Oil seed $$$ hike ignites food price fear

If rising oil prices were not enough, investors now have to contend with a bigger risk: a repeat of the 2007-08 spike in food prices.

Prices of commodities ranging from soyabeans and corn to rapeseed and feeder cattle are soaring as bad weather and strong demand in China combine to tighten supplies and trigger food inflation fears.

The rise in prices of these crops could be sustained, warn industry experts. The market is “not going to see food inflation abating in the next 18 months, to two years,” says Richard Feltes, vice-president at broker RJ O’Brien in Chicago.

Yet the surge is unlikely to mirror that of the 2007-08 spike. The cost of wheat and rice, the two most important agricultural commodities for global food security because of their status as a staple for billions of people in southern Asia and sub-Saharan Africa, remains stable thanks in large part to bumper crops over the past few years.

The cost of sugar, an important source of calories in India and other emerging countries, is also down from previous highs.

Instead, the main concern centres on the price of oilseeds, such as soyabeans, rapeseed and canola, and corn.

Oilseeds are not only a source of edible oil for coking and processed food but also the main source of protein-rich feed meal used to fatten cows, sheep, pigs and poultry. Corn is also a crucial source of feed meal. The rise in feed is already pushing up meat costs worldwide, analysts say.

Soyabean prices have risen more than 20 per cent since the start of the year and hit a peak of $15.09 a bushel on Friday, the highest in four years. Commodities traders say they are likely to rise to $16-$17 a bushel, targeting the all-time high of $16.63 set in the summer of 2008. “I am very bullish,” says a senior executive with a leading commodities trading house.

Canola prices hit C$665.90 a tonne last week, their highest since July 2008 and only a fraction below the all-time high set during the 2007-08 food crisis. And rapeseed prices in Europe, at €514 per tonne, are less than 2 per cent below the 2008 peak.

Soya production is sharply down in the Latin American agricultural belt of Brazil, Argentina, Uruguay and Paraguay after the La Niña weather phenomenon exposed fields to hot, dry weather, hurting yields. The output drop in the region, which accounts for more than half the world’s exports of the commodity, comes as Chinese imports have increased more than 20 per cent in the first quarter.

Chris Gadd, analyst at Macquarie, says Chinese buyers could afford high dollar-denominated prices thanks to a fall in freight rates and a stronger renminbi.

Moreover, Chinese soya production has dropped as farmers have opted to sow more acres with corn, which is fetching record prices in China.

Commodities traders are more restrained about the outlook for corn prices, but they warn that costs are likely to remain at historically high levels in spite of an expected surge in US production due to unusually high Chinese demand.

Beijing has only been an occasional importer of corn over the past 50 years, with significant overseas purchases over three short periods: 1973-75, 1978-83 and 1994-96. Those sporadic imports have become more common and traders expect China in the 2011-12 and 2012-13 crop season to make its biggest purchases of corn over a two-year period since records began in the 1960s.

Abdolreza Abbassian, senior grains economist at the UN’s Food and Agriculture Organisation in Rome, anticipates Beijing will buy between 8m and 10m tonnes over the two seasons.

In China, the cost of corn hit an all-time high in March of Rmb2,497 per tonne, up roughly 10 per cent from the beginning of the year, after Beijing said that its inventories were lower than thought. Since then, agricultural traders say Sinograin, the state-owned trading house which manages the state grain reserves, has been in the market buying corn to replenish its strategic stockpile.

Corn prices rose on Monday to $6.58¾ a bushel yesterday after the US government last week said traders had concluded their biggest single-day corn deals since 1991. The market is assuming that the corn is heading to China. During the 2007-08 food crisis, corn rose to $7.65 a bushel.

Sourced & published by Henry Sapiecha

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