Europe Leans on Less Stable Markets for Grains

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The world is in its fifth season of grain price volatility, and it doesn’t appear the ebbs and flows of key commodity crops will stabilize in 2012, analysts say.

Prices for corn, soybeans, wheat and oats have enjoyed favorable prices since 2008, when food scarcity drove down national reserves and created some unpredicted import/export schemes. Now, analysts are trying to determine if commodity prices have reached a new high, or if perhaps they might be in a bubble.

“Wheat, I would say, is priced too high right now,” said Jack Watts, senior analyst of cereals and oilseeds for UK-based Agriculture and Horticulture Development Board and the Home-Grown Cereals Authority. His comments came during a presentation at CropWorld London Oct. 31.

One reason for the inflationary prices is last year’s drought in the Black Sea region, which decimated the production of wheat, especially in Russia, the world’s fourth-largest producer behind China, India and the US. The US and Canada were able to fill some of the void. But the resulting low stock-to-use ratios painted a frightening picture for those in favor of more predictable prices.

“The world is becoming more reliant on less-stable markets for wheat production, and there is an export shift from the US to the Black Sea region,” Watts said.

There are four key factors contributing to the high grain prices and volatility:

1) The rising demand for livestock feed diverts food from the human food supply and can lower the stocks-to-use ratio and national reserves, which are at precarious lows around the world.
2) Crop competition for arable land: With corn and soybean prices at healthy levels, farmers are less willing to devote area to wheat and oats.
3) Emerging markets are exacerbating market conditions with heightened demand for cooking oils, feed stocks and higher-quality vegetables.
4) Speculation from the investment community creates more derivatives than actual production.

“Reactions in the futures market are not reflective of underlying fundamentals, but rather a reaction to what is going on today,” Andersons Research Economist Graham Redman said during a CropWorld discussion on hard grains. “But the noise created by the speculators is clouding the real factors contributing to volatility, such as demand. The 7 billionth consumer of agriculture was born today, and the industry might remain a bit unsettled until we know what policy developments and concerns might arise.”

Wheat for December delivery fell 8.25 cents to $5.90 a bushel, CBOT reported Nov.18. December corn fell 13.25 cents to $5.97 a bushel; December oats fell 4 cents to $3 a bushel; and January soybeans dropped 16.25 cents to $11.52 a bushel.

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