficient use of grains for creating protein Coupled with this strong demand were the low inventory levels which stated the 2007 grain year. There was not a strong replenishing of the inventory from the North American harvest in spite of the extra production. Grain prices will stay high as long as the world inventory levels are low. In fact, with growing income and population, the level of inventories should actually be growing to maintain the same level of buffer stock. 

On the supply side for 2007-08, the La Nina weather pattern has led to dry conditions in South America. Because this weather pattern lasts for the crop year, there is the expectation that harvests will be lower than earlier expectations. This only exacerbates the low inventory problem. This has forced prices on the CBT contracts to their high levels.

Instead of January being a relatively low volatile period, we should expect continued dramatic price changes during this critical South America period. This will fold over to planting intention and activity in the spring for the US markets. There is no reason to see significant declines in these markets until planting intentions are disclosed.