Wednesday, June 8, 2011

Expect More Food Price Pressures

The commodity group of grains (soy beans, wheat and corn) are base products in the US food system; they are the building blocks of our food system. Not only do we eat grains in the forms of cereals and breads, but these are fed to cattle as nutrients and make-up a percentage of our energy costs in the form of ethanol. As such, their costs are part of our entire food complex. As the charts below show, the upward move for these commodities has stopped. But prices have not come down, either, meaning the US consumer will be under continued pressure to make difficult consumer choices.

All the above charts show prices increasing and then stalling. There are two important conclusions to draw from these charts.

1.) While there is no longer a compelling reason to buy these contracts (unless they move above previously established highs), there is also no compelling reason to sell them (unless they move below support levels)

2.) Traders consider long bases as launching pads for future upside rallies (the longer the base, the stronger the rally)

Don't expect price prospects to improve any time soon:
The worst droughts in decades are wilting wheat fields from China to the U.S. to the U.K., overwhelming Russia’s return to grain markets and driving prices to the highest levels since 2008.

Parts of China, the biggest grower, had the least rain in a century, some European regions are the driest in 50 years and almost half the winter-wheat crop in the U.S., the largest exporter, is rated poor or worse. Inventory is dropping 8.8 percent, the most in five years, Rabobank International says. Prices will advance 20 percent to as high as $9.25 a bushel by Dec. 31, a Bloomberg survey of 14 analysts and traders shows.

And then there is this:

Wheat may gain as almost half of the U.S. winter crop remained in poor condition, while rains in France, Germany and the U.K., the European Union’s largest shippers, may already be too late to reverse crop damage.

The July-delivery contract rose as much as 0.4 percent to $7.47 a bushel on the Chicago Board of Trade before trading little changed at $7.4375 at 3:03 p.m. Singapore time.

About 44 percent of the U.S. winter-wheat crop was rated poor to very poor as of June 5, unchanged from a week earlier, and up from 9 percent a year ago, the U.S. Department of Agriculture said yesterday. The winter crops probably were irreparably harmed by the driest weather in 50 years in France, the hottest spring in 352 years in England and dry weather in central Germany, Telvent DTN Inc. said yesterday.

“The recent weather has been far from ideal with drought in Europe, drought in the U.S. Great Plains and floods in the northern U.S. wheat-belt hurting yield prospects,” Luke Mathews, a commodity strategist at Commonwealth Bank of Australia said in a report today. “Current wheat prices suggest existing production forecasts are overstated and will be revised lower in the coming months.”

And this:

World food prices lingered near record levels in May as meat and dairy costs rose, contributing to inflationary pressures that may drive millions into hunger, even as grain prices fell.

An index of 55 food commodities slid to 232.4 points from 234.8 points in April, the United Nations’ Food and Agriculture Organization said in a report on its website today. The gauge climbed to an all-time high of 237.7 in February.

The FAO meat index climbed to an all-time high, led by record beef and sheep prices and higher poultry and pigmeat costs. Prices for staple foods including corn will more than double in two decades unless action is taken, Oxfam International said last week. World grain stocks will fall for a second year by the end of June 2012, the International Grains Council said May 26.

And this:

The slow pace of spring sowings in Canada has dashed hopes of a rebuild in the country's inventories of grains and oilseeds, leaving them on course too fall below 10m tonnes for the first time in recorded history.

Canada's farm ministry, AAFC, slashed nearly 900,000 tonnes from its forecast for total inventories of the likes of barley, canola and wheat at the close of 2011-12, reducing the estimate to 9.46m tonnes.

The downgrade takes stocks below the 10.36m tonnes expected at the close of this season, to a "new record low level, 26% below the 10-year average", the ministry said, blaming the revision on a second successive season of wet spring sowing weather.

"Seeding progress in parts of Saskatchewan and Manitoba is currently well behind schedule due to very wet soil conditions," AAFC said.

"A significant portion of the area which was intended to be seeded… may not be seeded or harvested."
And this:
The US faces the prospect of "basement levels" of inventories of spring wheat and durum thanks to the rains which have delayed plantings to one of the slowest paces on record.

Alan Tracy, the president of industry group US Wheat Associates, said that the wet weather which had left 21% of the American spring wheat crop unplanted as of Sunday, when sowings are typically all but finished, was "going to have a drastic impact on supplies".

Supplies were going to become "terribly tight" for both conventional spring wheat and durum, the variety used to make pasta which is, in the main, also spring seeded.

"We are looking at a reasonable carryover coming into this year, but I do not think we are going to have a carryout," he told the International Grains Council's annual conference.

"We are going to be down to bargain basement levels," Mr Tracy said.

The US Department of Agriculture has estimated America's hard spring wheat inventories entering 2011-12 at 215m bushels, with those of durum pegged at 47m bushels.

All of these stories indicate the upside pressure on food prices is increasing, not decreasing.