Power Hour: Sustained High Commodity Prices Likely

September 21, 2012 09:31 AM
Power Hour: Sustained High Commodity Prices Likely

Grain and oilseed prices are likely to remain at record high levels over the next 12 to 24 months to sufficiently cut demand to match dwindling supplies and stimulate global crop production, according to a new report by Rabobank. Despite record prices, the effect on world consumers is far different than it was in 2008, however, when wheat and rice shortages sparked food riots in some countries.

Rabobank’s crop modeling suggests there may still be considerable downside from current official crop production forecasts, thus prices may not yet have reached their highs. "The market may still need to price in further reductions to output as well as a risk premium associated with the coming South American crops," the report says.

Power Hour webRabobank forecasts corn prices to rise from $7.90/bu. in the third quarter 2012 to $8.00 in the fourth quarter, $8.10 in the first quarter 2013, and $8.20 in the second quarter of next year. The bank expects soybeans to reach their peak in the third quarter 2012, while wheat prices are likely to peak in the second quarter of 2013.

The report, "Re-entering Agflation," says the affected commodities now are those used in animal feeds and not considered core food staples of the world’s developing economies. In 2008, by contrast, low wheat inventories and restricted rice exports held back the availability of those commodities for consumers.

Stockpiling and export bans are definitely possible for the end of 2012 and 2013, however, as governments try to protect consumers from rising food prices. Rabobank suggests that such efforts would be counterproductive and cause even higher spikes in commodities and food prices.

"The impact on the poorest consumers should be reduced this time around (compared to 2008), as purchasers are able to switch consumption from animal protein towards staple grains like rice and wheat," says Luke Chandler, author of the report. In developed countries, like the U.S. and Europe where meat and corn price elasticity is low, "the knock-off effect of high grain prices will be felt for some time to come," Chandler says.

The report says that although the U.S. ethanol and short-term animal protein production are both relatively inelastic, the scale of the U.S. drought will require significant demand reduction across both industries. Current ethanol production margins are near the worst in the industry’s history. On the livestock side, Rabobank looks for U.S. herds to be liquidated at an accelerating rate in the first half of 2013.

The report estimates that the Food and Agricultural Organization (FAO) Food Price Index will rise by 15% by the end of June 2013.


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