Shifting Structures

By Greg Vincent and Linda H. Smith

12/10/2007

The biggest story to hit agriculture in years is the biofuels industry that is developing throughout the world, and it is driving change in virtually all world markets. But biofuel isn't the only driver of these remarkable times.

A higher standard of living around the world is also driving up commodity prices across the board as demand increases not only for fuels, but also for industrial materials, precious metals and meat protein, says Brad Anderson, senior vice president with Informa Economics.
 

The devalued U.S. dollar is also playing a role in farmers' decisions worldwide.

"Over the past five years, we've seen an unprecedented increase in commodity prices," Anderson says. "This rally rivals that of the 1970s. But this increase is different. We have not yet seen a lot of consumer price inflation. Much of the cost increases are being absorbed by the middleman, so consumers are not yet seeing a dramatic increase in the prices they pay."
 

Anderson says the growing world economy-especially in China and India where 300 million people are expected to enter the middle class-is the most important factor supporting commodity prices. In fact, the majority of the world's economic growth is in largely untapped areas.
 

Anderson says 95% of the global population growth is in developing countries where wealth is also increasing. While Western economies like Europe and the U.S. are showing only modest growth, they are growing, which is also supportive.

North America/United States

Corn is less travel-weary today, says Chip Flory, editor of the ProFarmer newsletter, and ethanol has brought permanent market changes. The biggest factors are:
• Corn has a shorter trip to market.
• Improved basis in some traditionally poor-basis areas.
• Increased local demand keeps overflow-stored grain from rotting.
• Expansion of on-farm storage.
• Improved cash-market opportunity.
Corn carryout this year should be higher than previously thought, says Brad Anderson of Informa Economics, who expects 2007's record crop to bring carryout numbers above 2 billion bushels, slightly higher than USDA projections.

South America

You can't talk South America without talking Brazilian soybeans. The U.S. corn push has created potential shortages of world soybean supplies and supporting prices, even with expected acreage increases on both American continents.
• Mato Grosso is constructing seven biodiesel plants.
• Investment bank Rodman and Renshaw pledged $1.3 billion to construct three ethanol plants.
• Poultry and pork are supporting corn expansion in Goias, says Fabio Barros of AgraFNP.
• Argentina is becoming a major ethanol player.
• Argentinian law calls for a minimum of 5% biofuel blend nationwide by 2010.
 

Middle East

Oil companies have little fear of biofuels given growing markets. Fertilizer producers benefit big time. Egypt, always a price-sensitive feed buyer, may slow poultry production.

Asia

Strong vegetable oil demand is driving Asia's markets, says Ross Korves, a Truth About Trade consultant. Biofuels are added to growing economies, which are generating increased food demand.
• China's annual 6.5% inflation rate sparks food inflation fears.  China's biofuel push was corn ethanol-based, but focus is now on cassava and other feedstocks.
• India reduced import duties on soyoil from 70% to 30% this year.
• Malaysia planned for 30 to 50 palm-oil-based biodiesel plants, but only built five.
• Asia is a growing market for U.S. dried distillers grains.
• Japan, South Korea and Taiwan: "Have money, will buy, sums it up," Korves says.
 

European Union

Corn production will increase in the European Union (EU) through 2014, the EU's agriculture director says.
• Production will rise 155%, from 53.9 million metric tons (mmt) in 2007 to 137.8 mmt by 2014.
• Bioenergy corn use is expected to increase from 1 mmt to 5.1 mmt.
• This year's European corn yield is the lowest since its 2003 drought. Total production is expected to be 9 mmt below the five-year average.
• Intervention phase out may drop plantings 300,000 hectares, and reduce the risk of surpluses in Hungary, Slovakia, Bulgaria and Romania.
• Bulgaria and Romania increase biofuel production potential by one-third.
• Global Insights raises questions about the EU's ability to meet biofuels mandates due to low available acreage.
• Germany rescinded its zero tax treatment on biodiesel, putting it on par with regular diesel.