(May 6, 2011) - The issue of high and volatile agricultural commodity prices and its causes and impacts has been the subject of numerous publications and meetings over the last three years including Dakar Agricole 2011, a meeting that we spoke of in last week’s column. Before continuing with our discussion of that meeting, we would like to establish a foundation for that discussion by reviewing a paper written for the Canadian Foodgrains Bank, The paper, “Protecting the Food Insecure in Volatile International Markets,” was authored by Ian McCreary, an economist and former director of the Canadian Wheat Board. By way of disclosure, Daryll received and commented on an earlier draft of the paper.
The Canadian Foodgrains Bank is a coalition of all of the major Canadian churches. The paper was commissioned because the churches were “alarmed at the realization that sudden food price spikes had the potential to cast millions of people into chronic food insecurity.” They believed that “such price induced food crises quickly overwhelm any of the gains made by the recent decades of effort to reduce hunger in developing countries.”
(April 29, 2011) - The high and volatile agricultural commodity prices of 2007/2008 and 2010/2011 have given crop farmers relief from years of low and often below-the-cost-of-production prices, but they also have resulted in food riots around the world and a major jump in the number of persons experiencing chronic hunger—from approximately 850 million people to over 1 billion people. By far, the most devastating impact has been felt in developing countries, particularly the least developed among them.
As a result, President Abdoulaye Wade, Senegal, took the initiative of organizing the second edition of the International Dakar Agricultural Forum—called Dakar Agricole 2011—on Monday and Tuesday, April 18-19, 2011 in Dakar, Senegal. This meeting, scheduled two months before the G20 agricultural meetings, included heads of state, ministers, farmers and experts from across the globe to discuss the issues surrounding agricultural regulation and global agricultural governance.
The event was organized in collaboration with the French think-tank, MOMAGRI (Mouvement pour une Organisation Mondiale de l’Agriculture), to answer fundamental questions currently faced by the international community:
Under which principles can we regulate agricultural markets to prevent food crises and avoid repeated agricultural crises?
(February 13, 2011) - After hiring into the market newsletter biz 30 years ago, my new bosses informed me that I’d sink or swim on how well I learned either fundamental or technical market analysis. I had two weeks to master one.
Since fundamental analysis centers on farm and ranch facts and figures and technical analysis relies on charts and graphs that resemble more astrology than agronomy, I swam to what I knew—acres, yields, sows and cows—and away from double-bottoms and upside down bear pennants.
Besides, what self-respecting farm boy wanted to be an “elf,” a chart watcher who trusted squiggles on dry paper rather than a July rain in Iowa?
Curiously, however, it soon became apparent that most successful elves used market fundamentals to confirm their chart biases and, likewise, the best fundamentalists often leaned on charts to back up their facts and figures.
When I pointed out this anomaly to the office’s resident elf, he offered a Yogi Berra-like insight that explains everything from cotton exports to the Fed’s monetary policy: “No one wearing a belt and suspenders ever lost his shirt.”
(February 11, 2011) - As we write this column, March 2011 corn futures closed at $6.87/bu., wheat at $8.53.bu., soybeans at $14.33/bu., rice at $15.80/cwt., and cotton at $1.67/lb. Compared to February 2006 those prices are stratospheric. What we are seeing is a second wave of a general price increase for commodities that began in late 2006 and saw its first peak in 2008 followed by a retrenchment.
In this column, as elsewhere, parallels have been drawn to the situation in the early 1970s when prices began to rise as the result the Soviet Union entering the international grain market after a crop failure. The subsequent increase in prices produced a wave of optimism in the farm community.
The positive outlook was bolstered when the US Secretary of Agriculture told farmers to plant fencerow to fencerow. In 1974, the World Food Conference was held in Rome at a time when over 800 million people around the world were undernourished. The conference delegates established a goal of eliminating hunger within a decade. Farmers were being told that demand for food would exceed production for the next quarter century so the statement by the Secretary seemed reasonable. It appeared that farm prices had reached a new plateau.
(December 23, 2010) - Typically there are several-to-many reasons why commodity prices do what they do, especially if they have tripled from a mere few years ago. How the amalgamation of many influences leads to the formulation of crop prices is summarized in a major section of Derek Headey and Shenggen Fan’s IFPRI (International Food Policy Research Institute) monograph, Reflections on the Global Food Crisis. The factors that they identify as contributing to the final determination of an agricultural commodity’s price include stocks, costs, harvest area, weather, and yields on the supply side and domestic use, foreign imports, and economic and population growth on the demand side.
The analysis of the effect of rising oil prices on commodity prices caught our attention, as much for what may be implied as what it said. Headey and Fan write, “international fuel and food prices are closely linked historically. Rising oil prices were closely associated with the 1972–74 crisis and indeed were arguably the dominant factor, so there is clearly some precedent here.”
(December 3, 2010) - The recent ups, downs, and back ups of the agricultural commodity markets has everyone trying to figure out what is behind the wide price swings of the past four years. The October 2006 close on the Chicago Board of Trade nearby futures was $2.32 per bushel. By July 2008, just 20 months later, the close was $7.24, a 212 percent increase. Eight months later, the February 2008 close was $3.5075, a drop of 52 percent. Corn prices then began to turn around reaching an October 2010 close of 5.82, 150 percent above the price four years earlier. Soybeans, wheat and rice have followed similar, but more muted paths.
Potential, oft-mentioned causes for this market behavior have included: the increased use of corn to produce ethanol, a growing middle class in China and India that is demanding a diet that includes more meat, increases in the price of crude oil, the growing impact of index funds in the futures market, low interest rates, changes in the exchange rate of the US dollar, market intervention by various countries in response to food riots, a declining rate of growth in grain production, and a reduction in the stock levels of various grains. That is quite a list. Do all these “causes” belong on the list? Which ones are of most importance?
(April 27, 2009) - The current financial crisis has spread its devastation far and wide. We have all read about the problems created by risky behavior on the part of some of our most-trusted financial institutions: reduced consumer spending including a drop in demand for automobiles, new homes and even chickens.
Suddenly farmers, who signed contracts with integrators as a means of reducing their risk, find themselves with cancelled contracts and no income to pay the mortgage on their chicken barns. A number of those with cancelled contracts mortgaged everything they had to get into or expand what they thought was a steady, relatively safe business. Today many of them face bankruptcy.
The present problems cannot be laid only at the feet of the financial crisis. The meteoric increase in grain and oilseed prices between the fall of 2006 and the summer of 2008 played a significant role in this crisis.
(March 23, 2009) - Every spring brings its own risks for what is undeniably a risky profession. That being said, it seems to us that the challenges farmers face this year are greater than normal.
The first challenge is fertilizer. With fertilizer prices headed to the sky last summer, some farmers decided to protect themselves against even higher prices by contracting ahead for this summer's prices. As we all know, prices went south and what might have been a wise decision leaves some farmers facing unusually high input costs. For those farmers it will take ideal weather and extraordinarily high yields to take some of the sting off those high costs.
But, farmers weren't the only ones last summer who booked 2009 fertilizer orders at high prices. Lots of fertilizer distributorships are now holding large quantities of expensive fertilizer. With prices substantially lower, we are watching a stare-down contest between farmers who want lower priced fertilizer and dealers who want to minimize the financial blood-bath that is awaiting them. Each side is waiting for the other to blink first.