Thursday, January 13, 2011

Behold a Black Horse - World moves closer to food price shock

Behold a Black Horse - World moves closer to food price shock

http://www.ft.com/

The world has moved a step closer to a food price shock after the US government surprised traders by cutting stock forecasts for key crops, sending corn and soyabean prices to their highest level in 30 months.

The price jump comes after the UN’s Food and Agriculture Organisation warned last week that the world could see repetition of the 2008 food crisis if prices rose further. The trend is becoming a major concern in developing countries.

While officials are drawing comfort from stable rice prices, key for feeding Asia, they warn that a sustained period of high prices, especially in grains such as wheat, would hit poorer countries. Food price hikes have already led to riots in Algeria and Mozambique.

“Stocks of corn and soyabean are at incredibly tight levels ... and the markets are surging to incredibly strong prices,” Chad Hart, agricultural economist at Iowa State University, said.

Dan Basse, president of AgResource, a Chicago-based forecaster, added: “There’s just no room for error any more. With any kind of weather problem in the upcoming growing season we will make new all-time highs in corn and soy, and to a lesser degree wheat futures.”

Agricultural traders and analysts warn that the latest revision to US and global stocks means there is no further room for weather problems. The crops in Argentina and Brazil, to be harvested soon, look fragile due to dryness.

Traders are particularly concerned about the cost of vegetable oil, key for developing countries such as China where an emerging middle class is buying more frying oil. The US Department of Agriculture said the ratio of global stocks-to-demand would fall later this year to “levels unseen since the mid-1970s, reflecting an accelerated pace of vegetable oil” consumption for food and fuel.

In Chicago, the price of soyabeans rose as much as 5.2 per cent to $14.20½ a bushel, the highest since late 2008. The USDA said that domestic stocks-to-demand would drop to the lowest point in nearly half a century.

Corn prices jumped 5 per cent to $6.37 a bushel, the highest level since July 2008.

The USDA said that by August the ratio of US corn stocks-to-demand would fall to a surprisingly thin 5.5 per cent, the smallest cushion in 15 years.

The US is the world’s largest corn supplier, meeting more than half of global import needs. Corn is an important ingredient in animal feed, and the tightening market partly reflects stronger appetites for meat in emerging markets. Record ethanol production in the US will also swallow up nearly 40 per cent of the US crop.

The boom in agricultural prices has lifted the outlook of the agribusiness sector in the US. Cargill, the world’s largest trader of food commodities, said its profits had tripled year-on-year during the second quarter of its fiscal year.

The shares of Deere & Co, the world’s largest manufacturer of tractors and combines, surged 2.3 per cent, approaching an all-time high. But food companies such as NestlĂ© fell as analysts said they would struggle to pass rising wholesale costs to consumers.

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